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Showing posts with label SIVs. Show all posts
Showing posts with label SIVs. Show all posts

Friday, December 28, 2007

Legg Mason Bails Out Cash Funds

by Calculated Risk on 12/28/2007 06:57:00 PM

From Bloomberg: Legg Mason Shores Up Cash Funds With $1.12 Billion

Legg Mason Inc. pumped $1.12 billion into two non-U.S. cash funds to prevent losses, the biggest bailout by a money manager tied to asset-backed debt sold by structured investment vehicles.

The move, along with an earlier cash infusion, will reduce earnings per share by 15 cents in the quarter ending Dec. 31, the Baltimore-based company said today in a statement.
The Confessional is still open.

Friday, December 21, 2007

Super SIV is Dead

by Calculated Risk on 12/21/2007 03:20:00 PM

From the WSJ: Banks to Abandon Super-SIV Plan

Lack of interest has led the banks to drop the plan -- known as the Master-Enhanced Liquidity Conduit, or M-LEC. ...

The banks ... are likely to issue a statement by Monday saying they no longer intend to go forward with the fund, according to the people familiar with the matter.
This just makes official (well, on Monday) what was obvious from the beginning.

Tuesday, December 18, 2007

Financial Times on Second Wave of SIV Liquidity Issues

by Calculated Risk on 12/18/2007 07:19:00 PM

From the Financial Times: Second wave of SIV liquidity problems looms

January will bring the start of a second wave of liquidity problems for SIVs as the vast majority of medium-term funding starts to come due for repayment, according to a report from Dresdner Kleinwort analysts to be published on Wednesday.
...
SIVs rely on cheap, short-term debt ... [that] has come from both ...(CP) ... and from the slightly longer maturity medium-term note (MTN) markets. ... “So far SIVs have primarily felt the impact of collapsed CP issuance,” said Domenico Picone at DrK. “Outstanding MTN for the 30 SIVs currently stands at $181bn, which will be the next liquidity challenge they face.”
Luckily the SuperSIV will be ready to step in, from Bloomberg: `SuperSIV' Fund to Start Buying in Weeks, Banks Say.

Thursday, December 13, 2007

WSJ: Citi to Move SIVs to Balance Sheet

by Calculated Risk on 12/13/2007 06:48:00 PM

From the WSJ: Citigroup to Bring $49 Billion From SIVs Onto Its Balance Sheet

Citigroup ..., is bailing out seven struggling investment entities, bringing $49 billion onto its beleaguered balance sheet and further denting its depleted capital base.
...
The move could be the death knell for an industry-wide effort to create a rescue fund for the SIVs. ...

The move underscores how quickly Vikram Pandit, who was named Citi's new chief executive on Tuesday, is moving to tackle the myriad problems facing Citigroup. Just two days into his tenure, Mr. Pandit decided to bring the SIV assets onto the bank's balance sheet ...
...
By bringing the SIV assets on its balance sheet, Citigroup's already-depleted capital levels will come under further stress.
...
A Citigroup spokeswoman declined to comment on possible dividend cuts or capital-raising plans.

Tuesday, December 11, 2007

SuperSIV Melting Away

by Calculated Risk on 12/11/2007 11:19:00 PM

Reuters: SuperSIV fund now seen only $30 bln in size-CNBC

A banking industry fund to bail out structured investment vehicles reeling from the subprime mortgage crisis may only total $30 billion ... CNBC reported on Tuesday.

Bankers working on the fund said "if they're lucky," they may get $30 billion in SIV assets in the fund ...
On Nov 23rd, it was $75 billion to $100 billion.

Last week, it was $50 billion.

Now the SuperSIV will be "lucky" to be $30 billion. It's melting away.

I wouldn't be surprised if Citi's new CEO Vikram Pandit decides to pull out of the SuperSIV and move what remains of the Citi SIVs to their balance sheet.

A new broom sweeps clean.

