The Financial Times’ Paul Davies, citing Dresdner Kleinwort research, tells us that many structured investment vehicles face acute financial demands beginning in January when their medium term notes, the subordinated layer of their funding, come due. Note that this demand is a new source of stress. SIVs were already on the ropes due to their inability to roll maturing commercial paper, which was structured to be senior debt.
From the Financial Times:
The funding problems for the structured investment vehicles (SIVs) that have been at the centre of this year’s liquidity troubles are far from over in spite of a number of banks stepping in to support their vehicles.
January will bring the start of a second wave of liquidity problems for SIVs as the vast majority of medium-term funding starts to come due for repayment, according to a report from Dresdner Kleinwort analysts to be published on Wednesday.
SIVs rely on cheap, short-term debt to fund investments in longer-term, higher-yielding securities. They have been hurt as funding has dried up and asset values have declined.
This cheap debt has come from both the very short-term commercial paper (CP) markets and from the slightly longer maturity medium-term note (MTN) markets. CP funding has long dried up and much of what was sold has matured.
“So far SIVs have primarily felt the impact of collapsed CP issuance,” said Domenico Picone at DrK.
“Outstanding MTN for the 30 SIVs currently stands at $181bn, which will be the next liquidity challenge they face.”
This funding represents almost 65 per cent of the value of the SIV sector by the middle of October. Since then it is likely that SIVs have shrunk a great deal more and that that percentage is almost certainly higher.
According to the DrK analysts’ calculations, two-thirds of all MTN funding for SIVs comes due for repayment by the end of next September. Almost $40bn is to be repaid from January to March alone.
This second liquidity squeeze will affect some SIVs more than others.
Sigma Finance, run by Gordian Knot, accounts for 22.5 per cent of all outstanding MTNs issued by SIVs. It must repay about $22.5bn by the end of September and another $2.5bn in the final quarter.
Another heavy borrower in the MTN market is HSBC’s Cullinan Finance, which must repay $19bn by the end of September. DrK has to repay $13.4bn over the coming nine months and Citigroup $29.1bn.
No wonder banks are hoarding cash…..