Monday, December 10, 2007

SIVs get the shiv, and Guambat gets the shivers

First, for those who need some help here, and Guambat is always in desperate need of help:

"Structured investment vehicle or "SIV" is basically an investment company (SPV) which generates the investment returns through yield curve arbitrage by purchasing high grade (AAA, AA) medium and long term fixed income instruments and funding itself with low cost short term senior debt instruments such as Asset backed commercial paper (ABCP) and Asset backed medium term notes (ABMTN). SIV is thus a special type of CDO designed for the leveraged riding of the yield curve and generation better return for the subordinate debt (Capital Notes) and equity holders. Similar to the CDO structures, SIV funding is also classified in multiple trenches of senior and subordinate debts with residual equity funding. Typically capitalization of SIV is through a mix of equity and subordinated debt (Capital Note), which sometime is dominated by only capital notes.

SIV is one of the many instruments in the pedigree of structured finance and its origin can be traced in the Securitization ancestry. It is reminiscent to discuss the background of securitization to understand the foundation and structure of SIV...."

"A shiv is a weapon crafted from the limited resources of a prisoner’s closed world. Crudely constructed from such things as spoons, shoelaces and upholstery tacks, shivs lie somewhere between the graceful and the grotesque. They’re primitive, too — like outsider art, but produced deep on the inside.

The individual parts that make up a shiv tend to be everyday objects, innocent things furtively reconstituted as lethal weapons. Each design choice is essential, but what’s particularly notable is that shivs, at their core, are not so much evocations of minimalism as they are symbols of survivalism. A shiv is all about masked utility: it’s an innocuous object with improbably toxic intent (whether used to attack others or to protect oneself...)."

OK, so at this point Guambat is comfortable, but not entirely au fait, as they say, with the "shiv". But he's still having the shiv's with SIV. Maybe this further bit will help elucidate "SIV":
A growing number of banks have announced plans to help structured investment vehicles (SIVs) manage through turmoil that could force them to unwind.
Following are details of the current status of some SIVs, listed by sponsor:
** Axon Asset Management:
Standard & Poor's on November 27 cut its rating on Axon Financial Funding to default after the vehicle said assets were insufficient to repay senior liabilities, triggering a liquidation.
** Bank of Montreal (BMO.TO: Quote, Profile, Research):
Bank of Montreal said that between late August and November 21, assets of SIV Links Finance fell about $4 billion to about $18.7 billion, while assets of Parkland Finance declined by about 820 million euros to about 2.5 billion euros.
[... etc., etc., etc. Go there and read it yourself.]
Which more of less brings us to SIVs getting the shiv -- from S&P:

S&P calls the death of the SIV by Stacy-Marie Ishmael
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.

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
And while there is plenty plenty leaking going on in the SIV department, FT Alphaville adds:

UBS boggles - $10bn of writedowns, $17bn in emergency capital
After a month of obfuscation, UBS has also had the gall to say it’s making this announcement to “create maximum clarity on the issue.”

First, to the writedowns themselves. UBS’ $10bn writedown is based primarily on its CDO book. And it’s primarily on AAA debt.

The writedown has placed UBS in a situation where it needs to find more capital - so the news is accompany by a series of rather extreme measures to strengthen the bank’s ratios....
See, too, Banking giant warns all profit may be potentially wiped out this year



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