As FT Alphaville has been reporting, SIVs are making a come back as the bête noire of banking and finance, after shortly being eclipsed by CDOs in October.

Maybe it’s our predilection for catastrophe, maybe it’s the oddball names the banks give these things (Old Slip, Motown notes, Ajax Bambino, Giro Lion) but as you may have noticed, we can’t stay away.

Two more SIV events on Wednesday:

Firstly, Whistlejacket (named after a horse, if you must know) is in balance sheet manoeuvres with its parent, Standard Chartered. Straightforward CP freeze for this one. Read the FT Alphaville breakdown here.

And secondly, Sedna Finance – a $10.7bn Citi SIV saw Fitch ratings slash the value of notes by 12 notches from A to CCC.

That’s an unmitigated disaster. The Sedna notes in question – $867m worth – are second priority senior notes, issued under Sedna’s medium term note (MTN) programme. They’re subordinated to Sedna’s Commercial Paper notes and Sedna’s first priority senior MTNs, but they’re still above Sedna’s junior capital notes. Basically that makes them mezz – but with an odd blend of characteristics. Two things to take from that:

1. Even though these are capital notes they’re still issued under an MTN programme. The worry is that the downgrade may precipitate a more widespread fear – rational or not – among MTN investors writ large: replicating the kind of market shutdown SIVs have witnessed in commercial paper funding programmes.
2. Most of Citi’s SIVs — and this has hitherto been a major boon — have wind-down and restricted funding covenants built around the rating of their debt. Other SIVs, like Cheyne Finance, have already gone under because they had more strict covenants based on their portfolio’s NAV. Citi SIVs, have avoided the spectre of defeasance by holding onto their ratings, even though they have suffered big NAV declines (Sedna’s NAV is currently at a pitiful 54 per cent). But with this downgrade, Citi’s SIVs are looking vulnerable.

Fitch’s action on Sedna’s SPS MTN notes will have triggered a restricted investment event, based on the tests set out in Sedna’s regulatory filings. Sedna must now cease interest or principal payments to junior capital notes.Based on a NAV of 54 per cent and given that the SPS MTN’s have around $100m junior capital notes below them, its possible to infer that:

Sedna’s junior capital notes are worthless.

And Sedna’s SPS MTN notes have are worth only 60 per cent of their value.

On which basis, it’s surely one step closer to a downgrade of more senior notes and with that, an edging closer to mandatory liquidation triggers.

This entry was posted by Sam Jones on Wednesday, December 5th, 2007 at 10:55 and is filed under Capital markets. Tagged with citi, Sedna Finance, whistlejacket. Edit this entry.