Citi, under pressure from investors, on Thursday posted documents on the London Stock Exchange website providing details about seven SIV affiliates, including news that the structures sold $5.3bn of assets in August and information about their holdings and commercial-paper issuance, The Wall Street Journal reports.
The FT’s Davies, meanwhile, suggests that as the market for the short-term debt that funds much of the activity of SIVs, and their near-cousins SIV-lites, remains at best very expensive, and at worst inaccessible, managers might take a detailed look at how a recent restructuring was achieved by one manager, Cairn Capital, in London. It emerged Thursday evening that one of the first such vehicles to hit the buffers, Mainsail II, run by London-based Solent Capital, could be close to a deal.There are two main sources of the problems for these vehicles and the conduits run by many banks, says Davies: First is the drying up of funding in short-term debt markets. Simultaneously, values for the assets they hold have fallen as investors deserted all asset-backed bonds in response to fears of contagion from the US subprime mortgage markets.
Analysts at Moody’s said during an investor call on Tuesday, reported by FT Alphaville, said that the funding problem was by far the most serious for most vehicles.
For Cairn Capital, it was funding difficulties that hurt its $1.5bn SIV-lite, which is similar to a SIV, but has more junior debt - or less leverage - and invests exclusively in mortgage-backed bonds and CDOS.
Its assets remain all AAA rated and any value decline it has experienced has not been enough to force a sell-off such as that of Solent’s $1.3bn vehicle, Golden Key, run by Avendis of Switzerland.
Cairn explored several options with different investors as to how it might replace its short-term funding in a worst-case scenario, says Davies.
It is thought that Barclays Capital was supposed to provide liquidity for about 25 per cent of the senior debt, as with the three other SIV-lites it had arranged - Solent’s, Avendis’s and one for SachsenLB, the troubled German bank.
Eventually Cairn managed to organise a deal whereby Barclays increased this to 75 per cent, while Danske Bank of Denmark came in to fund the rest.
The banks said the deal was done on commercial terms. The vehicle can no longer increase in size, or buy new assets, as its current holdings mature - but crucially it will not be forced to liquidate its portfolio in a rush.
Moody’s said this week that SIVs run by banks were likely to have more options for support than those run by independent managers. However, notes Davies, “banks may have so-called soft reasons to support the vehicles they have arranged as well as those they run”.
For example, ne notes, hedge funds that run SIV-lites are often important clients because of the amount of other business they provide by their frequent trading.
There may be investors in vehicles that banks have arranged that are also important clients of the bank in other areas, making it politically important they do not suffer losses.
Barclays has now proposed a deal for Solent’s vehicle, which involves the bank paying back all senior investors at par and underwriting new senior debt.
But the real question is whether such deals can be done for the much larger, more highly leveraged SIVs. The $6.6bn Cheyne Finance, the first SIV to encounter trouble, is thought to be looking at a number of options, while the $11bn-plus Axon Financial Funding is another company talking to potential lenders.