Citi bails out struggling SIVs

Citigroup has bailed out seven of its own structured investment vehicles (SIVs), taking their $49 billion in non-cash assets onto its own balance sheet, as they continue to reduce in size.

The seven vehicles are Beta, Centauri, Dorada, Five, Sedna, Vetra, and Zela. According to the bank, they have "immaterial" indirect exposure to US subprime mortgages: 19% of their assets are in residential mortgage-backed securities from the US and elsewhere, and another 20% are in other forms of structured product.

As the SIVs' advisor, Citigroup was compelled earlier this year to buy $10 billion of their commercial paper, with an average maturity of 2.4 months, which they were unable to place in the open market. By selling assets, the SIVs have so far paid off $2.8 billion of their commitment; the rest should be paid off by maturity in March next year, Citigroup said. The remaining funding is through $48 billion in medium-term notes, with an average maturity of 10.1 months.

Citigroup said the SIVs have almost halved their assets since August, from $87 billion to $49 billion, but will still require $35 billion in funding by the end of next year. However, the bank says it should be able to meet this need through further asset sales.

The bank said the move would hit capital ratios, reducing the Tier I capital ratio by 16 basis points. Citigroup's capital adequacy was cited by New York rating agency Moody's analyst Sean Jones in a note yesterday, which downgraded the bank's long-term debt to Aa3 from Aa2 and its financial strength to B from A-. Jones said: "Management will need to take sizable writedowns against its subprime residential mortgage-backed security and collateralised debt obligation portfolio. The bank is also expected to make significant sustained provisions against its residential mortgage book, which is over $200 billion... Citigroup's weak earnings should prohibit the bank from rapidly restoring capital ratios."

Citigroup claimed it will return to its "targeted capital ratios" by mid-2008, but Moody's said it would need to improve over 2007 levels to be upgraded.

The bank reiterated its support for the Master Liquidity Enhancement Conduit (MLEC), a plan led by Citigroup with JP Morgan and Bank of America to set up an investment vehicle that would buy SIV assets to prevent forced sales at distressed prices. But Citigroup and several other banks have been dealing with their SIV problems by selling vertical slices of the SIV assets, rather than waiting for the MLEC to start operations next year.

See also: SIV pain resurfaces through ratings
Standard Chartered takes $46 million profit hit
SIVs in need of a service
HSBC plans $45 billion SIV restructuring
Banks aim to boost liquidity for foundering SIV sector