The structured investment vehicle (SIV) market has shed 95% of the $400bn of assets under management at the market’s peak in July 2007, according to a report out of Fitch Ratings‘ London operations. “Initially there were significant market concerns that the failure of the SIVs would result in a mass fire sale of assets,” says Glenn Moore, director in Fitch’s European Structured Credit team. “Although substantial, the asset disposals have been relatively orderly over the past two years. As the process comes to a close and the oversupply of assets from the SIV sector is removed this is one less factor weighing on structured finance valuations.” The Fitch report notes the SIV market in two years disposed of the majority of assets it grew over 21 years, costing investors deeply. Capital note holders generally suffered a complete 100% loss, while other investors lost on average 50% on SIVs that could not consolidate or restructure the senior note amid the market contraction. The SIV business model has historically offered investors stable returns by investing in highly rated assets and funding them with shorter dated liabilities. The maturity disparity, however, combined with the collapse of the US subprime mortgage-backed securities market and an historic liquidity crisis, led to the undoing of the SIV market, Fitch notes. Without the ability to refinance maturing debt in the capital markets, the rating agency says, SIVs faced limited options. “Initially the SIVs disposed of assets through open market sales, exchanged assets for SIV notes with existing investors and entered repurchase agreements in an attempt to repay the senior investors as their notes fell due,” Moore adds. “However, the continued market value decline of the asset prices combined with the closure of the capital markets eventually signified the end of the SIV sector.” The tight SIV market led to creative — and costly — solutions by European financial institutions. French investment bank Société Générale in late 2007 bailed out its only SIV, Premier Asset Collateralized Entity (PACE), by providing a $4.3bn credit line. PACE had run into some capital issues over US mortgage-related woes. Home loans including subprime mortgages, for example, comprised as much as 12% of PACE’s holdings. Investors quickly lost appetite for these kinds of SIVs after suffering exposure to toxic US mortgages. SocGen’s turn in the subprime spotlight came after a ratings agency said PACE was on the verge of falling into the hands of a trustee due to a capital emergency. SocGen said in December 2007 it would take on the equivalent of $4.3bn in assets from PACE, effectively quieting the public scrutiny of the SIV. Write to Diana Golobay.
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