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Friday, October 19, 2007

Somebody Start A SIV Implode-o-meter


The first few SIVs are unable to pay back all their debt.

Cheyne Finance SIV Won't Pay Debt as It Falls Due (Update2): “Cheyne Finance Plc, the structured investment vehicle managed by hedge fund Cheyne Capital Management Ltd., will stop paying its debts, a receiver from Deloitte & Touche LLP said.

Deloitte is negotiating a refinancing of the SIV or a sale of its assets, according to an e-mailed statement today. Cheyne Finance's debt with different maturities will now be pooled together, rather than shorter term debt being repaid sooner, Neville Kahn, a receiver from Deloitte said today in a telephone interview.

“It doesn't mean we have to go out and fire-sell any assets, quite the opposite in fact,” Kahn said. “The paper that falls due today or tomorrow won't be paid as it falls due.””

I have drawn up a letter in the same spirit that I will send to my creditors. It goes something like this:

Dear Credit Card Company/Mortgage Company/Bank

I have decided to pool together my debt of different maturities.
I will no longer be making payments as they fall due.
I trust that you will not liquidate my assets.
Thank you for your continued support and patience.

“Moody's cut the SIV's top credit ratings on Oct. 4 by as many as 12 levels to Ba3, three steps below investment grade, citing the deterioration in the market value of Cheyne's portfolio.”

To get cut 12 levels is pretty crazy. It also reveals that Moody’s ratings aren’t worth much.

Rhinebridge Commercial Paper SIV May Not Repay Debt (Update1): “Rhinebridge Plc, the IKB Deutsche Industriebank AG structured investment vehicle that has lost about half its value, is unlikely to repay all its debt.

Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to pay back debt coming due, the Dublin-based fund said in a Regulatory News Service release. Rhinebridge had $1.2 billion in commercial paper outstanding as of Oct. 5, according to Fitch Ratings.”

A mandatory acceleration event means that all of the SIV’s debt is now due. Immediately. (Good luck with that.)

“Rhinebridge, Cheyne Finance Plc and other SIVs, which borrow from the short-term commercial paper market to fund purchases of asset-backed securities, have struggled as investors retreated from all but the safest debt. SIVs have dumped about $75 billion of assets as a result, prompting U.S. Treasury Secretary Henry Paulson to organize an $80 billion bank-run fund to buy some of the securities.

In August, Rhinebridge had to sell $176 million of its assets to cover obligations, and as much $320 billion of holdings by SIVs worldwide may be dumped if the market doesn't improve.”

Liquidating even a fraction of $320 billion into a market that has gone ‘no bid’ would be devastating to say the least.

Gordian Knot's Sigma Raises $20 Million in Bond Sale (Update2): “Sigma Finance Corp., the largest structured investment vehicle according to Standard & Poor's, raised $20 million in a sale of two-year bonds.”

The headline and the first paragraph of the release sound optimistic. You may think to yourself that at least some of the SIVs are able to raise money. Maybe this will all blow over. Take a closer look…

“Sigma had more than $52 billion of senior debt outstanding in August, according to a Standard & Poor's report. The sale this week is ``part of Sigma's ongoing funding program,'' Nicholas Sossidis, who co-founded Gordian Knot said in an interview today.”

So Sigma, ‘the largest structured investment vehicle’ with $52 billion in outstanding debt was able to raise a token $20 million.

Gordian Knot: Any very difficult problem; insoluble in its own terms

A most excellent choice of name. Talk about foreshadowing.

Asset-Backed Commercial Paper Drops for 10th Week (Update3): “U.S. asset-backed commercial paper shrank for the 10th straight week, extending the worst slump in seven years and underscoring the depth of Treasury Secretary Henry Paulson's challenge to revive the market.

The short-term debt maturing in 270 days or less fell $11 billion in the week ended yesterday to a seasonally adjusted $888 billion, according to the Federal Reserve in Washington. The broader commercial paper market was little changed at $1.87 trillion.

Businesses rely on commercial paper, usually maturing in three months or less, for expenses including payroll and rent. Among them are structured investment vehicles, or SIVs, such as those run by hedge funds Cheyne Capital Management Ltd. in London and TPG-Axon Capital Management LP in New York. The SIVs sell commercial paper to fund purchases of other securities such as finance company bonds and mortgage securities.”

