World Bank Backs New Structured Finance Hedge Fund

Sep 12 2011 | 2:33pm ET

A World Bank subsidiary will invest in a hedge fund for the first time, putting up $100 million to help launch a new fund that will buy securitized bank loans in an effort to help banks meet stricter new capital requirements.

The Christofferson Robb & Co. fund's investments will come with a World Bank-friendly catch: The money freed up must be lent to companies in developing countries. The bank's International Finance Corp. said it hoped the $400 million fund would allow for as much as $4 billion in additional loans to emerging markets countries, loans that have been imperiled by Basel capital requirements.

"It's very easy to trash structured finance right now because it was an often-abused product in the last five to seven years," IFC's Xavier Jordan told the Financial Times. "But it is still a product that can have an enormously good impact as long as the products are structured correctly."

In the case of the new CRC fund, the products will be structured as a senior tranche paying 7%, which IFC's money will be used to buy, and a riskier tranche paying as much as 20%, bought by the fund's private investments. New York- and London-based CRC is targeting a six-year lifespan for the new fund.

"Securitization is maybe not the flavor of the moment, but this transfers risk of banks and lets investors take the risk," CRC's Richard Robb told the FT. "If something really bad does happen, the bank can continue to perform its funcations and the investors take the losses, which they're ready for."

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