Structured Investment Vehicle - SIV

Structured Investment Vehicle - SIV - invented by Citi in 1988 and popular till they crashed in 08. Borrow short term at low interest and then buy longer dated securities at higher interest. Classified as structured credit product ranging from size USD1~30bn. Reinvested in ABS and corp bonds. Open ended and evergreen structure.

Twofold risk - solvency risk if asset value drops and liquidity risk. A SIV may be thought of as a virtual bank. It borrows money using CP, which it traditionally issues close to LIBOR. It then uses money to purchase bonds. The bonds usually selected by a SIV are predominantly (70-80%) Aaa/AAA ABS and MBS - hence the SIV is effectively providing funds for mortgages, credit cards, student loans and similar products. A SIV would typically earn around 0.25% more on the bonds than it pays on the CP. This difference represents the profit that the SIV will pay to the capital note holders and the investment manager. The capital-note holders are the "first-loss investors," in that if any of the bonds purchased default, the capital-note investor will lose his investment before the CP investors do.

The short-term securities that a SIV issues often contain two tiers of liabilities, junior and senior, with a leverage ratio ranging from 10 to 15. The senior debt is invariably rated AAA/Aaa/AAA and A-1+/P-1/F1 (usually by two rating agencies). The junior debt may or may not be rated, but when rated it is usually in the BBB area. There may be a mezzanine tranche rated A. The senior debt is a pari passu combination of medium-term notes (MTN) and commercial paper (CP). The junior debt traditionally comprises puttable, rolling 10-year bonds, but shorter maturities and bullet notes are becoming more common.

In order to support their high senior ratings, SIVs are also obliged to obtain liquidity facilities (so-called back-stop facilities) from banks to cover some of the senior issuance. This helps to reduce investor exposure to market disruptions that might prevent the SIV from refinancing its CP debt. To the extent that the SIV invests in fixed assets, it hedges against interest-rate risk.

Oct 2007 - US govt wanted to set up Super SIV bailout fund but pull back last min. Stanchart got killed on Whistlejacket SIV. Citibank rescue SIV and bring them on balance sheet. BOA 4Q07 results got killed on SIV. Northen Rock got killed in SIV since Aug07 and nationalised in 2/8. Cheyne another victim.

http://en.wikipedia.org/wiki/Structured_investment_vehicle
On bloomberg - NI SIV