Las Vegas - The structured investment vehicle (SIV) market came up with several major developments in 2006, including two repeat sponsors that launched new vehicles, and a new type of sponsor, likely the Canadian Teacher's Fund. In the year ahead, expect to see U.S. pension funds take a closer look at participating in the sector, while some managers examine new possibilities for underlying assets, including structured finance paper, said industry professionals at the ASF 2007 in Las Vegas last week.
Raising the essential capital portion of SIVs is not the straightforward process that it was in the past, and many new SIVs introduced tranched capital pieces to their vehicles in 2006, Sean McCarthy, a vice president at Lehman Brothers who moderated the morning session, said. Furthermore, the SIV market has traditionally been the province of European sponsors. For nearly the last two years, however, more U.S. managers have been participating in the sector, as the increased availability of tranched capital has intensified interest among potential U.S. managers, sponsors and investors.
While so-called legacy SIVs are still biased toward buying debt from financial institutions, newer SIVs are looking to own more structured finance paper. U.S. pension funds share that sort of interest, said participants. Pension funds typically want returns similar to the Lehman Aggregate Bond Index, but that is harder to achieve in the current environment of increased interest rates and low spreads, Walter Shulits, a vice president at Eaton Vance Management, said. If they can leverage low-volume assets for fixed-income returns, the vehicles might answer that dilemma.
There are, however, three main obstacles that prevent pension funds from fully embracing the idea, namely leverage levels, performance fees and long asset lock up periods. Furthermore, banks and pension funds need to overcome cultural clashes. Banks generally like to think in terms of deals, while pension funds prefer long-term working relationships, Shulits said.
"While everyone is talking about pension funds going into structured finance, no one knows how [it would be executed]," he said.
Eaton Vance advanced the SIV market itself, when it introduced plans for a vehicle that will own non-investment-grade-assets, in order to generate higher spreads and meet market demands for new structures.
Targeted to core fixed-income investors, the key to the vehicle is the lower cost of leverage, and the lower degree to which generating target returns depends on leverage levels. Institutional investors generally do not like the long lock up periods associated with CLOs, splitting profits with, or paying performing fees to, the manager, he said.
"We felt investors were paying us to lower their leverage and fees," he said.
It should not, however, be called an SIV lite. "This fits the bank loan asset class," he said. "We see SIVs being applied to bank loans on a global basis."
Talk also turned to the practice of casting SIV vehicles in the swap counterparty role, namely by writing credit default swap (CDS) protection.
Citigroup SIV Strategies found that, through its Zela vehicle launched in October 2006, it could divert some of the noteholders' portion of returns to a portion of credit protection. The group hopes to take about 25 basis points of the 150 basis point returns to pay noteholders.
"The maximum downside is that spreads are tight forever," Burrows said.
Talk of CDPCs in the pipeline is relentless, and now includes plans to combine SIVs and CDPCs, which could be incorporated as banks. The market has already seen the advent of SIVs secured by bank loans, said Henry Tabe, a managing director at Moody's Investors Service.
On the market value CDO side, synthetic structures of CPDOs look very much like term corporate synthetic SIVs - without corporate funding, he said.
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