Wednesday, 24 October 2007

Failing SIV's pressure ABCP market

From Bloomberg:

SIV Defaults May Prompt Others to Close Their Door

Many structured-investment vehicles may be forced to close in the next few months as defaults by SIVs run by European hedge funds make it harder for others to avoid selling off their assets, according to CreditSights Inc.

Funds run by London-based Cheyne Capital Management Ltd. and IKB Deutsche Industriebank AG last week failed to repay maturing short-term debt. The defaults may lead to price and ratings cuts and force SIVs to sell assets, prolonging the "turmoil'' in credit markets, CreditSights analysts led by Christian Stracke in London wrote in a report yesterday.

"We continue to expect that the bulk of SIVs will manage to avoid a worst-case scenario of imminent liquidation,'' Stracke wrote in the report. "But the problems that the recent defaults have underlined will make a gradual unwind of many SIVs difficult to avoid over the next several months.''

Axon Financial Funding Ltd. Latest Casualty

Axon Financial Funding Ltd. LLC, a SIV with $9.8 billion of debt, had its credit ratings cut by Moody's today after its net asset value fell by more than half. The SIV, set up by New York- based hedge fund TPG-Axon Capital Management LP, had the rankings of its medium-term notes lowered by 12 steps to Ba3, three levels below investment grade, from Aaa, the highest-possible rating.

Cheyne Finance Plc was forced to sell some assets this year to repay maturing commercial paper and has now stopped paying its debts altogether. Rhinebridge Plc, run by a unit of Dusseldorf- based IKB, missed payments on $65 million of commercial paper last week. The market value of the Rhinebridge assets are 63 percent of their $1.1 billion face value, according to S&P.

Worst Ahead?

"We do not mean to say that price volatility in assets at a $1.0 billion SIV named Rhinebridge will be the straw that breaks the camel's back in global credit markets,'' Stracke wrote in the report. "But the experience at the defaulted SIVs should, at the very least, remind investors that the worst may not be over in terms of structured products ratings and the broader fall-out from the ABS sector.''

Stracke is fairly measured in his report. He is not predicting imminent liquidations and total catastrophe. However he points out that the worst may be yet to come in the Asset Backed Securities markets. If you need anymore convincing that this has the potential to cause major problems in creidt markets, just look at the desperation of Treasury Secretary, subprime is contained Paulson scurrying about the globe trying to drum up support for the super SIV program.