European structured investment vehicles gathered considerable momentum last year, with six new SIVs entering the market in 2002. The SIV market is expected to maintain steady growth in 2003, but it's likely that the number of new entrants into that arena will diminish.

"Overall there are a total of 16 pure vanilla SIVs, and while 2002 saw a substantial increase in new entrants, growth in the market going forward will come from existing vehicles," said one market analyst. "We may even see some consolidation among some of the smaller vehicles."

According to figures reported by Standard & Poor's, existing capital note issuance reached $7.9 billion by year's end 2002. Total debt issuance increased by 10% from December 2001 to December 2002, reaching a volume of $93.3 billion by year's end.

Newly rated SIVs accounted for about 8.6% of total debt issued for 2002. The growth of debt issuance was accompanied by a surge in combined (all SIVs included) portfolio size from $80 billion as of December 2000 to nearly $104 billion by December 2002 - an increase of 29%.

"In the short term, expect to see continued growth, especially within the larger vehicles," said one market source. A marked example of this is the new issue from Sigma Finance Corp. launched earlier this month. The issue comes after the introduction of a number of structural changes - including the removal of defeasance (a mandatory sale of assets upon failure to cure the breach of certain triggers) - that prompted S&P to affirm the vehicle's AAA'/'A-1+' rating in late March. The company will now enter remedial operating status - no growth and natural amortization - which would allow for an orderly wind-down of the asset portfolios should any triggers be breached.

The market also experienced a surge in investment-grade assets, largely due to the substantial number of new vehicles. Triple-A rated assets accounted for 61.89% of the market in 2002, up from 57.14% the year before. This subtle increase is attributed to the number of new entrants in the market that tended to focus more intently on triple-A assets.

Once established, analysts said, these vehicles are likely to shift their focus to other assets. "It all boils down to management strategy, and some will question whether it's better to buy these triple-A assets and run up the leverage," said one bank manager.

Those SIVs that intend to maintain a triple-A focus may find high-quality assets harder to come by. The rated bond universe continues to shrink, and maintaining an investment-grade focus will limit growth opportunities. Growth will likely come from SIVs with a more dynamic capital model. "People are taking SIV technology and adapting it to structures that may be neither a CDO nor an arbitrage conduit but exhibit similar elements, and we will see more credit derivatives, liabilities and debt tranching included," said one source.

Primus is doing credit default swaps on agencies with high credit qualities in the U.S.; in Europe, the managed CDO Jazz has aspects of a managing company that can ideally be applied to future SIVs. Turning to synthetics will open up a universe of opportunities.

There is also the continued focus on improving portfolio transparency. Bank One, the manager for the White Pine SIV, has developed a detailed credit monitoring system. According to analysts, reports are produced for each individual asset that summarize collateral statistics and key performance indicators.

The White Pine vehicle also operates its own watch list that incorporates a detailed monitoring system for the vehicle's CDO holdings. "The market is more competitive today and this is what investors want," said one bank manager. "But increased transparency is only part of the equation; the other part relies on investment management philosophy."

S&P is expected to release an updated criteria report based on questions received regarding existing vehicles and possible opportunities for new ones. The agency recently released revised ABCP criteria for liquidity banks. The new criteria allow up to 20% of the liquidity for A-1+' ABCP to be provided by A-1' institutions while maintaining the conduit's rating.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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