A county in Washington state emerged as the most recent casualty from the financial-market turmoil caused by complex securities known as SIVs when Standard & Poor's Corp. said yesterday it may downgrade debt of King County because of investments in debt issued by SIVs....
The rating action by S&P stemmed from investments made by the $4.1 billion King County Investment Pool in three struggling SIVs, which currently total about 3.8% of the fund. S&P said the fund held securities issued by Cheyne Finance LLC, Rhinebridge LLC and Mainsail II LLC. King County includes the city of Seattle.
Ken Guy, King County's finance director, said county officials saw the SIV-issued commercial paper as a safe investment that would provide slightly higher yields than U.S. government bonds, and relied on the high ratings given the commercial-paper investment vehicles by S&P, a division of McGraw-Hill Cos., and Moody's Investors Service, a subsidiary of Moody's Corp.
"That is the frustrating aspect about all this: you have these highly rated investments that have been downgraded simply overnight," he said. "If you look historically at commercial paper, it's always been considered a safe investment. This was an area where you might be able to earn a little bit more within safe parameters."
In August, about $1 billion of the King County Investment Pool's $4.1 billion in assets was in commercial paper. After commercial paper began taking a beating in the market, the county stopped buying it; now less than 10% of the pool is in commercial paper, Mr. Guy said.
All of the $608 million in commercial paper that the county redeemed in recent weeks paid off at par value, Mr. Guy said. It is unclear, he said, whether the county will lose money on the outstanding commercial paper, including the Cheyne, Rhinebridge and Mainsail investments. If S&P does downgrade the investment pool's rating, Mr. Guy said, it is unlikely that would affect the county's ability to borrow money cheaply. The credit ratings on the county's investment pool and debt service aren't linked, he said.
King County's investments were in some of the riskiest or newest SIV structures in the market. Rhinebridge PLC and U.S. counterpart Rhinebridge LLC, for example, began operating as SIVs just this year in an attempt by German bank IKB Deutsche Industriebank AG to broaden its structured-investment business. IKB itself ran into financial troubles in late July when another bank affiliate, a conduit called Rhineland Funding Capital Corp., began having troubles paying off maturing debt.
King County also invested in a risky form of SIVs known as SIV-lites that typically invest more than SIVs in securities tied to residential-mortgage securities, including subprime loans. One investment by King County was in SIV-lite Mainsail II, an affiliate of London hedge fund Solent Capital Partners LLP. King County's investments have been under stress for several months. In August, S&P downgraded notes issued by Mainsail II.
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