SIV-lite vehicles take massive hit from S&P

Rating agency Standard & Poor's (S&P) has made spectacular downgrades to two structured investment vehicle-lites (SIV-lites), which combine collateralised debt obligation structures with short-term funding common in SIVs.

Mainsail II, a $4.519 billion SIV managed by Solent Capital, had already gone below minimum capital levels on August 17, according to a filing with the London Stock Exchange, due to falling values of mortgage backed securities in its portfolio. As a result, the vehicle had started to wind down, and was forced to sell assets as it had failed to raise the requisite amount of short term commercial paper (CP) to meet its obligations.

"Current market volatility and lack of market liquidity with respect to subprime lending markets have caused adverse conditions with respect to the liquidity and market risk exposures on the company's underlying portfolio of investments," the SIV said in a statement filed with the exchange.

As a result, S&P has downgraded the vehicle's Tier 1 and Tier 2 mezzanine notes by 16 notches, with the most senior notes going from AAA to CCC+.

Golden Key, a SIV-lite managed by Swiss hedge fund and asset manager Avendis Capital, has fared even worse, with a 17-notch downgrade on the same two mezzanine note tranches. That vehicle has also started selling assets and is failing its net asset value tests. Its Tier 1 notes have been downgraded from AAA to CCC, and may be downgraded further, S&P says.

"The fall in market prices of US subprime mortgage securities over the last month is unprecedented," says S&P spokesman Martin Winn. "Our rating actions reflect the fact that this disruption in the secondary market for high grade mortgage securities is both recent and dramatic, and has a significant impact on the portfolios of these vehicles." S&P is reviewing its assumptions on market value-based structures.

A SIV-lite, unlike conduits and SIVs, is a closed-ended vehicle that issues subordinated notes as well as commercial paper. It uses that funding to finance long-term leveraged investments, in this case asset-backed securities, while financing with short-term 30- to 90-day CP and other notes.