S&P Cuts Capital Notes of 13 SIVs, More Cuts Possible (Update2)

By Shannon D. Harrington


Dec. 7 (Bloomberg) -- Standard & Poor's said it lowered credit ratings on capital notes of 13 structured investment vehicles and placed debt of 18 SIVs on negative outlook as the funds struggle to finance themselves.

Orion Finance Corp., managed by asset manager Eiger Capital Ltd., became the fourth SIV to enter ``enforcement mode,'' requiring the appointment of a trustee to protect senior debt holders. Premier Asset Collateralized Entity Ltd., an SIV sponsored by Societe Generale SA is close to breaching capital tests that would trigger enforcement, S&P said in a statement.

Investors have shunned the short-term debt sold by SIVs because some of them bought securities linked to subprime mortgages, which have roiled credit markets. Moody's Investors Service last week said it may cut $105 billion of SIV debt, citing a slump in their net asset value.

``We do not see asset values rising appreciably in the coming months, and we could see price erosion continue,'' S&P analysts led by Nik Khakee in New York and Katrien van Acoleyen in London wrote in a report today. ``Also, we cannot see investors returning to the market in sufficient numbers to reverse the funding problem, and we are aware that not all restructuring plans are yet final.''

SIVs were set up to make money by selling short-term debt and buying longer-dated and higher-yielding assets including bank bonds, mortgage-backed securities and collateralized debt obligations.

Premier, K2

Ratings on junior debt of Premier Asset and K2 Corp., a $22 billion SIV run by Frankfurt-based Dresdner Bank AG, were cut to below investment grade. Rankings on capital notes of Five Finance Corp., Sedna Finance Corp. and Zela Finance Corp., three SIVs run by New York-based Citigroup Inc., were also lowered.

The ratings cuts reflect ``the increased likelihood that capital investors in these vehicles will see actual losses materialize,'' the S&P analysts said.

Money-market funds, considered among the safest investments, as well as government investment pools that manage the cash of schools and towns bought the commercial paper and medium-term notes sold by SIVs.

School districts, towns and cities across Florida last month were denied access to their money after the State Board of Administration halted withdrawals from its investment pool to stem a run on the fund, which had $2 billion in SIVs and other debt tainted by the subprime collapse, state records show.

Money-market managers including Legg Mason Inc. have propped up funds to preserve top ratings or cushion them against possible losses on defaulted SIV debt.

Orion, Harrier

S&P said it may cut its ratings on the senior debt issued by Premier Asset, Orion and WestLB AG's Harrier Finance Funding Ltd.

WestLB, Germany's third-largest state-owned bank, said this month that it provided a credit line for the $11 billion Harrier SIV to repay commercial paper.

Premier has proposed a restructuring, New York-based S&P said. Societe Generale is France's second-biggest bank by market value.

``Managers are successfully selling assets in the open market, executing asset switches with capital investors and trying to manage the structures toward potential soft landings,'' the analysts wrote.