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Friday, November 30, 2007

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.