Friday, December 07, 2007

S&P Cuts Capital Notes of 13 SIVs

by Calculated Risk on 12/07/2007 07:01:00 PM

From Bloomberg: S&P Cuts Capital Notes of 13 SIVs, More Cuts Possible (hat tip John)

Standard & Poor's said it lowered credit ratings on capital notes of 13 structured investment vehicles and placed debt of 18 SIVs on negative outlook ...

Orion Finance Corp., managed by asset manager Eiger Capital Ltd., became the fourth SIV to enter ``enforcement mode,'' requiring the appointment of a trustee to protect senior debt holders. Premier Asset Collateralized Entity Ltd., an SIV sponsored by Societe Generale SA is close to breaching capital tests that would trigger enforcement, S&P said in a statement.
...
``We do not see asset values rising appreciably in the coming months, and we could see price erosion continue,'' S&P analysts led by Nik Khakee in New York and Katrien van Acoleyen in London wrote in a report today. ``Also, we cannot see investors returning to the market in sufficient numbers to reverse the funding problem, and we are aware that not all restructuring plans are yet final.''
...
Ratings on junior debt of Premier Asset and K2 Corp. ... were cut to below investment grade. Rankings on capital notes of Five Finance Corp., Sedna Finance Corp. and Zela Finance Corp., three SIVs run by New York-based Citigroup Inc., were also lowered.

The ratings cuts reflect ``the increased likelihood that capital investors in these vehicles will see actual losses materialize,'' the S&P analysts said.
What is a Friday without some rating cuts?

Thursday, December 06, 2007

Rabobank bails out SIV, "model is dead"

by Calculated Risk on 12/06/2007 10:23:00 PM

From the Financial Times: Rabobank bails out SIV

Rabobank on Thursday ... bail[ed] out a troubled structured investment vehicle ... The Dutch bank plans to take assets worth €5.2bn ($7.6bn) on to its balance sheet to prevent a fire sale of Tango Finance.

The bank, which manages the SIV with Citigroup, has already sold almost half the vehicle’s assets because it could not find sufficient funding. ...

Eddie Villiers, responsible for European sales at Rabobank, said: "The current SIV business model is dead and so there is no prospect of its survival in its current form."

“Our decision has been made purely for liquidity reasons as the assets in the portfolio are of high quality, but there is no market for asset-backed commercial paper for SIVs. We have done this for reputational reasons as our exposure to the SIV is small,” Mr Villiers said.
Memo to Paulson and Citigroup: SIVs are dead.

'Lack of interest' in Super Fund SIV

by Calculated Risk on 12/06/2007 01:46:00 AM

From the WSJ: 'Super Fund' for SIVs, Hoped for $100 Billion, May Be Half the Size

The three banks assembling a "super fund" ... are scaling back its size due to a lack of interest ...

Originally envisioned as a $100 billion fund that would buy assets from the struggling investment vehicles, the fund may now wind up being about half that size... The banks, which have informally been seeking participation from other financial institutions, expect to start a formal syndication process within the next several days.
Two weeks ago it was "next week". Now it's the next several days. Shrinkage and schedule slippage are not a good signs for the Citi bailout Super SIV cleanup fund.

Wednesday, December 05, 2007

Orange County: Bankrupt in '94, Now Invested in SIVs

by Calculated Risk on 12/05/2007 12:19:00 PM

From Bloomberg: Orange County Funds Hold SIV Debt on Moody's Review

Orange County, California, bankrupted in 1994 by bad bets on interest rates, bought structured investment vehicles similar to those that caused a run on funds invested by local governments in Florida.

Twenty percent, or $460 million, of the county's $2.3 billion Extended Fund is invested in so-called SIVs that may face credit-rating cuts, said Treasurer Chriss Street. ...

Orange County's money is invested in commercial paper under review by Moody's that was issued by Centauri Corp.'s CC USA Inc., Citigroup Inc.'s Five Finance Inc., Standard Chartered Plc.'s Whistlejacket Capital Ltd. and Tango Finance Corp., according to Rodenhuis.
It doesn't sound like Orange County will suffer any significant losses, but I doubt they will be investing in any more SIV asset backed commercial paper.

