Moody's slashes SIV ratings

Credit downgrades affect $14bn in bonds w SIV net asset values plunged 17% in three months
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The Independent Online

Moody's, the under-fire credit ratings agency, unleashed a flurry of credit downgrades and negative outlooks on the debt held by highly specialised investment vehicles that are at the centre of the global credit crisis.

The moves taken on half-a-dozen investment funds known as SIVs and SIV-lites were the result of the agency's comprehensive review of the $400bn (£200bn) global sector and further unsettled markets jittery about the extent of the credit crunch that began in America's subprime mortgage market.

The negative outlooks announced yesterday affect $14bn in bonds made up principally of risky US mortgages. The European Commission last month opened an investigation into whether Moody's, along with rival Standard & Poor's, reacted swiftly enough when the credit market began to melt down earlier this summer.

Paul Mazataud, managing director of the structured finance group, said the revamp of its approach to valuing SIVs was necessary not because of a fundamental loss of value of underlying assets, but rather solely due of the complete evaporation of the market's confidence in the sector. "This is a situation in which volatilities in market value are not significantly correlated with declines in asset quality and in which commercial paper investors do not seem to be willing to discriminate between vehicles to any great degree," he said. "The situation has not yet stabilised and further rating actions could follow."

The vehicles singled out were Axon Financial, Harrier Finance, Kestrel Funding, Rhinebridge and Victoria Finance, all of which had bonds placed on review for possible downgrade. The agency downgraded some bonds from Cheyne Finance, and slapped a negative outlook on other Cheyne notes.

SIVs are unregulated funds set up by investment banks for other investors like hedge funds that rely on raising cheap forms of debt to invest in more high-yielding instruments, making money by pocketing the difference. SIV-lites are generally much more concentrated on a few asset classes. In most cases these are almost exclusively invested in residential mortgage-backed securities, RMBS, which are packages of US home loans.

Around the world there are 30 SIVs and six SIV-lites controlling $400bn and $12bn between them, respectively. Those that were set up in since 2006 have been the hardest hit, Moody's said.

When defaults of US subprime loans – those granted to borrowers with poor credit histories – skyrocketed earlier this year, the value of the assets underlying RMBS declined drastically. Given the opaque nature of the market and the dripfeed of news about the investors who are exposed, credit markets have shut down until they have more clarity about the true extent of the crisis. "The blow to confidence in the global financial system means that what was once liquid is now illiquid," said Paul Kellogg of Moody's.

Edward Cahill, a former Barclays banker who pioneered SIV-lites, resigned last month, while several SIV-lites his team set up have run into trouble.

Mr Mazataud pointed out that there have been no defaults on the assets underlying SIVs and SIV-lites. However, SIV net asset values – a measure of how much the market value exceeds senior debt – dropped from 102 per cent at the start of June to 85 per cent at the end of August. SIVs heavily exposed to RMBS saw more extreme drops, from 96 per cent in June to 72 per cent by the end of last month. Mr Mazataud said the new rating model assumes that only bonds that can sustain a price decline double that already experienced in the July through August window will retain their AAA ratings.