Source: Reuters, 28 August 2007
The turmoil in the credit markets has put the focus on a range of structures that use short-term debt to buy longer-term securities.
Highly leveraged structures called SIV-lites have become a particular focus after Standard & Poor’s downgraded two structures by up to 17 notches as they were being forced to sell assets at a loss.
Following are five facts about SIV-lites, with data sourced from ratings agencies Moody’s Investors Service and Standard & Poor’s.
SIV-lites use a mixture of technology from structured investment vehicles (SIVs) and collateralised debt obligations (CDOs). Like SIVs, they issue short-term commercial paper and medium-term notes to invest in longer-term securities. Unlike SIVs they are not perpetual, making them look more like CDOs, which have fixed maturity dates. CDOs however usually raise all of their money at the start of their life and are not reliant on short-term funding.
SIV-lites have invested the bulk of their cash in U.S. residential mortgage-backed securities, with some exposure to U.S. subprime debt, but with the vast majority of these securities rated triple-A or double-A, according to Moody’s Investors Service. By contrast, traditional SIVs invest in a much more diverse pool of assets, including commercial mortgage-backed securities, CDOs and financial debt, and invest in a wider range of ratings categories.
SIV-lites aim to profit from differences in funding costs. Firstly, they raise the bulk of their cash in short-term debt markets and buy longer-dated securities, benefiting from the spread between the two. Secondly, they issue very highly-rated debt and invest in a portfolio that has an average lower rating, again benefiting from the spread between the two. This strategy has run into troubles as funding in the short-term markets has dried up and the value of the securities the SIV-lites has invested in has fallen, triggering forced sales of assets by some of the structures.
S&P has only rated five SIV-lites, and initially rated all of their capital structure in the investment-grade category. The four structures that use short-term funding gained the highest A-1+ ratings, while the junior debt’s highest ranking tranches came in at AAA. Last week, however, it cut ratings on the Golden Key and Mainsail II programmes sharply, and said it might cut its ratings on Sachsen Funding I and Cairn High Grade Funding I. It affirmed ratings on Duke Funding High Grade II-S/EGAM I, which has no commercial paper outstanding.
SIV-lites are managed both by banks and by hedge fund and CDO managers. Golden Key is managed by Guernsey-based structured finance specialist Avendis Financial Services, while Mainsail II is managed by UK hedge fund Solent Capital Partners. Sachsen Funding I is managed by Sachsen LB Europe, part of the German Landesbank, while Cairn High Grade Funding I is managed by Cairn Financial Products, a subsidiary of credit fund Cairn Capital. Duke Funding High Grade II-S/EGAM I is managed by Ellington Global Asset Management.