Tuesday, December 04, 2007

Fitch Downgrades Citigroup SIV 12 Levels

by Calculated Risk on 12/04/2007 02:16:00 PM

From Bloomberg: Citigroup SIV's Junior Sedna Debt Cut to CCC by Fitch (hat tip FFDIC)

Citigroup Inc.'s Sedna Finance Corp. had $867 million of junior-ranking debt downgraded 12 levels to CCC by Fitch Ratings after declines in the structured investment vehicle's assets.
...
Sedna's net asset value has fallen to 54 percent, eroding nearly all the protection the downgraded ``second priority senior'' notes gets from ranking above the lowest layer of debt, Fitch said in a statement today.
12 levels? Yikes!

Money Market Funds with SIV Exposure

by Calculated Risk on 12/04/2007 12:01:00 AM

From the WSJ: SIV Exposure Seen at Some Money Funds

Funds recently holding some of the SIVs include some from Barclays PLC's Barclays Global Investors; UBS AG; Charles Schwab Corp.; Deutsche Bank AG; BNY Hamilton Funds and Morgan Stanley.
...
The funds range in asset size from $2 billion to $36 billion, and hold about 1% to 2% of their investments in some of the SIVs.
...
Among funds holding SIVs is the $29 billion Western Asset Money Market Fund, run by a unit of Legg Mason Inc. The fund holds a SIV called Orion Finance, which was on Friday downgraded by Moody's. Orion represents about 0.5% of the fund.

A Legg Mason spokeswoman said in an email that the company is confident in the stability of the fund's net asset value. "By and large, SIVs are paying on time, and Legg Mason's money funds' exposure to SIVs continues to come down as paper matures and pays."
It is extremely unlikely that any of these funds will "break the buck". However the last comment is important for the SIVs: everyone wants to reduce their exposure to SIVs as the paper matures.

Monday, December 03, 2007

German Banks Bail Out SIVs

by Calculated Risk on 12/03/2007 02:54:00 PM

From Bloomberg: WestLB, HSH Nordbank Bail Out $15 Billion of SIVs (hat tip Brian)

WestLB AG ... and Hamburg-based HSH Nordbank AG provided financing to more than $15 billion of troubled investment funds to prevent a fire sale of their assets.

WestLB provided a credit line for its $11 billion structured investment vehicle called Harrier Finance to repay commercial paper, the Dusseldorf-based bank said in an e-mailed statement today. HSH Nordbank said it will provide backup funding to cover all commercial paper issued by its 3.3 billion- euro ($4.8 billion) Carrera Capital SIV, spokesman Reinhard Schmid said in an interview.
To understand these stories, it helps to understand the structure of an SIV (Structured Investment Vehicle). (see SIV Accounting for more)

First an SIV has investors - like hedge funds or wealthy individuals - who invest say $1 Billion in the SIV (the equity). Then the SIV issues commercial paper (CP) and medium-term notes (MTN) that pay slightly higher rates than similar duration paper. The typical SIV, according to Fitch, uses 14 times leverage, so in our example the SIV would sell CP and MTN for $14 Billion.

Now the SIV invests this $15 Billion ($1 Billion equity and $14 Billion borrowed) in longer term notes. The idea is simple: borrow short, lend long, hedge the interest rate and credit risks - and the profits flow to the investors in the SIV.

Back to the story: what happens when the CP comes due and no one wants to buy any more? To cover the CP, the SIV might have to sell the longer term assets at a steep discount, and this would trigger a liquidation of the entire SIV. To prevent this "fire sale", the sponsoring banks stepped up and provided the financing to cover the expiring CP.

Of course this limits the banks ability to make other loans (aka Credit Crunch). Perhaps this story is related: Banks Urge UK Clients To Stop Borrowing (hat tip FFIDC)
The banks are urging some of their biggest clients not to draw on standby credit facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability to fund themselves.

