Public investment pool stung by mortgage woes

Fallout from the nationwide mortgage-market meltdown has KO'd two small investments in the King County Investment Pool, but the county's finance director remains optimistic the fund won't suffer significant losses.

The investment pool, which manages about $4.1 billion for King County, Sound Transit and dozens of school districts and smaller jurisdictions, holds about $100 million in short-term "commercial paper" issued by U.K.-based Cheyne Finance and Rhinebridge, a German entity.

Last week, Cheyne (pronounced chain-ee), which has been in receivership since last month and is seeking a buyer, won court permission to halt payments on its commercial paper, including $50 million due last Wednesday to the investment pool.

Rhinebridge also defaulted on some of its commercial paper last week (though not the slice held by the investment pool, which isn't due until January). German media have reported that its parent bank is preparing to liquidate it.

Ken Guy, the county's director of finance and business operations, said Monday he was hopeful that Cheyne would be bought and that senior creditors — including the investment pool — would be repaid in full.

Cheyne and its receiver, Deloitte & Touche, said Monday that the Royal Bank of Scotland was in talks to buy Cheyne's assets.

If that happens, Guy said, "it could be a matter of weeks when we'd see the money, rather than years."

The outlook for Rhinebridge, which is owned by IKB Deutsche Industriebank but operates out of Dublin, is less clear. A leading German newspaper, without citing sources, said IKB would liquidate Rhinebridge after the Dublin Stock Exchange retracted the right to run it.

"We don't know if they're in an orderly wind-down or something else," Guy said, adding that Rhinebridge has scheduled a conference call with investors for this morning to update them on its status.

Cheyne and Rhinebridge both are "structured investment vehicles," or SIVs. Such entities borrow money short-term using commercial paper and invest it in longer-term, higher-yielding "asset-backed securities" — typically backed by residential and commercial mortgages, auto loans, credit-card payments and other cash flows.

But the turmoil in the U.S. mortgage markets has eroded the portfolio value of many SIVs, hampering their ability to redeem their commercial paper on time or refinance by issuing new paper.

Until recently, commercial paper was seen as a reasonably safe and attractive investment for funds such as the King County Investment Pool. The pool is a sort of piggy bank where local governments can stash their excess cash until it's needed; by law, earning high returns takes a back seat to safety.

As recently as two months ago, the pool had about $1 billion, or nearly 25 percent of its assets — the statutory maximum — invested in commercial paper.

But after the investment rating of another commercial-paper fund in the pool's portfolio, Mainsail II, was cut to junk, the pool stopped buying new commercial paper.

Since then, Guy said $608 million in commercial paper has been repaid, leaving $379 million remaining in the pool's portfolio.

Drew DeSilver: 206-464-3145

or ddesilver@seattletimes.com