This downgrade by Fitch of the junior debt on the Citi SIV Senda affects only $867 million of debt. But what makes this announcement noteworthy is it is yet more bad news about Citi, and it again illustrates how rapidly newer financial instruments, which have either high embedded leverage or high explicit leverage (SIVs rated by Fitch are geared on average 14x) can fall in credit quality.
This is a defect of the ratings process. While the agencies claim that a given rating means the same thing for all instruments given that grade, it’s hogwash. You’d never see a corporate bond downgraded this far except possibly in the case of rampant financial fraud.
Citigroup Inc.’s Sedna Finance Corp. had $867 million of junior-ranking debt downgraded 12 levels to CCC by Fitch Ratings after declines in the structured investment vehicle’s assets.
The cut from Fitch comes as Moody’s Investors Service considers its biggest wave of downgrades since subprime mortgages contaminated the bond market. Moody’s said last week that it may lower its ratings on $105 billion of SIVs, including Sedna’s $10.7 billion of senior debt and five more Citigroup funds.
Sedna’s net asset value has fallen to 54 percent, eroding nearly all the protection the downgraded “second priority senior” notes gets from ranking above the lowest layer of debt, Fitch said in a statement today. The securities will start losing money if the Cayman Islands-based SIV sells $500 million of assets to repay senior-ranking debt, according to Fitch.
“The probability that the SPS notes will incur a loss has significantly increased over the recent weeks,” Fitch said. Next year “there will be significant refinancing requirements that may need to be covered by the sale of assets.”….
The average price of the assets held by Sedna has fallen below 97 percent of face value, Fitch said.
Citigroup said the assets in its seven SIVs declined to $66 billion as of Nov. 30, from $83 billion in September.
SIVs use short-term debt to invest in higher-yielding securities, including mortgage-backed notes. The net asset value measures the amount that would be left after selling assets and repaying senior-ranking debt.
Sedna’s second priority senior notes and the lowest-ranking capital notes are designed to absorb losses before holders of the highest-rated commercial paper and medium-term bonds.
Standard & Poor’s rates the SPS notes A, the sixth-highest investment-grade ranking. Moody’s didn’t rate them when the company was set up in September.