Montana, Connecticut: SIV Bagholders

by Calculated Risk on 12/03/2007 02:07:00 PM

Ahhh, I'm reminded of Tanta's post in early June: Reelin' In the Suckers

Once again, from David Evans at Bloomberg: Montana, Connecticut Hold SIVs Downgraded, Reviewed by Moody's (hat tip energyecon)

Montana and Connecticut state-run investment funds hold debt tainted by the subprime mortgage collapse that was cut or put under review by Moody's Investors Service, leaving local governments vulnerable to losses.

... Montana owns $50 million of the paper. Moody's put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records show.

``This just reinforces the fact that we have a serious issue,'' said State Senator Dave Lewis, of Helena, Montana, a member of the Legislative Audit Committee.
...
The Montana pool, managed by the Montana Board of Investments, has 25 percent, or $550 million, invested in SIVs, all of which carried top investment ratings when purchased.
...
Connecticut's Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody's. The state's $5.8 billion fund held notes issued by SIVs affiliated with Citigroup ...

Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance.
More bagholders found.

Friday, November 30, 2007

Florida Schools Hit by Fund Freeze

by Calculated Risk on 11/30/2007 07:56:00 PM

From David Evans at Bloomberg: Florida Schools Struggle to Pay Teachers Amid Freeze (hat tip Saboor)

School districts, counties and cities across Florida sought to raise cash after being denied access to their deposits in a $15 billion state-run investment fund.

The Jefferson County school district was forced to take out a short-term loan to cover payroll for the 220 teachers and other employees in the system after $2.7 million it held in the pool was frozen yesterday. At least five other districts also obtained last-minute loans, said Wayne Blanton, executive director of the Florida School Boards Association.

``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, located 30 miles (48 kilometers) east of the state capital Tallahassee. ``What we just experienced here is a classic run-on-the bank meltdown.''
This is the same school disctrict mentioned in David Evans piece on Nov 15th: Public School Funds Hit by SIV Debts Hidden in Investment Pools
Hal Wilson smiles at the blue numbers on his desktop screen. His money is yielding 5.77 percent. For the chief financial officer of Florida's Jefferson County school board, that means the $2.7 million of taxpayer funds he's placed in the state's Local Government Investment Pool is earning more on this October day than it would get in a money market fund.

And Wilson says he knows the Florida officials who manage the funds of the 1,559-student district have invested them wisely.

``We're such a small school district,'' Wilson, 55, says. ``We don't have the time or staff for professional money management. They have lots of investment advisers. It's risk free and easy.''
From "risk free and easy" to "classic run-on-the bank meltdown" in less than two months weeks.

Moody's Takes Rating Action on SIVs

by Calculated Risk on 11/30/2007 04:31:00 PM

UPDATE: Here is the Bloomberg story: Moody's Says Citigroup SIV Debt Ratings Under Threat (hat tip CBam)

From Reuters: Moody's cuts or may cut over $100 billion of SIV debt

Moody's pointed to continued decline in the value of the investments made by structured investment vehicles, or SIVs, in downgrading or issuing warnings for about $116 billion of their debt.

"The situation has not yet stabilized and further rating actions could follow," Moody's said in a news release.
...
Given the continued decline in SIV asset values, Moody's said it is now expanding its review, which is not complete, to include the senior debt of some vehicles.
From Moody's (no link)
London, 30 November 2007 -- Moody's Investors Service announced today that it has completed part of its review of the SIV sector. This review was prompted by the continued market value declines of asset portfolios. Moody's confirmed, downgraded, or placed on review for possible downgrade, the ratings of 79 debt programmes (with a total nominal amount of approximately US$130 billion). This action affects 20 SIVs as described below.

Moody's has completed its review of capital notes started on November 7th. The significant additional deterioration in market value of assets across the SIV sector observed since November 7th has resulted in the expansion of Moody's original review to include the senior debt ratings of some vehicles. Moody's will continue to closely monitor SIV ratings, taking actions on individual vehicles as warranted.

In its monitoring of SIV ratings, Moody's pays particular attention to the evolving liquidity situation of each vehicle, changes in portfolio market value, and the vehicle's prospects for restructuring.

