Articles on siv0

Oil and Gas Prices, $ and euro, June 4, 2008, Mark Wyatt

Food for Thought, May, 2008, Niels Jensen

Stagflation and the Fed, February 29, 2008, John Mauldin

Consumers, Credit, and Complications, February 8, 2008, John Mauldin

What Caused the Home Mortgage Market to Go Out of Control?, February 2008, Thomas Tan

Summary of Orange County, California, Structured Investment Vehicle Holdings, January 31st, 2008, Mark Wyatt

Taking Out the Structured Investment Vehicle Garbage, October 21st 2007, John Mauldin

A Summary of Orange County Structured Investment Vehicle Holdings

Feburary 8, 2008
By Mark J. Wyatt

This summary is based on:

1. Preliminary Report on Risk Analysis of the Treasurer’s Investment Pools, Orange County Board of Supervisors, January 8, 2008, Presented by Marty Margolis, Managing Director, PFM Asset Management LLC, available on the Treasurer’s website.

2. Frequently Asked Question About Structured Investment Vehicles, PDF author “krodenhuis”, Dec. 7th, 2007, available on the Treasurer’s web site.

3. Derivative Ratings, Structured Finance, February 2000, Standard and Poors (this is the most recent I can find on the internet).

Note: A substantial amount of information is available at the OC treasurer's site (this file includes the above referenced documents 1 and 2). This additional documentation nidicates that there may be an additional $4 miilion in SIVs tied to John Wayne airpot, but not included in this report (unless it was moved into the extended funds).

INTRODUCTION

The Orange County Register, in and article titled “Consultant: Street investment pool is safe”, by Ronald Campbell summarized that:

“Street came under fire last month for his purchase of $818 million in structured investment vehicles, or SIVs. Some of the complex securities were threatened with a rating downgrade, which would have hurt their value. But the consultant said that while SIVs are doing badly in the market, "Orange County seems to have selected SIVs that should continue to perform relatively well."

The consultant also agreed with Street's strategy to hold the SIVs until they mature. The last of the 18 SIVs in the county pool will mature in September 2009. Because of the poor market, "it is simply unrealistic to sell SIVs at this moment," the consultant said. Street repeated Monday that he won't be buying more SIVs. "We just have to be patient and hope that one of the banks sponsoring it doesn't have a Societe Generale situation," Moorlach said, referring to the giant French bank convulsed by a $7 billion trading loss.”

The purpose of this report is not to support or dispute the finding, but rather to summarize what the consultant’s report actually said in terms of the risky portion of the investments, and what the nature of the SIV holdings are. All of the holdings are senior tranche (meaning these obligations are satisifed first in the event of sell-off of the fund) and as of the last rating, the senior positions are considered high grade with a few negative warnings. All of the SIV holdings appear to be medium term notes (MTN). At least for one fund (Sigma Finance), OC may have the option to redeem their notes if an enforcement acion occurs (i.e., the fund encounters problems which trigger a response by its trustee).

Stressed Investments:

The PFM report [1] speaks of “stressed securities”, which it refers to as asset backed securities (ABS) and SIVs (structured investment vehicles). A SIV is a specific asset backed security. This is largely based on concerns over the “pricing, rating, and soundness” of some ABS. The PFM report breaks the amounts out by pool (corporate, education, extended). All of these securites are considered at risk due to the possibility of them containing sub-prime loans. Table 1 summarizes the ABS scenario for the OC investment pools.

