The SIV unease continues to unfold with more drama. Moody's Investor Service announced recently that 16 SIVs, holding approximately $30.3 billion of debt securities, have been placed on review and face possible downgrade. Among the carnage are some of the more established vehicles from veteran players like Citigroup, Rabobank and HSBC. The negative news sent pricing spreads spiraling out to crisis-mode levels.
Just last week, Fitch Ratings announced that it had downgraded Axon Financial MTN and CP to CCC/ ShortTerm C' and its mezzanine notes were also downgraded to CC.' In addition, the agency placed Sedna second priority senior notes on Rating Watch Negative. The negative news sent pricing spreads spiraling out to crisis mode levels. Analysts at Deutsche Bank said that European asset-backed floater spreads have retraced much of the tightening seen since early September. "SIVs require a liquid market and stable spreads, and we don't have either in Europe right now," said one investor who is currently trying to walk away from his SIV investment. "I've been expecting the ratings agencies to take action, but with double spread widening, I'm probably toast."
One analyst at a European-based bank said that SIVs would have to keep their net asset values at above 66 percent in order to avoid a downgrade. And, according to Henry Tabe, group managing director at Moody's in charge of international derivatives ratings, the current trends are making this scenario look more and more unlikely.
"As an example of what has happened to portfolio values, the average NAV across the traditional SIV sector was 102% at the beginning of June, 101% at the beginning of July, 94% at the beginning of August, 85% at the beginning of September, 74% at the beginning of October and 71% at the beginning of November," Tabe said during a recent teleconference.
According to analysts at Dresdner Kleinwort, the shrinking ABCP market is also weighing on the SIV sector, adding to the lack of available liquidity. "Investors, predominantly money market funds, therefore appear to be backing away from the sector as a whole, and are not distinguishing between programs or collateral compositions," said the analysts. "Even [these] more established programs with negligible exposure to U.S. subprime linked assets are feeling the pinch."
Moody's placed the capital notes of 11 SIVs (Centauri, Beta, Dorada, Tango, Asscher, Links, Cullinan, Whitepine, Hudson Thames, Nightingale and PACE) on rating watch negative while taking no action on the senior debt of any of these vehicles. Three SIVs (Victoria, Harrier, Orion) had their senior debt placed on negative watch, while Kestrel had its senior debt affirmed, having previously being on credit watch negative following ABCP make-whole commitments from WestLB.
"Senior debt rating actions have been a result of realized mark-to-market losses in some cases and the potential for such losses to be realized in others," explained analysts at Dresdner. "It seems unlikely that investors will regain confidence in the SIV sector, and several market participants, including us, believe that this sector will not survive the current disruption in its current form."
Analysts at Societe General agreed that SIVs are unlikely to continue operating as is, and one casualty will be in the form of widening ABS spreads, which they said are not likely to improve.
Well-vaunted rescue proposals, such as M-LEC, are also expected to go online too late. Moody's analysts said in the call that SIV take-up of the proposed M-LEC "is as yet unclear with most vehicles preferring to seek independent solutions and SIVs continuing to look at restructuring solutions that aim generally to create a cash flow CDO-like model." Furthermore, "the agency analysts also stated that many SIV managers do not expect their business models to survive the current credit crisis," reported analysts at Deutsche Bank.
But on a positive note, Christopher Greener, senior analyst at Societe General, said that the market should easily absorb a wind-down situation. "In the event of a sector wind-down, which is unlikely in our view, the current appetite for secondary paper means this $40 billion supply should be easily digested over a three-month period," he said. "It should be noted that this $40 billion amount is equal to only a month's worth of primary supply in the first quarter of this year."
David Fanger, chief credit officer for global financial institutions, said the ratings agency believes that the liquidity risks posed by the SIVs are manageable in light of their current ratings. But, he added that banks face more pressure on capital if the firms move to support their SIVs further.
"Most of these banks have the capability to restore their capital position from earnings over a relatively short time period," Fanger said. "For banks with weaker BFSR (Bank Financial Strength Ratings), it would take longer to restore their capital positions." Fanger said that he expects many banks will probably not support their SIVs in order to preserve capital.
According to Moody's, there are currently two SIVs and two SIV-lites in enforcement and accelerating debt: Cheyne Finance, Rhinebridge, Golden Key and Mainsail II, respectively. "One SIV is in an enforcement state and cannot issue new debt. One SIV-lite has voluntarily ceased issuance and has been restructured to refinance outstanding debt," said Tabe. "Two SIVs have breached triggers as a result of deteriorating value of capital due to market value declines: in one case, the sponsoring bank is purchasing outstanding senior debt; in the other, the manager is attempting to reposition the SIV so as to repay senior debt from a combination of asset sales and refinancing."
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