Rationale for Rating Actions

In recent weeks, Moody's has observed material declines in market value across most asset classes in SIV portfolios. These asset classes include Financial Institutions, which represent, on average, 38% of SIV portfolios, ABS 16%, CDOs 12% (including CDOs of ABS 1.4%). Financial Institutions debt suffered an average price decline of 1.6% from October 19th to November 23rd, ABS 0.7%, CDOs (excluding CDOs of ABS) 0.5%, and CDOs of ABS 22%. Furthermore, the continued inability to issue or roll Asset Backed Commercial Paper (ABCP) or Medium Term Notes (MTNs) causes mark-to-market losses to be realised when assets are liquidated to meet maturing ABCP and MTNs.

In this latest review, Moody's employed its updated methodology as announced on September 5th. The methodology update reflects the unprecedented volatility in the market value of the securities held by SIVs. For each SIV, Moody's models expected loss using a stressed volatility for the distribution of market asset prices based primarily on declines observed since July 2007. With this stress, only those tranches of the ABCP and MTNs issued that can sustain an additional price decline of two times the decline observed in this period will retain Aaa/Prime-1 ratings.

For example, if the net asset value of a SIV (measured as the difference between portfolio market value and the notional value of senior liabilities, expressed as a percentage of paid-in capital) was par in July and declined 30% to a current value of 70%, Moody's assumes that the probability of a deterioration in net asset value by an additional 60% of par to levels below 10% is negligible and is therefore consistent with a Aaa probability of default. Moody's analysis therefore assumes that all asset prices may move in a highly correlated manner. In addition, in Moody's stress analysis of the senior debt, Moody's reduced its estimate of current net asset value of all SIVs by 10-15 percentage points to reflect uncertainty in the ability to execute trades at current market quotes given continued NAV declines.

In modelling both senior and capital notes, Moody's extended its analysis by including the potential benefits of refinancing maturing senior debt using repurchase agreements. Moody's assumes that a vehicle that is able to replace maturing senior funding by repo funding continues to do so until an optimal level of repos is attained; the vehicle then enters into wind-down mode and, for the purpose of our analysis, liquidates its assets at distressed levels in order to satisfy noteholders.

Conclusions and Outlook

Moody's has taken rating actions as a result of deteriorating credit and other market conditions. It appears that the situation has not yet stabilised and further rating actions could follow. As with previous actions, the rating actions Moody's has taken today are not a result of any credit problems in the assets held by SIVs, but rather a reflection of the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities.

Monday, November 26, 2007

SIV Accounting

by Calculated Risk on 11/26/2007 12:10:00 PM

What does it mean that HSBC is moving their SIVs to their balance sheet?

Let's start with the structure of an SIV (Structured Investment Vehicle). First an SIV has investors - like hedge funds or wealthy individuals - who invest say $1 Billion in the SIV (the equity). Then the SIV issues commercial paper (CP) and medium-term notes (MTN) that pay slightly higher rates than similar duration paper. The typical SIV, according to Fitch, uses 14 times leverage, so in our example the SIV would sell CP and MTN for $14 Billion.

Now the SIV invests this $15 Billion ($1 Billion equity and $14 Billion borrowed) in longer term notes. The idea is simple: borrow short, lend long, hedge the interest rate and credit risks - and the profits flow to the investors in the SIV.

So what does a bank like HSBC have to do with this? Usually the bank sets up the SIV, attracts the investors, manages the SIV for a fee - and there was always the appearance that the SIV CP was backed by the bank - perhaps allowing the CP and MTN to pay lower interest rates.

So what is the problem? Some SIVs invested in asset backed paper, backed by home mortgages. Even though the SIVs almost always invested in the highest tranches (with no losses to date), the market value of these assets has fallen recently (not a news flash). This means that the investors in the SIV (the equity) have taken paper losses on their $1 Billion investment.

UPDATE: Note the following NAVs are for the equity portion. A NAV of 71% means the $1 Billion equity in the example is now worth $710 million.

