The $6bn Victoria Finance SIV has defaulted on its senior liabilities, say Standard & Poor’s.
The vehicle failed to meet an upcoming payment on maturing commercial paper (CP), due January 10. The SIV’s capital manager, Ceres Capital Partners has been ousted under the terms of the enforcement mode now in place.
Thankfully though – just before they were shown the door, Ceres did do something helpful; renegotiating the terms of the “security agreement” under which the SIV is managed. Had Ceres not done so, Victoria Finance would now be under a legal obligation to liquidate its assets as swiftly as possible, meaning a big fire sale.
Under the amended terms, senior creditors – holders of the SIV’s CP and medium term notes (MTNs) have until Thursday 17 January to decide what to do with their pro rata share of the portfolio. From S&P:
Any senior creditor who does not respond or chooses to liquidate will have his share of the portfolio liquidated immediately. The senior creditors who elect not to liquidate must allow the enforcement manager to review the portfolio over a yet-to-be-determined time period. After this time period, the enforcement manager will determine if the proceeds from a sale of the remainder of the portfolio would be sufficient to pay off all senior creditors. If all senior creditors would be paid in full, the enforcement manager will liquidate the portfolio and use the proceeds to pay the senior creditors their remaining liability amounts. However, if the enforcement manager determines that the proceeds from a sale would not be sufficient, senior creditors would need to vote again if they would like their share of the portfolio liquidated or if they would like to remain a senior creditor in the Victoria vehicle.
Standard & Poor’s reported a technical default on its senior liabilities on Monday evening (GMT).
Why has Victoria plummeted so suddenly and swiftly (it first hit headlines last week)? Perhaps unsurprisingly:
Victoria, like many SIVs, suffered from its inability to refinance its short-term funding. In addition, Victoria experienced a significant decline in the market value of its asset portfolio, which has a high concentration of collateralized debt obligations (CDOs), including those with corporate, residential, and commercial real estate exposure.
In fact, the majority of Victoria’s asset portfolio is invested in structured finance assets. Specifically, a great big bundle of AAA-rated CDO debt.
And all this is after several rescue attempts and restructuring bids at Victoria – including, in late November, a “vertical slice” sale of assets to raise cash. A representative slice of the SIVs assets was sold to a CDO, Farmington Finance Ltd.
Victoria’s failure bodes ill for other SIVs out there. It will also be interesting to note later today what Citi reports in its Q4s, and how the decision to take on board its massive $49bn SIV family plays out.