The volatility continuing to grip the structured investment vehicle (SIV) sector has forced at least one program to liquidate assets, while others brace for a similar fate. IKB Credit Asset Management (manager of IKB's Rhinebridge SIV) announced that it had liquidated $176 million of securities, becoming the first "conventional" SIV to do so. Cheyne Finance, an SIV with assets with a face value of approximately GBP6 billion ($12.9 billion) run by Cheyne Capital Management, a London-based hedge fund, also faced liquidation.
About 79% of Rhinebridge's underlying assets were U.S.-related. Eighty percent were invested in RMBS, while roughly 21% of assets were backed by European assets and just 12% comprised U.K. securitized product, according to the rating agencies. Although no liquidity has been drawn yet from the Rhinebridge program, the SIV has relied on equity injections from IKB. But the manager said in a statement released by the bank that further support from IKB and its sponsors cannot be expected.
According to the manager, all of Rhinebridge's rating-agency tests remain in compliance despite the fact that Fitch Ratings placed notices of negative ratings watch on the program's CP and MTNs. Last week, however, Fitch announced that it had downgraded the loan facilities provided by IKB and IKB International S.A. The downgrades are the result of rating migrations in the portfolio referenced by the Havenrock II credit default swap.
"We believe the outcome from here looks pretty inevitable, whether Rhinebridge draws on any available third-party liquidity lines or drip-feeds more assets into the market to fund outflows," Deutsche Bank analysts said. "Ultimately, any forced portfolio defeasance is typically managed by the trustee, which may take the form of a fire-sale or a more orderly liquidation, depending on the perceived recoverable value for debt holders."
ABCP conduits that are big ABS buyers could also experience difficulties with their funding. European analysts, however, believe that widespread asset liquidations are unlikely because SIVs can avoid forced liquidations by recapitalizing their assets or liabilities.
A good example is an SIV-lite program run by Cairn Capital. Cairn High Grade Funding I, a $1.8 billion SIV-lite arranged by Barclays Capital and managed by Cairn Capital, was restructured last week when Barclays reportedly provided a term loan to bail out the $1.6 billion of maturing ABCP. According to market reports, investments will be converted into a cash-flow CDO, but without any overcollateralization tests, because the market-value triggers have been removed. Barclays stated they have hedged the term-funding risk via a swap.
"We expect SIV recapitalizations - whether on the asset or liability sides (or both) - to gather pace as these vehicles are taken out of the short-term funding (ABCP and MTN) market, with assets likely to be marked to market," Deutsche Bank analysts said.
Cheyne Capital, whose conduit was downgraded at the end of August, is also likely to be forced into liquidation, according to Standard & Poor's. The rating agency stated that the downgrade followed a breach of a key capital test that triggered an enforcement event. Cheyne's CP, senior MTNs and mezzanine capital notes were downgraded from A-1+' to A-2,' from AAA' to A-,' and from A' to B-,' respectively, with all remaining on negative watch.
Moody's Investor Service placed the mezzanine capital notes rated A3' and the combination capital notes rated Baa2' on review for possible downgrade, citing the inability to issue sufficient CP. Deutsche Bank analysts said that without an acceleration event, this should essentially mean that the trustee will look to draw down all available liquidity, cease any funding and sell investments to pay outflows in accordance with whatever agreement the manager and rating agencies put together. The Cheyne SIV portfolio is believed to include 18% CDOs, 11% CMBS and 48% RMBS (of which 24% may be non-triple-A and 13% is monoline-wrapped, according to Moody's). Around 82% has exposure to the U.S., 11% to the U.K., 4% to the Netherlands and just over 2% to Australia.
"Asset allocation and liquidity problems together caused the current difficulties for Cheyne, a relatively young SIV," reported analysts at Morgan Stanley. "The larger, much older and often bank-sponsored SIVs that make up the bulk of the sector's assets have less exposure to recent ABS vintages, longer investment histories and potential sponsor support."
These larger, older SIVs are not close to being forced to wind down or sell assets at distressed levels. According Morgan Stanley, subprime RMBS constitutes only 2% of all SIV investments, although a disproportionate exposure to subprime exists for some vehicles. The SIV-lites in particular have a high exposure (96%) to RMBS and are invested primarily in U.S. RMBS. Morgan Stanley analysts estimated the size of the SIV-lite market at approximately $9 billion and believe that a wind-down at two out of the five vehicles will put pressure on ABS spreads for the immediate future.
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