What Are Structured Investment Vehicles (SIV)?
What Are Structured Investment Vehicles (SIV)?
The first SIVs were founded in the mid-1980s as bankruptcy-remote entities and were sponsored by large banks or investment managers for the purpose of generating leveraged returns. They do this by earning the spread (differences in yields) between the longer-dated assets purchased and the short-term liabilities issued. The balance sheet of a structured investment vehicle typically contains assets such as asset-backed securities (ABS) and other high-grade securities.
Maintaining a high quality asset portfolio is a fundamental part of running a SIV. The purchase of these assets is funded through issued liabilities in the form of commercial paper (CP), medium-term notes (MTNs) and subordinate capital notes. The CP and MTN are given the highest credit ratings (AAA or A3) from one or more of the three major rating agencies. The virtually risk-free rating is what makes SIV debt so appealing and successful in the capital markets.
In order to maintain the AAA-rating, SIVs have to demonstrate compliance to a stringent set of operating guidelines that cover a wide range of performance characteristics including projected cashflows, diversification risks, market rate sensitivity and capital adequacy. These tests are conducted on a very frequent basis; some are required daily. Principia’s robust analytics, risk management and new out-of-the-box compliance reporting provides all the tools required to satisfy these operational requirements. Moreover, SIVs typically hedge out all interest and currency risks using swaps and other derivative instruments; these are asset classes that Principia was originally developed to price, trade and manage.
Finally, as bankruptcy-remote entities, SIVs are essentially small banks that are required to manage their entire operation through to accounting, independent of their sponsoring parent. Principia operation backbone provides a turnkey Chart of Account designed for handling the nuances of SIV accounting and back office processing.
So how does Principia SFP differentiate itself from other investment management packages? On the functionality side, we have uniquely developed SIV-specific compliance reporting and accounting packages. Additionally, Principia’s Vehicle Management interface enables managers to process a combination of SIVs, conduits and other operating companies in a single, consolidated platform. Finally, the software provides the extensive audit control and data transparency that is lacking in Excel or Access solutions.
As of July 2007, there are 30 SIVs:
- Citigroup (Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Zela, Vetra)
- Gordian Knot (Sigma Finance, Theta Finance)
- Eiger Capital (Orion Finance)
- Dresdner Kleinwort Wasserstein (K2)
- Bank of Montreal (Links Finance, Parkland Finance)
- III Offshore Advisors (Abacas Investments)
- West LB (Harrier Finance Funding Ltd., Kestrel Funding
- Standard Chartered Bank (White Pine, Whistlejacket Capital)
- Societe Generale (Premier Asset Collateralized Entity)
- Stanfield Global Strategies (Stanfield Victoria Finance)
- Rabobank International (Tango Finance)
- HSBC (Cullinan Finance, Asscher Finance)
- Cheyne Capital (Cheyne Finance)
- Eaton Vance (EV Variable Leveraged Fund)
- HSH Nordbank (Carrera Capital Finance)
- MBIA (Hudson-Thames Capital)
- IXIS/Ontario Teachers (Cortland Capital)
- Axon Financial (Axon)
- AIG-FP Capital (Nightgale Finance)
- IKB KG (Rhinebridge)
(source: Standard and Poor’s, DerivativesFitch and Moody’s )
Additionally there has been increased discussions of SIV-Lite (a combination of collateralized debt obligation (CDO) and SIV technologies). Unlike SIVs, SIV-lites have static capital structures, as well as defined reinvestment and amortization periods, meaning they have a lot in common with market value CDOs. Examples include:
- Avendis Capital (Golden Key)
- Cairn Capital (High Grade Funding)
- Solent Capital (Mainsail II)
- Sachsen LB (Sachsen Funding)
- Ellington Global Asset Management
(Duke Funding)
The credit and liquidity crisis in the second half of 2007 has highlighted fundamental problems with the SIV business model. Many of these SIVs have either moved into wind-down mode, sourced alternative and additional source of liquidity or restructured the vehicle.