The Financial Times today reports that sales of asset backed securities and related debt could easily reach $100 billion in 2008 between the winding up of SIVs and forced selling by the occasional ABS hedge fund player hitting the wall.
Note that some, perhaps many, of these players do not have much latitude in the timing of their dispositions. The $100 billion figure is the estimate of SIV medium term notes maturing before year end. Given the existing strains on their balance sheets, most banks will presumably fold the SIVs and pay out the MTN holders whatever is their due. The continuing sale of ABS is likely to keep prices low for some time and will also make it hard to sell new asset backed securities.
From the Financial Times:
Troubled leveraged funds are likely to sell almost $100bn worth of asset-backed bonds and financial company debt by the end of the year as they struggle to avoid defaulting on their own debt, according to analysts at Citigroup.
Sales of asset-backed securities, such as mortgage-backed bonds and collateralised debt obligations, have gathered pace in recent weeks, pushing prices down further and keeping the market shut for new issues.
However, selling pressure looks set to increase as structured investment vehicles (SIVs) face a wave of medium-term debt repayments over the next few months, with more than $10bn due in each of the next seven months, up from the $4bn that matured in February, according to Citigroup analysts.
“Just less than $100bn, or 65 per cent, of the existing medium-term note [MTN] debt is due to be repaid in 2008, leaving around $50bn of MTN outstanding at the end of the year,” Birgit Specht at Citigroup said. “This looks like a good proxy for both the magnitude and the pace of a potential wind-down this year.”….
“While the SIV crisis may have few surprises left, we remain firmly of the view that bank bail-outs are unlikely to stem the flow of asset sales,” said Ganesh Rajendra, head of securitisation research at Deutsche Bank. He added that recent weeks had already seen a notable pick-up in selling pressure.
It is not just SIVs that are being forced to sell such bonds. Yesterday, news arrived about the collapse of Peloton, a London-based hedge fund specialising in asset-backed bonds, and there is rising concern about who might be next.
Of the $100bn due in MTN repayments, Citigroup estimates that almost $85bn is due by the end of September. There will also be repayments due on short-term commercial paper and repo facilities with other banks.
In addition, there is about $25bn-$30bn of debt that defaulted SIVs have already failed to repay.
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As serious as this may be ($100 billion in forced SIV liquidation), the real monster is CDO forced liquidation.
There are about $2 trillion in CDOs outstanding. As the MBS gets downgraded going forward, CDOs will go into “technical default” en masse. Technical default usually leads to forced liquidation.
I think this could very well lead to systemic financial meltdown. There is no bailout scheme that can prevent this because of the dispersion and multitude of entities involved. Welcome to the brave new world of securitization.
The difference is that SIVs have global assets, and fear over SIV sales is the main thing that has crippled ABS markets in Europe and Australia, where credit issues are minimal. It’s no surprise that the US MBS market is screwed, CDO liquidations or no.
I read Birgit’s piece, and whilst I have a lot of time for her generally, I believe she is off the mark. She’s definately right that the rolling off of senior debt is a massive challenge to the asset markets (no-brainer), but I believe she’s been overly simplistic in this assessment.
Firstly, asset sales will be driven by net redemptions, not gross. Given that many SIVs (including the largest) are funded for the next 2-3 months, this should cushion the readjustment process. In addition, Birgit’s numbers include Cullinan (fully restructured as of Feb 21st) and Asscher (currently negotiating restructuring), both of which contribute(d) significantly to the MTN market. Finally, the headline numbers do not take into account the funding facilities that have been committed / put in place by sponsors such as Citi and Dr, which will clearly be drawn down as / when necessary to meet senior debt redemptions. At the expense of capital note holders, I should add.