In the two years of deleveraging that has taken place since the crisis took hold in July 2007, when SIVs held $400 billion in assets under management, the sector has seen a "substantial [but] relatively orderly" disposal process, said Glenn Moore, a director in Fitch's European structured credit team in London.
"The initial fear was that the SIVs would be forced to liquidate all $400 billion of assets into the market at once, but in fact different vehicles followed different routes. Some SIVs managed to restructure or unwind – some obtained liquidity, capital support or were consolidated onto the balance sheet of the sponsoring banks –and the others ultimately defaulted."
SIVs funded themselves through the issuance of commercial paper and medium-term notes to invest in highly rated longer-term assets, including large amounts of asset-backed securities and collateralised debt obligations. This strategy turned sour when the commercial paper markets dried up early in the crisis, leaving the SIVs unable to continue funding themselves.
They initially attempted to fill the funding gap by selling off assets, exchanging assets for notes and entering repo agreements with their creditors. But the fall in the market value of the underlying assets meant this was not enough to save them – and, in many cases, broke net asset value limits, forcing sell-offs. Of the 29 SIVs in existence in July 2007, five were restructured, seven defaulted on note payments, 13 were rescued by liquidity support from their sponsoring banks, and four deleveraged, Fitch said.
The collapse of the SIV market also highlighted a weakness in accounting standards. Although SIVs were theoretically separate from their parent banks, many of the banks provided liquidity facilities or took the SIVs on balance sheet to avoid the reputational damage that a SIV failure would bring – examples include Rabobank and the Tango Finance SIV, Standard Chartered and the $7 billion Whistlejacket SIV, and Citi and five separate vehicles totalling $49 billion.
Proposals for reform of the rules regarding off-balance-sheet accounting have included calls for these sorts of contingent liabilities to be reported, reducing the advantage of moving assets into a SIV-type vehicle.
Other SIVs suffered different fates. London-based hedge fund Cairn Capital successfully replaced the commercial paper funding on its HGF SIV with a term loan from Barclays Capital. But after Royal Bank of Scotland failed to restructure another SIV, Cheyne Finance, its assets were sold off at auction, fetching only 44% of par value.
An initiative to save the SIV industry by affected dealers and then US Treasury secretary Henry Paulson in late 2007 failed. The plan was to set up a massive conduit, the Master Liquidity Enhancement Conduit, to buy up SIV assets to avoid forced sales. However, disagreements over asset valuations meant major banks who were to have funded the conduit failed to sign up, and the scheme was eventually discarded.
Overall, Fitch said, "capital noteholders have generally suffered a 100% loss. In cases where the SIVs were unable to consolidate or restructure the senior note, investor losses averaged 50%, although there has been considerable variation ranging from negligible losses to losses approaching 100%".
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