Standard & Poor’s has lost faith in SIVs.
On Friday, S&P cut the credit ratings on the capital notes all of the SIVs it rates, and said it did not expect the asset class to survive.
It also put 18 SIVs on ratings watch negative, meaning downgrades are likely in the near future.
In a strongly worded statement accompanying the downgrades - which saw some debt cut 10 notches to CCC from BBB - S&P opined:
The SIV as a type of vehicle is unlikely to persist and thus we formally assigned negative outlooks due to the issues in this sector
The downgrades reflect “the increased likelihood that capital investors in these vehicles will see actual losses materialize.”
Market prices for the structured finance and other types of assets in the SIV portfolios have been falling. [Moreover] funding options have been drying up as investor sentiment severely dampened demand for SIV liabilities
S&P analysts expect continued erosion in the net asset values of these vehicles, as well as a dearth of investor appetite for SIV debt, noting:
We cannot see investors returning to the market in sufficient numbers to reverse the funding problem
The ratings on junior debt of SocGen’s Premier Asset Collateralized Entity and Dresdner’s $22bn K2 were cut to junk.
Premier’s senior debt is on watch for a possible downgrade, since it is close to breaching its capital adequacy test.
S&P also downgraded the capital notes of three Citigroup SIVs - Five Finance, Sedna Finance and Zela Finance.
And it gets better (or worse) - the unprecedented pressure on the asset class :
has resulted in the first defaults of senior debt in the structured commercial paper markets in its more than 20-year existence.
All of this comes after Moody’s said it had cut or was going to cut ratings for more than $100bn of SIV debt.
RIP.
