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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

In July 2007, investors rapidly pulled their funding from asset-backed commercial paper (ABCP) programs that held US subprime mortgage-linked securities. According to the Financial Crisis Inquiry Commission (FCIC), German bank IKB Deutsche Industriebank AG (IKB) was the “first big casualty” of that run on ABCP. It had directly and indirectly guaranteed to provide EUR 9.3 billion in liquidity to its off-balance-sheet vehicle, Rhineland Funding Capital Corporation. German authorities and the Kreditanstalt für Wiederaufbau (KfW), a state-owned German development bank, quickly took over those obligations on July 30 to keep IKB solvent and prevent it from closing. KfW also agreed to cover up to EUR 1 billion of IKB’s potential losses on on-balance-sheet subprime mortgage assets. But IKB remained undercapitalized as losses increased on its on-balance-sheet exposures in 2008. KfW, with government backing, increased IKB’s capital by EUR 2.3 billion over the course of 2008, raising its ownership in IKB from a pre-Global Financial Crisis stake of 37.8% to a peak of 90.8%. The capital injection measures included the conversion of a EUR 54 million bond into equity in February 2008; a EUR 1 billion loan in February 2008, for which KfW immediately waived IKB’s obligation to repay unless IKB’s finances improved; and the injection of EUR 1.3 billion in common stock in August 2008. In October 2008, Lone Star, a US private equity firm, acquired KfW’s 90.8 % stake in IKB for EUR 137 million. The different measures German authorities took to support IKB cost the German taxpayers EUR 9.6 billion in total.

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