Research Primer: Structured Investment Vehicles
Moody’s has issued a pair of reports on Structured Investment Vehicles (SIVs) that serve as a useful primer on these complex “special-purpose structured finance operating companies.” In A Short Guide to SIVs, Moody’s provides a helpful definition of these entities:
Put simply, SIVs issue short-term debt – mainly asset-backed commercial paper (ABCP) and medium-term notes (MTN) – to fund the purchase of a diversified portfolio of higher-yielding long-term credit assets.
They could be said to operate as virtual banks, taking “deposits” from ABCP and MTN investors and “lending” the proceeds out to purchase bonds.
The aim is to generate a spread between the cost of funding and the yield on the portfolio by managing credit and liquidity risks.
The current tightening in the credit markets, largely brought about by market deterioration of US subprime mortgage-backed securities, has made managing such risks a much more complicated proposition, Moody’s says.
The concise report report addresses the problems of falling net asset values and frozen commercial paper markets that have plagued SIVs and those who invested in them. It also includes suggestions for helping restore SIV liquidity.
A related Special Report, Moody’s Update on Structured Investment Vehicles, provides extensive details on SIV holdings.
The overview highlights several factors Moody’s considers in its monitoring of SIV ratings. The report covers various restructuring and other alternative funding initiatives that have been, or are currently being, implemented by SIVs.
Indeed, the entire SIV business model is now widely acknowledged as unsustainable without restructuring
Moody’s presents statistics on SIV net asset values, the maturity profile of senior liabilities, and portfolio sector, rating and country compositions. Also included are statistics on available backstop liquidity and cash deposits, the average life of asset portfolios, aggregate mark-to- market prices and realized values, and the amount of leverage applied by vehicles in the sector.
Moody’s notes that as the Weighted Average Life of liabilities indicates the extent of near-term funding pressures a vehicle may face, “those vehicles with the shortest WALs may be required to take urgent action (such as asset sales at potentially “fire sale” prices) to ensure repayment of senior debt as it falls due.”
The chart below illustrates aggregate SIV refinancing needs up to November 2008. This is computed by netting daily asset inflows with liability outflows. The result of this computation represents amounts that the sector would need to refinance through alternative funding arrangements or asset liquidations. Thus, $15 billion matured in December 2007, $32 billion matures in January 2008, and $ 89 billion will mature from February to June 2008.
A handy reference tool is Common Terms in Structured Finance, a glossary available free of charge from attorneys Thatcher Proffitt.
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