| SIV 101 |
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| 13/01/2008 | |
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Nik Khakee, Managing Director at Standard & Poor's Structured Finance, answers this week's questions on structured Investment Vehicles (SIVs). 1. What is a Structured Investment Vehicle and how big is the market? A structured investment vehicle or "SIV" is a limited-purpose operating company that undertakes arbitrage activities by purchasing mostly highly rated medium- and long-term, fixed-income assets and funding itself with cheaper, mostly short-term, highly rated CP and MTNs. While there are a number of costs associated with running a structured investment vehicle, these are usually balanced by economic incentives: the creation of net spread to pay subordinated note holder returns and the creation of management fee income. Vehicles sponsored by financial institutions also have the incentive to create off-balance-sheet funds management structures with products that can be delivered to existing and new clients by way of investment in the capital notes of the vehicle. SIVs had approximately $200 billion of outstanding senior debt as of early-January 2007. SIVs are generally in wind-down and are not issuing new paper or growing their portfolios. 2. Given that SIVs rely on short-term commercial paper (CP) to fund longer dated assets, where are CP spreads and how have they impacted SIVs? SIVs are not issuing new funding in the market and thus the spreads they are paying generally reflect the yields demanded by investors in February through August of 2007. The cost of funding they locked in is in many cases higher than the historical L-2 to L+5 that SIVs generally enjoyed. Funding costs did increase nevertheless for all SIVs. 3. Who are the holders of SIVs? What risks and advantages do they represent for pension funds? SIV senior debt is held by a variety of investors. The commercial paper and short-dated MTNs may be held by money market funds, investment funds, corporate treasurers, local and state government funds amongst the universe of short-term fund investors. SIVs are issuers whose repayment of liabilities is dependant upon the ability to liquidate assets in the marketplace to raise cash to repay existing debt holders. SIVs role in the marketplace going forward is unclear, but SIVs in the past represented an opportunity to invest in the liabilities of finance companies holding highly rated and identifiable assets. 4. What is SIV light? SIV-lites are called light by various participants for various reasons. We at S&P referred to them as SIV-lites for the following reasons. First, the SIV-lite did not generally have the asset diversification requirements that traditional SIVs had. Second, SIV-lites generally did not employ the same level of operation infrastructure that traditional SIVs established. SIV-lites often relied upon the infrastructure of existing asset managers. Third, SIV-lites were not intended to be perpetual operating vehicles (although they were intended to have fairly long maturity profiles and operate as an actively managed term transaction). SIV-lites had a defined capital structure and were not intended to adjust capital structure on an ongoing basis. This made SIV-lites differ from traditional SIVs and more like market value CDOs where the manager manages return profile with a given capital structure. In traditional SIVs, the ability to manage leverage was one of the goals of the structure. Indeed, in our view one reason why some traditional SIVs have been more resilient to market conditions is that their managers had begun to de-lever in some cases as the managers observed market deterioration in the summer of 2007. We have no requests to rate new SIV-lites at this time. 5. What impact has the sub-prime crisis had on SIVs and where do you see the market in 2008? SIVs have functioned without incident for almost 20 years. Yet recently, SIV portfolios, irrespective of whether they were "conservative" or "aggressive" were not differentiated as investors have pulled back from that product type. The business model has been called into question by some in the financial marketplace. The core business of the SIV – financing high quality assets portfolios in a limited purpose finance company worked well until investors lost confidence in the managers abilities to differentiate between liquid assets and less liquid assets. Less liquid assets are potentially problematic in a market value structure where the repayment of senior liabilities must come from market place liquidations of the asset portfolios. The events of 2007 can be characterised as a period of illiquidity for assets that were previously viewed to be liquid. |
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Articles of the same Serie : 101 |
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