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Lone Star picks up German subprime casualty

The US private equity firm will add a second struggling German bank to its portfolio, purchasing a 91 percent stake in business bank IKB, which entered into an 'existential crisis' in July 2007.

Lone Star Funds will acquire 90.8 percent of German bank IKB for an undisclosed but “positive” purchase price, according to a statement from the vendor, the state-owned German bank KfW.

IKB, which specialises in lending to small- and medium-sized businesses in Germany, was the first European

In this transaction the nominal purchase price is not all that significant

Wolfgang Kroh

casualty of the sub-prime crisis.

Since the lender’s announcement in July 2007 that it was dangerously exposed to the US subprime mortgage market, it has been the subject of two separate rescue packages reported to be worth over €8 billion ($11.9 billion).

It has also gone through an insider trading probe by German regulator BarFin, as well as an EU investigation into state aid; had a lawsuit filed against it by New York-based bond insurer FGIC; and seen several senior departures.

Wolfgang Kroh, chief executive officer of KfW, described the bank as facing “an existential crisis” at a press conference this morning.

IKB is the second stricken German bank that Lone Star has bought, following its acquisition of Allgemeine HypothekenBank Rheinboden in late 2005, now known as Corealcredit.

Lone Star said this morning the deal will entail a “clean break” from the German state-backed KfW and that the private equity firm will assume IKB’s future risks. It will provide IKB with an undisclosed amount of additional equity.

“In this transaction the nominal purchase price alone is not all that significant,” said Kroh.

In order to attain the goals of the IKB rescue mission, KfW took on an extraordinarily heavy burden, but one that is not too heavy to handle

Wolfgang Kroh

He underscored the fact that the sale meets the key objectives of the IKB rescue effort: preventing the lender’s collapse and maintaining German economic stability.

“In order to attain the goals of the IKB rescue mission, KfW took on an extraordinarily heavy burden, but one that is not too heavy to handle,” said Kroh.

By of the end of 2007, the IKB rescue package had left a €7.2 billion hole in KfW’s balance sheet. On completion of the deal, which is expected once the EU completes its investigation into state aid, KfW predicts the costs will be as much as €7.8 billion.

Lone Star is not the only private equity firm seizing opportunities thrown up by the subprime fallout.

Recently Christopher Flowers, chairman of financial services-focused private equity firm JC Flowers, reportedly launched a fund in his own name to let him avoid US federal regulations regarding investment in banks.

In May, JC Flowers injected €300 million into HSH Nordbank, a German Landesbank, as part of an attempt to strengthen the financial institution’s balance sheet.

Lone Star recently agreed to purchase $30.6 billion of collateralised debt obligations from beleaguered investment bank Merrill Lynch for $6.7 million.

The sale of IKB follows yesterday’s approval by the German government of new laws designed to prevent foreign investors, particularly sovereign wealth funds, buying strategically important German assets.