Table1: ABS Held by Orange County, California

PoolABS held
Includes SIVs
($millions)
SIV held
Market value
($millions)
Total pool
($millions)
County47049.252,240
Education25998.52,350
Extended670670.0882,210
Totals1,399817.8386,800

Total ABS = $1.4 billion (20.5% of all funds)
Total SIVs = $817.8 million (12.0% of all funds)

The SIVs:

Orange County holds 20 unique accounts from six different SIV funds with a combined purchase value of $ 860,000,000 [1]. By unique accounts, I mean one with a unique CUSIP number. CUSIP is the US protocol for uniquely identifying a security. There are differences between the Treasurer’s FAQ[2] and the PFM report [1]. I used the information from the more recent, independent PFM report [1]. Table 2 lists the Securities held [1]:

Table 2: Summary of OC Held SIVs

CUSIPFund Bank Sponsor
Initial Value
$Million
Maturitypool
33828WDY3Five Finance Citigroup50 11/25/2008Extended
33828WDZ050 6/6/2008Extended
33828WCV015 11/25/2008Extended
12500GVF8 CC (USA)50 2/9/2009Extended
12500GWY650 1/23/2009Extended
87582TKX6Tango Finance Rabobank50 6/10/2009Extended
87582TJM250 11/12/2008Extended
87582TLG240 7/30/2009Extended
87582TJA825 9/25/2009Extended
96335WJT1Whistlejacket
Capital
Standard
Charter
50 1/25/2009Extended
96335WFP330 1/26/2009Extended
48273PTK9K2 (USA)Dresdner50 6/9/2009Extended
48273PRR650 3/10/2008County
48273PRR650 3/10/2008Extended
48273PRE525 2/23/2009Extended
48273PTL725 6/9/2009Extended
8265Q0UM2Sigma Finance None50 5/14/2008Extended
8265Q0UA850 10/30/2008Extended
8265Q0WB450 2/21/2008Education
8265Q0UA850 10/30/2008Extended

Total SIV = $860,000,000 par value. Note the $817.8 million value in the Stressed Investment section is PFM/IDC estimated (methodology not presented) market value as of Dec. 31st, 2007. This is likely a valuation based on the notes not reaching maturity, possibly minus any written off amounts.

The PFM report [1] states that as of Dec. 31st, 2007, 2-3% of the SIVs value was “wrote off”.

Written Off Investment = $17,200,000 to $25,800,000 (stated as of Dec. 31st, 2007, could be as high as 4.9% based on presented numbers, or $42 million)

CUSIP: The unique identifier which identifies the SIV.

Fund: The name of the SIV fund.

Bank Sponsor: The bank (if any) committed to supporting the SIV in troubled times.

PFM indicated that Dresdner Bank had not committed to supporting the K2 fund at the time of this report (January 8). Sigma Finance has no bank sponsor.

Initial Value: The note price.

Maturity: Point at which the note matures.

Pool: PFM looked at the Educational, Corporate and Extended investments as separate pools.

The Funds:

Most of this is from The Moody report [3] from 2000. Emphasis is mine. Note that the policies, enforcement actions, etc., may have changed since 2000.

Five Finance

“Five is a structured investment company incorporated in the Cayman Islands. It issues commercial paper and medium term notes directly in the European markets. Five Finance Inc. (FFI), its single wholly owned Delaware subsidiary, was formed for the purpose of co-issuing commercial paper and medium-term notes in the U.S. domestic market along with Five. Both are jointly and severally liable under those obligations. All CP holders (Five and FFI), all MTN holders (Five and FFI), the derivative counterparties, and the liquidity providers are senior secured and pari passu. Citibank International PLC (Citibank) has been contracted to serve as investment manager, group funding manager, defeasance manager, global custodian, and to provide operational support to Five.

Although Five is the fifth structured investment company created and managed by Citibank, it does have a number of features that are departures from the previous four. Five may purchase loans as eligible portfolio assets; it may purchase noninvestment-grade assets (both loans and securities) as eligible assets; and its capital adequacy model has been enhanced to capture the additional risks associated with this greater flexibility.”

CC (Centauri Corporation, [2])

“Centauri is a structured investment company incorporated in the Cayman Islands. It issues commercial paper and medium-term notes directly in the euro markets. CC (USA) Inc., its Delaware subsidiary, was formed for the purpose of issuing commercial paper and medium-term notes in the U.S. domestic market. CC (USA) lends the proceeds from an issuance to Centauri through an intercompany loan agreement.

Citibank International PLC has been contracted to serve as investment manager, group funding manager, defeasance manager, and custodian to Centauri.”

