The Financial Times reports that Standard & Poor’s has issued downgrades on the capital notes for all its rated structured investment vehicles (note as far as we can tell, the FT is breaking this story). Bear in mind that capital notes are subordinated debt, generally 4% to 6% of an SIV’s capital structure. No SIV commercial paper was downgraded in this announcement, although the CP from several SIVs was put on watch for a possible downgrade. S&P was also negative on the prospects for SIVs generally.
From the Financial Times:
Standard & Poor’s has downgraded the capital notes of all its rated structured investment vehicles, and said it did not expect the asset class to survive. It also put 18 of these off-balance sheet vehicles on “ratings watch negative”, meaning downgrades are likely in the near future.
“The SIV as a type of vehicle is unlikely to persist and thus we formally assigned negative outlooks due to the issues in this sector,” the ratings agency said.
“[The downgrades reflect] the increased likelihood that capital investors in these vehicles will see actual losses materialise.” SIVs raise money through short-term borrowings and invest this cash in higher-yielding, longer-term assets.
But investor appetite for SIV debt has dried up, and market prices for the structured finance and other types of assets in the SIV portfolios have declined precipitously.
S&P analysts expect continued erosion in the net asset values of these vehicles, and they do not expect investors to return to the market in sufficient numbers to reverse the SIV funding problem.
The ratings agency said the unprecedented pressure experienced by SIVs had also left its mark on the market for short-term debt, resulting in the first defaults of senior debt in the structured commercial paper markets in its more than 20-year existence.
The ratings action affected SIVs managed by Citigroup, Dresdner Kleinwort and Société Générale. Up to $1bn of junior debt issued by Citigroup’s Five Finance was slashed to CCC from BBB+.
S&P also cut to junk the ratings on the junior debt of SocGen’s Premier Asset Collateralised Entity (Pace) and Dresdner’s $22bn K2. SocGen on Monday said it would bring all of Pace’s assets on to its own balance sheet.
Pace’s most junior capital notes have lost about three-quarters of their value to date, and the SIV is close to breaching its capital adequacy test.
S&P put Pace’s senior notes on watch for possible downgrade, as well as the triple-A rated Harrier Finance Funding and Orion Finance vehicles.
Ratings agencies have issued more than 20,000 downgrades in recent months, but have largely declined to apply a dollar value to the affected securities.