As the screw begins to turn, HSBC’s decision two weeks ago to consolidate its two SIVs - Asscher and Cullinan - onto its books, looks ever more timely.
Roll on December, roll on those SIV downgrades. Moody’s “signalled a turn for the worse” according to the WSJ, in downgrading and putting on review $119bn of SIV debt late on Friday.
20 SIVs are affected by Moody’s review - foremost among them the troubled clutch sponsored by Citi; Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, and Zela Finance. All - currently on review - are expected to be downgraded, reports Marketwatch. (Citi also run another SIV - Vetra, which isn’t in trouble).
Over to another rating agency - this time Fitch - and it appears there’s more SIV suffering in the offing. Consider this chart of SIV Net Asset Values (relative worth of a SIV’s assets against capital notes, after leverage):
While things look like they’ve been ticking over - holding steady at around 70 per cent - consider the fact that Fitch have removed the Rhinebridge SIV from the data after October 19 (Rhinebridge is currently in enforcement). That gives an artificial bump to the average NAV at October 26th, but there’s clearly been some suffering since, with a slump in the first week of November.
It will be interesting to see what the data show for the last couple of weeks. By all accounts, MBS and CDO prices have had a far less nervy time, but things have still been bad. What’s more, most SIV managers are still marking their assets down at optimistic levels.
And the big elephant in the room is still liquidity. The rating agencies are aware that SIVs continue to struggle placing CP - most can’t issue any at all. The funding portfolio - as the below graphic from Fitch indicates, is still similar to that pre-crunch. Bank sponsors are having to prop these vehicles up. Were there no banks behind them, asset prices would be far lower than they are - fire sales would depress prices as SIVs struggled to delever.
The clock is ticking. SIVs are buoyed by their MTN programmes, which provide funding over the medium term 6 months - 1 year. CP issuance is diminishing, supplanted by Repo’s and capital injections, but MTN issuance still makes up the lion’s share of SIV funding. When those programmes start to roll, will SIVs finally be forced to unwind?
Little wonder, with such a grim possibility, that Citi is still declaring the M-LEC “supersiv” a viable programme. It’s that, or consolidation. And given Citi’s current capital situation, the HSBC option is simply not worth countenancing.
