First auction of assets by an SIV

Remember the money center banks’ ludicrous attempt to pretty up those off-balance sheet vehicles via the ‘Super SIV?’ Well, that was a clear bust. But, the toxic waste in those vehicles is still there. Some of these vehicles have been brought back on the balance sheet, adding additional pressure to deleerage as they bloat stretched balance sheets even more. HSBC was the first global bank to note doing so.

Now, the first SIV has auctioned off its assets and its not pretty. Note the downgrade by Moody’s.

The first auction of assets by a structured investment vehicle drove Moody’s Investors Service to downgrade the Cheyne Finance Plc SIV by five levels, describing it as a “fire sale.”

The $6 billion SIV set up by London-based Cheyne Capital Management (UK) LLP is scheduled to auction its assets this week or transfer them to a new company under a reorganization by receivers Deloitte & Touche LLP and Goldman Sachs Group Inc. Moody’s said it cut the SIV’s senior debt to Ca, its second- lowest grade, in a report today.

Cheyne Finance was the first of the companies that financed themselves in the short-dated commercial paper markets to buy longer-dated assets that defaulted after investors shunned all but the safest government securities because of contagion from the collapse in subprime mortgages last year.

“Moody’s has taken into account the expectation that prices achieved at auction may be significantly lower than prices that may be expected through an orderly and selective liquidation,” analysts led by Paul Kerlogue and Henry Tabe wrote in the report.

“Severe price declines” have cut the value of the SIV’s assets to 62.9 percent of face value as of July from 99.5 percent a year ago, Moody’s said.

Investors can opt to receive cash for their holdings after the auction or exchange them for new securities issued by the new company, Moody’s said. The ratings don’t take into account any recovery investors may get from the new notes, Moody’s said.
–Bloomberg, 15 Jul 2008

As I said, these things are still out there and I do not believe they have been fully accounted for on the balance sheet of our venerable financial institutions.