Five Facts about SIV-lites
Source: Reuters, 28 August 2007
The turmoil in the credit markets has put the focus on a range of
structures that use short-term debt to buy longer-term securities. Highly
leveraged structures called SIV-lites have become a particular focus after
Standard & Poor's downgraded two structures by up to 17 notches as they were
being forced to sell assets at a loss. Following are five facts about
SIV-lites, with data sourced from ratings agencies Moody's Investors Service
and Standard & Poor's. * STRUCTURE SIV-lites use a mixture of
technology from structured investment vehicles (SIVs) and collateralised
debt obligations (CDOs). Like SIVs, they issue short-term commercial paper
and medium-term notes to invest in longer-term securities. Unlike SIVs they
are not perpetual, making them look more like CDOs, which have fixed
maturity dates. CDOs however usually raise all of their money at the start
of their life and are not reliant on short-term funding. * INVESTMENTS
SIV-lites have invested the bulk of their cash in U.S. residential
mortgage-backed securities, with some exposure to U.S. subprime debt, but
with the vast majority of these securities rated triple-A or double-A,
according to Moody's Investors Service. By contrast, traditional SIVs invest
in a much more diverse pool of assets, including commercial mortgage-backed
securities, CDOs and financial debt, and invest in a wider range of ratings
categories. * RETURNS SIV-lites aim to profit from
differences in funding costs. Firstly, they raise the bulk of their cash in
short-term debt markets and buy longer-dated securities, benefiting from the
spread between the two. Secondly, they issue very highly-rated debt and
invest in a portfolio that has an average lower rating, again benefiting
from the spread between the two. This strategy has run into troubles as
funding in the short-term markets has dried up and the value of the
securities the SIV-lites has invested in has fallen, triggering forced sales
of assets by some of the structures. * RATINGS S&P has only rated
five SIV-lites, and initially rated all of their capital structure in the
investment-grade category. The four structures that use short-term funding
gained the highest A-1+ ratings, while the junior debt's highest ranking
tranches came in at AAA. Last week, however, it cut ratings on the Golden
Key and Mainsail II programmes sharply, and said it might cut its ratings on
Sachsen Funding I and Cairn High Grade Funding I. It affirmed ratings on
Duke Funding High Grade II-S/EGAM I, which has no commercial paper
outstanding. * MANAGERS SIV-lites are managed both by banks and
by hedge fund and CDO managers. Golden Key is managed by Guernsey-based
structured finance specialist Avendis Financial Services, while Mainsail II
is managed by UK hedge fund Solent Capital Partners. Sachsen Funding I is
managed by Sachsen LB Europe, part of the German Landesbank, while Cairn
High Grade Funding I is managed by Cairn Financial Products, a subsidiary of
credit fund Cairn Capital. Duke Funding High Grade II-S/EGAM I is managed by
Ellington Global Asset Management.
|
