SIVs Downgraded, Causes Concern For Some Money-Market Fund Investors
Structured investment vehicles, or SIVs, have been placed under the magnifying glass, after a recent downgrade by Moody’s Investors. And that has some money market fund investors — including Charles Schwab Advisor Cash Reserves, as well as similar funds from Morgan Stanley, Barclays PLC, UBS AG and Deutsche Bank AG – worried.Â
The Wall Street Journal reported Dec. 4, 2007, that even though the funds in question have a small percentage – 1 percent to 2 percent – of their investments in the SIV, it could nonetheless spell trouble. If the SIV debt obligation held by the money fund loses its total value, a “break-the- buck†scenario could unfold in which investors receive less than a dollar-for-dollar return on their investment. Â
A total of $14 billion in SIV debt was part of the downgrade by Moody’s, plus another $105 billion placed under review. According to the Wall Street Journal article, the action “reflected the continued deterioration in market value of SIV portfolios combined with the sector’s inability to refinance maturing liabilities.â€The liabilities are commercial paper – money-market securities sold by banks and other corporations to investors. Proceeds from commercial paper are typically used to meet short-term operating needs. Money funds typically view commercial paper as a safe investment. Â
SIV commercial paper is a different animal.
SIV Background
SIVs are special-purpose entities that issue commercial paper and medium-term notes to buy longer-term, higher-yield securities. An example is collateralized debt obligations (CDOs), which own contract rights in mortgage securities. A SIV uses the proceeds from the sale of commercial paper to pay the principal and interest owed on previously issued, commercial paper that has matured. The mortgage securities include risky sub-prime mortgages.
When sub-prime loans go into default, the value of the CDOs that hold interests in the loans, and the credit-worthiness of the SIVs that hold the CDOs, go south. As a result, money funds are pulling back their investments from SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations. Their only alternative:Â sell the holdings at fire-sale prices.And that creates a whole new set of challenges for banks, which may have no choice but to carry SIVs on their balance sheets, thereby supporting the billions of dollars in debt the SIVs might have to pay in the future.
Citigroup – the largest sponsor of SIVs – apparently has come up with a plan to deal with the SIV issue. Citigroup joined with other banks to form a super fund of cash that could provide liquidity to their SIVs. The bad news: Between Oct. 19 and Nov. 23, CDOs saw a 22% drop in market value. That performance, along with Moody’s recent downgrades, has left many analysts scratching their heads on whether a super fund is a solution after all.
HSBC Holdings PLC went on record that it will shut down its SIVs and take $45 billion in asset-backed securities onto its own balance sheet.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.
