June is turning out to be an important month for a couple of structured investment vehicle (SIV) programs. Mizuho Securities announced plans to roll out a SIV-lite deal collateralized by leveraged loans, and Morgan Stanley arranged a program that includes a fourth tranche, an increasingly popular feature in SIV programs.
The program from Mizuho Securities is actually a SIV-lite. It will use its proceeds to fund leveraged loans because that asset is considered to be more stable than traditional SIV investments, which include residential mortgages and CDOs, said Alexander Rekeda, head of structured credit at Mizuho Securities. Recovery rates are also higher among leveraged loans than other typical SIV assets.
"Any collateral you put into a SIV requires mark to market," a market source said. "That is a bit of a drag on the structure. When you create a SIV, you want collateral that is more stable from a mark to market perspective."
Slated to come to market by yearend, the SIV-lite deal will help Mizuho meet the demands of structured credit investors who are looking for term-note commitments with finite maturities, rather than the typical open-ended structure of regular SIV programs. The latter can issue commercial paper, medium-term notes and capital notes. They can change their leverage levels, thus growing or decreasing in size. The funding behind SIV-lites is also simpler, because they tend to issue mainly CP and capital notes.
Aside from its relative straightforwardness, Mizuho's program, whose name was not released at press time, will also issue yen-denominated capital notes.
"Given the specifics of our banks, we have some clients in that part of the world that are interested in the product," Rekeda said.
Mizuho Securities is still keen on developing a strong traditional SIV business, according to market sources. Earlier this year, the investment bank wrapped up a traditional SIV program called Variable Leveraged Fund, or VLF, for which it acted as arranger and placement agent. With outstandings totaling about $700 million, the bank hopes to begin marketing notes again later this year, according to market sources. The bank is also considering putting together one other traditional SIV program this year.
Elsewhere, a more traditional SIV called Rhinebridge LLC from arranger Morgan Stanley includes a fourth tranche that issues senior capital notes. The inclusion of the fourth tranche follows a pattern of further tranching of SIV structures and shortening maturities, by which SIV program arrangers and sponsors hope to reduce the cost of funding for their vehicles, market observers say.
Whether that strategy pays off consistently is still an open question, say market sources. If for instance, Fitch Ratings and Standard & Poor's required 5% credit enhancement levels, but Moody's Investors Service required 7%, a program manager could issue single-A and triple-A tranches that achieve different enhancement levels of 5% and 2% respectively. In the end, the blended average of two lower-rated tranches would require a cost of funding that is lower than if a single-A, 7% tranche was issued.
The challenge, however, is that by splitting up the tranches and making them smaller, those tranches could potentially be less liquid, market sources say.
"There is a big move from two-tier to three-tier structures, but that is driven by managers trying to get liquidity," one market source said.
The list of programs to include the fourth capital tranche is a short one, because in the end, market sources say, the benefits of that feature in SIVs have not been consistently proven. Morgan Stanley did not return calls by press time. The Links Finance program, sponsored by Bank of Montreal, is believed to be the SIV that introduced that innovation. Cheney Finance, sponsored by Cheney Asset Management, also uses the fourth-tranche feature.
Arranged by Morgan Stanley's London office, the Rhinebridge program is sponsored by IKB, a German industrial bank. It issues medium-term senior secured notes and began trading in mid-June, according to market sources familiar with the program.
The program began trading earlier this month.
(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.