In a special report issued in January this year, Moody’s highlighted the difficulties facing the much-maligned structured investment vehicles (SIVs) market. In a bleak prognosis, the ratings agency reiterated the acknowledgement made by many managers and sponsors of SIVs that senior investors are unlikely to return to this sector in the absence of fundamental changes to the business model. While this sentiment undoubtedly predominates, its validity should not go unquestioned.
Let’s start with the fundamentals. SIVs involve an investment by one or more special purpose vehicles (SPVs) in a portfolio of primarily asset-backed securities generally actively managed by an investment manager. The SPV typically funds itself by issuing a mix of short-term commercial paper and medium-term notes (MTNs) which have a much shorter maturity than the underlying assets. This funding therefore needs to be continually refinanced as it matures. The sponsoring bank will usually provide a liquidity facility to protect the SIV from being unable to refinance its debt due to market disruption. However, the amount of liquidity that can be drawn is normally significantly less than the SIV’s total liabilities; about four to six months of funding obligations covering, on average, less than 15% of the senior short-term debt, is common.
