For those familiar with the sector, the name structured investment vehicles (SIV) can suggest a fairly generalist, diverse investment strategy, and for much of the industry's history, that was true. These days, however, newer SIV managers are targeting structured finance assets to bolster their vehicles.
AIG FP Capital Management, a London-based investment management unit of AIG Financial Products Corp., is managing Nightingale Finance, which will have the ability to issue to up to $25 billion in euro and U.S. dollar-denominated commercial paper and medium-term notes. At press time, it was unclear as to when Nightingale would begin issuing its debt securities, although the start of trading is expected to be soon. One thing is certain: Nightingale is using its traditional structure in a somewhat trendy way.
It seems to be all the rage these days for SIVs to place a greater portion of their assets in structured finance products, such as asset-backed securities. For its part, Nightingale can place up to 100% of its assets in ABS, although it is flexible enough to invest its assets in a number of other types of debt, including corporates. It was unclear as to what underlying revenues would secure its ABS assets, according to people familiar with the deal.
Nightingale has a traditional structure wherein a senior debt portion is supported by a capital layer. Like a lot of other SIVs, it can invest in a wide range of eligible securities, but AIG designed it to invest primarily in structured finance products. Given the current spread environment, the structured finance business offers an easy way to create diversification. Many SIV vehicles invest in assets with credit ratings that generally hover in the double-A range, and in such cases it is not easy to achieve a decent spread at the corporate portfolio level. A lot of managers of newer SIV vehicles are waking up to that fact and investing more heavily in that sector, although managers of older SIVs are used to taking that investment approach. Also, compared to such assets as corporate bonds, structured finance products offer a more favorable risk-return profile.
"It is mainly because of the availability [of product] and the depth of the market," said Martin Rast, a London-based analyst from Moody's Investors Service, explaining the SIV industry's rationale. "There are quite a lot of liquid investments in the structured finance world."
Nightingale's assets must have a minimum credit rating of Baa3', but the average rating is expected to be much higher than that. The anticipated quality of those assets, which can be sold to repay maturing securities, plus a liquidity facility from AIG, prompted Moody's to give its U.S. and Euro commercial paper and senior medium term notes Prime-1' ratings, Rast said.
Although Nightingale Finance is believed to be AIG FP Capital's first SIV, the company has had substantial practice managing similar vehicles. At press time, the company had two arbitrage ABCP vehicles to its name, Curzon Funding and Nyala Funding, according to the Moody's ABCP Index. Although the credit rating agency does assign SIV manager ratings, it has not given AIG FP a public SQ rating.
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