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.
As usual, Evans-Pritchard descends into inaccurate hysteria regarding Paulson’s limp attempt to alleviate subprime stress by characterizing it as a violation of contract law.
This guy is a frumpy, shrill, fire-screamer in the theater and I propose you ban his black prattlings.
He won’t be getting a job at FT anytime soon.
Evans-Pritchard, did not say “violation,” he said “abuse.” In an earlier post, I went on at some length about how there were obvious grounds for lawsuits against the Paulson proposal, but it appears likely to be so trivial in impact that no one will bother.
Investors have written me saying they don’t like the plan because they think it sets the stage for further government meddling in private contracts if the housing market continues to deteriorate, which they anticipate.
And that wasn’t what the guts of the piece was about. He was talking about global imbalances and how the US debt problems were going to undermine our ability to act as a global engine of growth. Nouriel Roubini is on the same page.
I acknowledged his tone was overwrought, but that doesn’t mean the substance is untrue, merely overstated.
“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). “
If you can break a press release…
“Investors have written me saying they don’t like the plan because they think it sets the stage for further government meddling in private contracts if the housing market continues to deteriorate, which they anticipate.”
I don’t follow this. The whole point of the plan is that it is supposed to enable servicers to act without breaching their contractual obligations (or to give them cover, if you’re cynical). And it’s an industry proposal that the White House is claiming credit for. I don’t see what it has to do with government meddling in contracts. That said, there are legitimate reasons for some investors to be annoyed at it – from what analysts tell me, it favours junior investors over senior ones, even though senior investors are controlling creditors.
Agreed with your junior/senior point, the rating agencies have also weighted in with that point of view.
However, the presentation of this as an investor plan is a stretch. This is an originator/servicer driven plan. They are very much worried about the securitization being subject to more regulations (remember, there is a proposal for assignee liability floating about). And Paulson felt compelled to defend innovation in his speech announcing this plan.
The only people at the table allegedly representing investors were Freddie, Fannie, and the American Securitization Forum. The ASF is a lobbying group, and includes servicers, originators, accountants, attorneys, rating agencies, etc. In either the practical or legal sense, ASF is most decidedly not an investor representative.
As to the legality of this move, the legal rationale for a mod (and the test heretofore) is that it makes the pool as a whole no worse off. You can do that in one-off mods becasue, among other things, they compare the outcome with foreclosure. Here they abandon that step (there is some verbiage in the AFS guidelines statement as to why they think that’s valid, but someone who wanted to could have a field day with it). Therefore there is not way of knowing or proving that these mods in fact do leave investors better off. For instance, Calculated Risk has said to expect high recidivism among anyone getting a mod under this program. So what if the effect is to get say 2 more years of income and then foreclose at a lower price? That’s a scenario investors are worried about.
The 2005 bankruptcy bill produced unforeseen consequences (much lower filings post the new law, and nearly all Chapter 7, so that the acceleration of BKs that took place prior to the effective date appears to have left the industry worse, or at least not better off).
It’s too early to tell if anyone will sue (there needs to be a breach of an agreement, not the mere threat of a breach). It’s likely no one will, not because they don’t have grounds, but there won’t be enough mods for anyone to feel it’s worth the cost and effort to make a stink.
I never said it was an investor plan. I just said it’s not government meddling.