SIV Bondholders See Value Fall by 47%, Moody's

And just to finish off lunchtime with more indigestion

SIV Bondholders See Value Fall by 47%, Moody’s Says (Update3)

By John Glover

Jan. 16 (Bloomberg) – Bondholders in structured investment vehicles, caught in the collapse of the subprime mortgage market, suffered a 47 percent drop in the value of their investments, according to Moody’s Investors Service.

The net asset value of SIVs, funds that use commercial paper and medium-term notes to buy higher-yielding debt, tumbled since July, when subprime-related losses contaminated credit markets. Investors who own the funds’ lowest-ranking bonds, called capital notes, would receive 53 percent of their money should the SIVs be forced to liquidate, the ratings company said in a report today.

SIVs sold $55.6 billion of holdings between June and November because investors stopped buying their commercial paper, debt due in less than 270 days. Five of the funds have gone out of business or are winding down and total assets in these companies have dropped to $300 billion, Moody’s said.

SIVs with high net asset values may see sharp declines as contagion spreads across different segments of the credit markets,'' Moody's analysts led by Henry Tabe in London wrote in the report. Managers and sponsors of SIVs now acknowledge that the senior debt investor base is unlikely to return to the sector in the absence of fundamental changes to the business model.‘’

Banks led by Citigroup Inc. in New York, the largest manager of SIVs, and London-based HSBC Holdings Plc are bailing out their funds to avoid a fire sale of assets. Citigroup yesterday posted the biggest loss in its history after it was forced to write down the value of subprime mortgage investments by $18 billion.

Subprime Contagion

Victoria Finance Ltd., the $6.8 billion Cayman Islands-based SIV run by Ceres Capital Partners LLC in New York, had its credit ratings cut by Standard & Poor’s this week after it failed to pay short-term commercial paper.

Net asset values declined to as little as 27.6 percent, while the highest for the 25 SIVs rated by Moody’s was 80.3 percent.

SIVs emerged as one of the biggest threats to capital markets as record U.S. home foreclosures led to the collapse of subprime mortgages, or loans to people with poor or limited credit. The contagion from losses in July and August sent borrowing costs higher, with the three-month London interbank offered rate for dollars reaching 5.72 percent on Sept. 7, the highest in seven years. It fell to 3.9975 percent yesterday.

Investors also reduced their purchases of commercial paper backed by assets such as mortgages, raising concern that SIVs would be forced to sell holdings and further roil credit markets.

Mortgage debt made up 23 percent of SIV assets, with most having no direct subprime link, Moody’s said in July.

The amount SIVs will raise by selling their holdings depends on the credit ratings for the underlying assets and the type of debt they own, according to the report. In some cases, ``dramatically low’’ prices have been quoted, Moody’s said, citing one SIV that received bids averaging 7 percent of face value for a collateralized debt obligation with the highest Aaa credit ratings. CDOs package pools of mortgages, and aren’t traded on exchanges.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: January 16, 2008 07:04 EST

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