More Downgrades Ahead For SIVs
The problems facing structured investment vehicles (SIVs) continue to rage on. The structures have been hit hard in the turmoil sweeping the credit markets from their lack of access to funding and a massive decline in the value of the assets they hold.
Now, Moody’s Investors Service has announced that HSBC Holdings Plc and American International Group Inc. (AIG) are among those facing possible downgrades on $3 billion of SIVs. The cuts would affect capital notes, the lowest ranking debt, issued by HSBC’s Asscher Finance, WestLB’s Harrier and Kestrel, Bank of Montreal’s Links Finance, Banque AIG’s Nightingale Finance and Societe Generale’s Premier Asset Collateralized Entity.
Reportedly, holders of this type of debt are not likely to benefit from any type of restructuring proposal.
SIVs are special-purpose entities that issue commercial paper and medium-term notes to buy longer-term, higher-yield securities. An example would be a collateralized debt obligation (CDO). 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 subprime loans go into default, the value of the CDO holding interest in the loans and the credit-worthiness of the SIV that holds the CDOs plummets. As a result, money funds have pulled back their investment in SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations.
All six of the capital notes under review by Moody’s already have been rated in the “junk†category, between Ba2 and Caa3.
In announcing the potential cuts, Moody’s said its actions reflected “further deterioration in the market values of SIV portfolios, and the limited benefits to capital notes of the various restructuring proposals implemented by bank sponsors.
Meanwhile, as reported in an April 24 article on Bloomberg.com, SIVs with at least $31 billion of debt have defaulted in the past nine months after investors stopped buying their notes because of the subprime toxicity surrounding them.
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