Tango Finance

Not reported on in [3]

Whistlejacket Capital

Not reported on in [3]

See this article:

Market Report -- In Play (WIRES)
January 31, 2008 9:03 AM ET
"Standard Chartered is to take $7.2 bln of assets from Whistlejacket Capital onto its balance sheet after committing to fund the structured investment vehicle, but moved to reassure investors that the consolidation had no significant impact on the bank's earnings or capital position..."

K2

“K2 is a structured investment company incorporated in the Cayman Islands. It issues commercial paper and medium-term notes directly in the European markets. K2 (USA), its Delaware subsidiary, has been established for the purpose of issuing commercial paper and medium-term notes in the U.S. domestic market. K2 (USA) lends the proceeds from such issuance to K2 through an intercompany loan agreement. The obligations of K2 (USA) are unconditionally and irrevocably guaranteed by K2. Dresdner Bank AG London branch (Dresdner) has been contracted to serve as manager to K2, providing it with investment and treasury management and operational support services.”

(Note: The PFM report[1] indicates that the Dredsner bank has not committed to support K2)

Sigma Finance

“Sigma, a limited purpose finance company, was rated in January 1995. It is a Cayman Islands limited liability company formed for the purpose of issuing debt securities in the European commercial paper and medium-term note markets and investing these funds in a portfolio of highly rated securities. Sigma has one wholly owned subsidiary, Sigma Finance Inc., a company incorporated in Delaware for the sole purpose of issuing and selling U.S. commercial paper and medium-term notes as a nominee for Sigma. Such debt securities are guaranteed by Sigma. Sigma is owned by its capital note and equity holders.

The conduct of Sigma’s investment activities has been delegated to Gordian Knot Ltd. (the investment manager) pursuant to an investment management contract. Gordian’s owners include Deutsche Bank AG, Sarofim & Co., and Gordian’s founders. Sigma is a credit arbitrage vehicle. The debt is issued at the ‘AAA/A-1 ’ rating, and assets of varying ratings, but always of investment grade, are purchased with the proceeds. These assets are match funded by the debt, or a derivative transaction is used to manage the cash flows, thus eliminating market risk. Sigma’s policy is usually to buy and hold; thus, the credit spread is realized over the life of the asset. Given the nature of Sigma’s business of identifying pricing differentials in the credit market, the ‘AAA/A-1 ’ rating is important for maximum profitability (within permitted leverage constraints). Therefore, Sigma was structured to achieve and maintain the ‘AAA/A-1 ’ rating. If any debt security issued by Sigma ceases to be rated ‘AAA/A-1 ’, an enforcement event will be deemed to have occurred.”

The Moody report states for Sigma’s enforcement:

Should an enforcement event occur, the security trustee, acting on behalf of the secured creditors, realizes his charge on Sigma’s portfolio. The security trustee then reorganizes the assets, the derivatives, and the liabilities into various pools on the basis of maturity. Each pool will contain assets, and derivatives if necessary, whose maturity matches that of the liabilities due in that same year. As the assets mature, the liabilities are repaid. As a result, assets may need to be sold, others of matching maturity purchased, and derivative transactions terminated or recontracted. The credit support for each of these pools remains in a residual pool.
Medium-term noteholders have an option to redeem their notes upon enforcement.
If this option is exercised, these liabilities are included in the pool with a maturity of one year or less.

The following events will trigger enforcement :

-Failure to maintain a rating of ‘AAA/A-1 ’,
- Insolvency or winding up of Sigma,
- Failure without cure of the capital adequacy and leverage tests,
- Loss of 30% of capital,
- Failure without cure of the liquidity tests,
- Failure without cure of the interest rate sensitivity tests,
- Failure without cure of the exchange rate sensitivity tests,
- Failure to repay any liquidity provider when due within the applicable grace period,
- Failure to repay any of the noteholders when due within the applicable grace period, and
- Failure to repay any derivative counterparty when due within the applicable grace period.”