In fact many of the SIV NAVs have fallen substantially. From Moody's: Moody's says some SIV NAVs have fallen below 50%

Moody's [on Nov 8th] said that the average NAV across the SIV sector has fallen from 101% at the beginning of July to 71% at the beginning of November, and the shut-down of the CP market has led to realised losses in some cases.

However, the rating agency pointed out that there was significant variation between the NAVs of different SIVs, with some declining only to 90% and others falling below 50%.
Once the value of the equity falls enough (usually 50%) there is usually a trigger event forcing the SIV to liquidate the longer term investments. A forced liquidation might not only wipe out all the remaining SIV equity, but the holders of the CP and MTN might take some losses too.

This has made potential investors in CP and MTN (not to be confused with the investors in the equity of the SIV) to refuse to buy any more CP. Since there is a duration mismatch - the investments are in longer term notes, CP is less than 9 months - the SIV is stuck with a liquidity problem when the CP comes due.

To solve this problem, a bank like HSBC could explicity guarantee the CP and MTN, and this would attract investors in CP and MTN again. But under accounting rules, this guarantee means the SIV belongs on the bank's balance sheet. The structure stays the same - the SIV equity investors still take the losses - but there is no liquidation event. If the losses exceed the equity investment ($1 Billion in our example), then the bank would start taking losses.

From the HSBC article this morning:
[HSBC] insists earnings won't be materially impacted, because existing investors will continue to bear all economic risk from actual losses.
Clearly HSBC think these is adequate equity in these SIVs to cushion the bank from any losses.

Finally, to the balance sheet!

The balance sheet lists the assets and liabilities of the company. Moving the SIV to the balance sheet simply means adding the $15 Billion in assets (those longer term notes) to the Asset portion of the balance sheet, and moving the $15 Billion in CP, MTN and SIV equity to Liabilities. The new assets balance with the new liabilities, and there is no income or loss for the bank. Since the equity will take the losses first, any mark down in the $15 Billion in assets will be matched by a mark down in the liabilities - up to $1 Billion.

So what is the problem if there are no losses for the bank? There is an impact on the ratios of the bank - the reason the SIVs were off the balance sheet in the first place - and this limits other lending activities of the bank, contributing to the credit contraction.

HSBC Moves SIVs to Balance Sheet

by Calculated Risk on 11/26/2007 09:30:00 AM

From MarketWatch: HSBC to provide $35 billion in funding to SIVs

HSBC Holdings on Monday said it would move two of its structured investment vehicles onto its balance sheet and provide up to $35 billion in funding, saying it doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks hold.

...[HSBC] insists earnings won't be materially impacted, because existing investors will continue to bear all economic risk from actual losses.

"We believe that HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector ... " the bank said in a statement.
This is a poke in the eye to the SIV Superfund and will put pressure on Citi and others to make similar moves.

Thursday, November 22, 2007

SIV Superfund Seeking Support

by Calculated Risk on 11/22/2007 11:21:00 PM

From the WSJ: SIV-Plan Founders to Seek More Support for Superfund

[Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co] ... are expected next week to start soliciting their industry brethren to pitch in with the effort ...

... BlackRock Inc. is expected next week to be named the manager for the $75 billion to $100 billion fund ...

The participation of other banks will play a significant role in the fund's success. ... some banks have expressed informal interest ...
The purpose of the Superfund is to buy time for a "more orderly demise" of many of these SIVs. To buy time, other institutions will have to get involved, so this will be interesting to follow.

Friday, November 16, 2007

The Corporate We or the Editorial We?

by Tanta on 11/16/2007 08:35:00 AM

Floyd Norris sums it all up:

We should have known something was strange.

Tuesday, November 13, 2007

JPMorgan: SIVs have No Business Purpose

by Calculated Risk on 11/13/2007 02:05:00 PM

Quote of the day from Bloomberg: JPMorgan's Dimon Says SIVs Will `Go the Way of the Dinosaur'

"SIVs don't have a business purpose."
Jamie Dimon, JPMorgan Chase & Co. CEO, Nov 13, 2007