Rathgar Capital Management (Bermuda) Ltd. has set up a structured investment vehicle (SIV). It is the first SIV with an investment manager outside the United Kingdom, and one of the first SIVs that can sell capital as well as senior debt into the U.S. market. West End Capital Management (Dublin) Ltd. provided investment advice, and Clifford Chance acted as legal adviser on the establishment of the vehicle, which is called Rathgar Capital Corporation.

Rathgar has set up four senior secured debt programs, two in the European market and two in the U.S. market. They have an overall issuance limit of $20 billion and are rated by Moody's Investors Service and Standard & Poor's. For the European market, Rathgar established: a $5 billion Euro medium-term note (MTN) program rated Aaa/AAA; and a $5 billion Euro commercial paper (CP) program rated P-1/A-1+. The U.S. subsidiary, Rathgar Capital (U.S.) Corporation, has set up: a $5 billion MTN program rated Aaa/AAA; and a $5 billion U.S. CP program.

Rathgar has already done CP issuance in the United States, and, going forward, is expected to issue debt almost every day. Rathgar will also issue debt under its $2 billion income note program to provide an additional funding source and to credit-enhance the senior debt.

Neil Hamilton, partner at Clifford Chance, went over some of the advantages of setting up an SIV as opposed to an ABCP program: "One difference between an SIV and an ABCP conduit is that an SIV does not require 100% liquidity coverage as is required for some CP conduits. There is a dynamic liquidity requirement based on a daily calculation of the SIV's maximum cash outflows for given periods. This typically equates to about 10% of outstanding debt issuance. SIVs also have a dynamic credit enhancement requirement rather than a predetermined level of over-collateralization as with many CP program structures."

The changes in liquidity requirements for some ABCP programs proposed by the new Basel capital accord have also influenced some banks when deciding whether to set up an SIV or an ABCP conduit. "The eligibility criteria for SIVs usually permit the SIV to purchase many types of securities as long as they are investment-grade (BBB-/Baa3 or above)," Hamilton said. "Some SIVs allow loans or sub-investment grade assets to be purchased."

Rathgar, however, cannot buy assets rated below A3/A-. A large component of its pool is likely to be ABS issues. Hamilton adds that most CP conduits are set up just to issue CP, although increasingly conduit structures are adding MTN programs so that they can issue long-term as well as short-term debt instruments, just like SIVs.

But now a number of SIVs have added to their core CP and MTN funding by issuing term eurobonds and by putting in place specialized programs for different markets: for example, French billets de tresorie or Australian CP programs.

Hamilton says that SIVs are continuing to develop and evolve. "The earlier SIVs could only continue to operate if they were rated triple-A; if they went below this, they went into defeasance and could not recover," he said. "If Rathgar and other recent SIVs are downgraded below triple-A this is not fatal - the manager has to take specified steps to restore the triple-A rating, but there is no forced wind down."

Some recent SIVs can acquire loans as collateral, and some, such as Citibank's 5 Finance Corp., can invest in non-investment grade assets. Certain recent SIVs can also use different types of liquidity covers, including: asset purchase agreements, whereby a commitment is made to buy assets at a discount; breakable deposit agreements, whereby cash can be placed in a bank and called on demand; and liquid assets: For example, triple-A rated credit card securitizations can count towards liquidity.

Clifford Chance believes that more SIVs will appear in the market because banks are looking for alternatives to commercial paper conduits. The banks aim to fund portfolios of securities off-balance-sheet with the minimum liquidity requirement. "The SIV sector is fairly active at the moment because it has become better known to the market," says Hamilton. "SIV technology is also starting to be used in conduits - there is some crossover in the technology."

However, SIVs require a considerable investment in personnel. Many people are required to service the vehicle, and there is also a need to invest in suitable systems. The number of employees the manager needs to service a SIV varies depending on the size of the company and the complexity of its operations. Generally at launch there tends to be around 10 to twelve people servicing the SIV in management, credit, treasury, risk, settlement, accounting and technology. As the company grows in size the numbers of people grow, and staff numbers have reached over 50 for the largest SIVs. But some functions such as settlement or technology can be outsourced to the sponsor bank, reducing the number of people needed.

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