In recent months, it has become readily apparent that the credit crisis that began in the summer of 2007 has been particularly unkind to the structured investment vehicle ("SIV") market. SIVs typically operate by purchasing rated long-term assets, and funding the purchases by issuing short term liabilities, customarily in the form of highly-rated commercial paper and medium-term notes. Unlike most CDO vehicles, which focus on cash flows, SIVs are market value driven. Due to an unprecedented strain on the commercial paper market, numerous SIVs have been unable to meet their short-term debt obligations while simultaneously experiencing significant drops in their portfolio market values. As a consequence, participants in the SIV market - a market valued at $400 billion at its peak in July 2007 - have been scrambling to find viable restructuring or refinancing alternatives.
With few exceptions, "vertical slicing" has proven to be a critical component in recent SIV reorganization and restructuring efforts. Assets are said to be vertically sliced when one or more classes of SIV noteholders and in some cases, certain other SIV creditors, are allocated a proportionate share of each asset in the SIV's portfolio, calculated according to their proportionate share of the SIV's liabilities. Since a creditor who receives a vertical slice maintains exposure to every asset in the SIV portfolio, vertical slicing has emerged as a means for SIV managers and sponsors to reduce the potential for litigation, as it effectively eliminates the argument that certain creditors have cherry-picked the highest performing assets.