Creditflux Newsletter

In a new report 'SIVs: an oasis of calm in the sub-prime maelstrom', Moody's analyst Henry Tabe points out that SIVs and SIVs-lite have little exposure to US sub-prime RMBS. Although they have suffered recent declines in market value, the rating agency points out that these vehicles have features that make them much more robust than other mark-to-market investments.

SIV NAVs have fallen gradually from a high of around 105% on avearge two years ago to just over par today. However, SIV-lites have dropped from 100% to 95% average NAVs in the past four months, according to the report.

Even if an SIV suffered a rapid NAV deterioration that left it unable to roll its liabilities, it could draw on committed liquidity facilities, notes the report. This means that SIVs are unlikely to be forced to sell assets at exactly the worst time.

The SIV sector as a whole has 23% exposure to RMBS, says the report, of which less than half is US subprime RMBS. SIV exposures to CDOs stand at 11%, but the report points out that SIVs have historically shunned CDOs of ABS.

Fishknife comments:

Moody's is undoubtedly right to point out that SIVs are in a much stronger position than other mark-to-market vehicles that invest in ABS, such as hedge funds.

But the clouds on the horizon are darker than the agency suggests. While SIVs have liquidity lines in place, these facilities are much more limited than is the case with an ABCP conduit. SIVs (and SIV-lites) rely primarily on ratings - not liquidity commitments - to support their standing in the short-term funding market.

Still, it would take a catastrophic fall in NAV for any SIVs to get into trouble, SIV supporters point out. True, but a catastrophic fall in market value is precisely the risk that highly leveraged vehicles are exposed to. And SIVs are as highly leveraged as any ABS hedge fund out there.

The declines in NAV seen to date give no immediate cause for concern. NAVs are certainly miles above the levels that would force them to go into run-off. But another cause for concern is that SIV managers are responsible for marking their own portfolios to market, which means that the decline in NAV may be somewhat greater than these figures suggest.