Banks Well Placed To Handle Near-Term SIV Exposure
Bank sponsors of Structured Investment Vehicles are well placed to meet the near-term potential funding needs of those struggling financial instruments, Fitch Ratings said today. However, should the credit or liquidity environment worsen, sudden funding needs could be more challenging.
In a report published today, the agency assesses the potential for banks to support these vehicles, even though they are not legally obliged to do so. The report provides a helpful background and overview of the SIV market and also assesses the impact of SIV support on the banks concerned from a credit perspective.
In total, 11 banks sponsor 20 SIVs with combined senior notes outstanding estimated at $246 billion as at end-July 2007. Citibank International plc is by far the largest sponsor, representing about a third of the total, followed by HSBC Bank plc with about a sixth. Dresdner Kleinwort, Bank of Montreal, Standard Chartered Bank, WestLB (Brightwater Capital) and Rabobank each have exposure over $10 billion. Banks with smaller exposure are Societe Generale, HSH Nordbank, IKB Credit Asset Management and Emirates Bank.
Bank-sponsored SIVs dominate the SIV industry, accounting for around 72% of senior notes outstanding. A further nine SIVs representing $92 billion are sponsored by a mixture of investment managers and specialist arms of non-bank financial institutions. More than half this total is managed by Gordian Knot Ltd through the Sigma Finance Corp SIV.
In Fitch’s opinion, the SIVs with strong bank sponsors behind them are in a better position to weather the current market storm than privately sponsored SIVs, although SIVs are stand‐alone financial entities designed to succeed or fail on their own merits with no obligation on any party to step in and provide support.
There are various incentives for banks to support their own SIVs. It should be noted however, that Sigma is a privately managed SIV which has weathered the storm successfully without having to deliver.
While Fitch considers it unlikely, under a worst-case scenario, support may require a sponsored SIV to be consolidated onto a bank’s balance sheet. Currently Fitch views the majority of banks as having adequate capital to absorb these vehicles. However, the extent of any specific capital deterioration will depend upon the valuation of the SIVs’ underlying assets. This, in combination with other liquidity calls from Asset-Backed Commercial Paper conduits (ABCP), Leveraged Buyout Loan (LBO) exposures plus general valuation issues regarding structured products, could cumulatively have a negative impact on capital. This may increase ratings pressure, given the current market environment. Under such a scenario, negative rating actions could not be ruled out.
Fitch expects minimal capital impact on banks that do not sponsor SIVs, although for entities with significant exposure to the riskier capital notes of these vehicles, negative rating actions remain a possibility.
SIVS - Assessing Potential Exposure of Sponsor Banks is available for purchase.
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