As long as the SIVs can’t get financing, ABCP outstanding will continue to shrivel up.
“The gap between the yield on asset-backed commercial paper and the Fed funds rate signals investors still have concerns about the short-term debt.”

Yes… and so they should.

“Investors fled asset-backed securities on concerns they may contain subprime mortgages. The retreat left some companies unable to roll over their commercial paper, forcing them to sell assets.”

The housing market isn’t exactly getting any better…

SIV Concerns Trigger Worst Week for Credit in Three Months: “Credit-default swaps rose the most in three months this week as plans for an $80 billion fund to rescue structured investment vehicles failed to prevent two funds warning they may be unable to repay all of their debt.

The iTraxx Europe index of 125 companies with investment- grade ratings increased as much as 7.5 basis points to 37.25 basis points including a 2.25 basis-point jump today, JPMorgan Chase & Co. prices show. The CDX North America index climbed 8 basis points, the most since Aug. 3. The indexes measure the cost to protect against debt defaults and rise when perceptions of credit quality worsen.”

To make matters worse, the Super SIV bailout has been met with little enthusiasm from some serious players. Bill Gross at PIMCO ridiculed M-LEC… and now Greenspan isn’t exactly endorsing the project.

“Greenspan said it wasn't clear to him that the benefits to be gained from such a fund exceeded the risks, according to the report in Emerging Markets, a newspaper that is published during meetings of the International Monetary Fund, the World Bank and regional development banks.”

Could it be that the Super SIV might flop?

Philadelphia Fed's Factory Index Dropped to 6.8 (Update3): “The pace of manufacturing in the Philadelphia area cooled in October, signaling economic growth is slowing.

The Philadelphia Federal Reserve Bank's general economic index fell to 6.8, from 10.9 in September, the bank said today. Readings greater than zero signal expansion.

The report showed sales fell by the most since September 2006, orders slowed and inventories dropped. Gains in exports and lean stockpiles will keep factories running even as consumer and business spending cool, economists said.”

Weak, but leading economic indicators increased.

U.S. Leading Economic Indicators Rose in September (Update1): “The index of leading U.S. economic indicators rose in September as stock prices climbed and fewer Americans lost their jobs, a private report showed.

The Conference Board's gauge rose 0.3 percent, as forecast, after a 0.8 percent August decrease that was larger than previously estimated, the New York-based group said today. The measure points to the direction of the economy over the next three to six months.”

Unfortunately, since stocks turned in the biggest September advance since 1998 too much of the increase in the indicator is a result of equity performance… and can just as quickly be undone.

Note that the decrease in August was larger than previously estimated.

“The rise in the S&P index added 0.11 percentage point to leading indicators. Stock prices rose to a record this month.

First-time applications for jobless benefits, which fell to a weekly average of 313,300 in September from 323,200 in August, also contributed 0.11 percentage point to the leading
Index.”

.Which brings me to yesterday’s claims numbers.

U.S. Jobless Claims Rose 28,000 to 337,000 Last Week (Update1): “The number of Americans filing first-time claims for unemployment benefits increased more than forecast last week, adding to concern the job market is softening.

Initial jobless claims rose by 28,000, the biggest jump since February, to 337,000 in the week that ended Oct. 13, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, gained to 316,500 from 310,500.”

Not yet a trend, but ‘biggest jump since February’ isn’t encouraging. To be fair, this data series is quite volatile.

Wachovia Net Drops 10% on Mortgage, Loan Writedowns (Update2): “Wachovia Corp., the bank that's spending more on acquisitions than its biggest competitors, reported earnings that missed analyst estimates after $1.3 billion in writedowns for mortgage-backed securities and loans for leveraged buyouts.

Net income fell 10 percent in the third quarter, the first decline in six years, to $1.69 billion, or 89 cents a share, from $1.88 billion, or $1.17, a year earlier, the Charlotte, North Carolina-based company said today in a statement. Excluding merger costs, Wachovia earned 90 cents a share, compared with the $1.04 average estimate of 19 analysts surveyed by Bloomberg.”

Another bank, another miss.

Google can’t hold up the market by itself… at least not for long...

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