• 14 Dec 2007 at 10:04 AM
  • Citigroup

Citi Bails Out Its SIVs

The move everyone but Citi seems to have known was inevitable came to pass last night when Citi announced it would consolidate $49 billion of assets in its seven SIVs. The SIVs were facing a likely ratings downgrade, which would resulted in their immediate collapse. The debt of Citi’s SIVs reportedly has ratings covenants that would have been triggered by a downgrade. A default would have required an immediate liquidation because the cost of raising new short term debt that is the lifeblood of the SIVs would have become astronomical, if it were even possible.
Although it is being described as a bold move by newly minted chief executive Vikrham Pandit, the Financial Times describes the move as “embarrassing” Citi, and indeed Citi investors have good reason to object ot the move. By keeping the SIVs off balance-sheet, Citi concealed what turns out to have been real risks from potential investors, many of whom were unaware such off balance-sheet gamesmanship was continuing after the accounting and regulatory reforms of the early years of this century. Citi had insisted it had no obligation to take on the SIVs and no intention of doing so but that seems to have been true only in a technical and legal sense. When it came down to allowing the SIVs to fail, Citi stepped up. Shouldn’t they have known they would have done this all along? Are there any circumstances in which the SIVs would have been allowed to fail?
Perhaps Citi can explain the move as a response to “temporary market conditions.” Citi maintains that the long-term debt held by the SIVs, 28% of which is mortgage related, is still sound despite the current conditions of the credit markets. It believes that a sale into the current market would result in steep losses, while a strategy of holding the assets until market conditions are better will keep losses, if any, to a minimum.
It’s important to note that while Citi now provides the ultimate backstop to the failure of its SIVs, it is not responsible for all their losses. The first $2.5 billion of any lossses will be borne by the junior noteholders. (Thanks to Alea, who we found through Felix Salmon, for pointing this out). This, in part, is why those noteholders have insisted on ratings triggers for their debt.
So what does this mean for the Super Siv, MLEC? It is probably done for, an anachronism done in first by a market skeptical of the bailout plan and finally by the fact that this move by Citi to take the SIVs on-balance sheet obviates much of the need for an off-off-balance sheet rescue vehicle. It seems Citi finally found a rescue vehicle that would work, and it was Citi.
Last night Moody’s cut Citigroup’s long term debt rating from Aa1 to Aaa, citing concerns about its capital ratios. (The rating agency also cut Citigroup’s issuer rating to Aa3 from Aa2 and lowered its overall financial strength rating to B from A.) Apparently, the bank still claims it will pay a 54 cent dividend on its shares. But be warned. There is already speculation that Pandit’s next “bold move” will be to cut the dividend. Sure, the banks has said it wouldn’t do that. But it also said it wasn’t going to take the SIVs on-balance sheet.
Citi launches $49bn SIV rescue [Financial Times]
Fact Sheet from Citi [Citigroup]

  • 13 Nov 2007 at 1:02 PM
  • SIV

DealBreaker Awards: An Early Winner!
SIV Portfolio Wins For Honesty

We’re gearing up for our annual DealBreaker of the Year award here. (Send nomination to But we’ve found an early candidate for the smaller—much smaller, given the recent behavior of Wall Street’s banks and brokerages—category for the award in “Truth In Advertising.”
The award for the most honest name in finance today goes to the freshly renamed SIV Portfolio plc. Sadly, it is not Citigroup that has renamed itself. Rather, Cheyne Finance plc, which is currently in receivership, has shucked off its former name in favor of the bolder SIV Portfolio.
Cheyne Finance, which was managed by the prestigious London hedge-fund group Cheyne Capital Management (UK) LLP, ran into trouble this summer as investor’s lost their appetite for SIV debt. They began selling battered mortgage assets to repay debts after drawing down credit lines from Bank of New York Mellon, Merrill Lynch and Danske Bank. S&P slashed their credit rating. The SIV went into receivership in September. A subsequent rescue deal with the Royal Bank of Scotland reportedly fell apart but an insolvency ruling held off a firesale of the assets, much to the relief of every other financial institution that is still playing the SIV standoff game of trying to avoid creating a glut in mortgage based assets.
We’re sure that Cheyne is relieved that the SIV they founded in 2005 no longer bears their name. Hopefully, however, memories have not become so attenuated as to forget who it was who started and managed the company now called SIV Portfolio. It is hard not to wonder, however, if the name change might complicate negotiations for a refinancing of the SIV. Would you want to go before your credit committee pitching a loan deal for SIV Portfolio?

  • 22 Oct 2007 at 9:22 AM
  • Banks

Goldman RBS Leads Cheyne Finance Bailout

The news on Friday that a court had issued an order allowing Cheyne Finance, the London based SIV, shiv it’s creditors by ceasing payment on its commercial paper is, somehow, good news. At least, it’s good news for Goldman’s prime brokerage business, according to the Telegraph.
How’s that work? If it’s too early in the day for you to read about the sordid tales of Wall Street conflicts of interest, you may want to skip this item. Here’s how it starts: last month Goldman set up a private equity arm to invest in hedge funds, a move that is widely seen as a way of giving a boost to its already fabulously successful prime brokerage business. If the hedge fund investments earn great returns, they’ll make money. And if they don’t, the fund managers may be grateful enough for the new fund injections that they’ll give Goldman their prime brokerage business. And if that doesn’t work—if the fund managers don’t make Goldman the broker for their funds—well, Goldman can always threaten to send in a couple of redemption notices. They’ll get the message pretty quick.
It’s a standard Goldman move, the kind of thing that makes you slap your forehead in wonder that you hadn’t thought of such an obvious strategy yourself. If only you had a more devious mind.
Now hedge funds that had invested in Cheyne’s commercial paper are panicking at the SIV’s insolvency. And who is riding to their rescue? Well, that very same Goldman Sachs, of course.
Deloitte, which is administering Cheyne, has been holding talks with banks interested in rescuing the fund with new money. According to the Times, Deloitte is expected to narrow these rescue talks down to a single bidder within days. Goldman is widely thought to be the lead bidder, although the Royal Bank of Scotland is also said to be a contender. There’s also talk of a strong third bidder but we have no idea who that might be and the Telegraph isn’t naming them either.
This brings about the mind-boggling possibility that Goldman has invested in hedge funds that have invested in commercial paper issued by an entity which may soon be owned by Goldman Sachs. And you thought that KKR borrowing money from Citigroup to buy Citigroup loans to KKR was spinning things right round like a record baby, right round.
Goldman takes lead in race for Cheyne [Telegraph]
Update, 9:47 AM: It looks like even Goldman couldn’t get around to spinning things that fast. The latest word is that RBS is now in exclusive talks to buy the assets of Cheyne. “If the deal goes ahead, it will mark the first known sale of an SIV’s entire book of assets, and would be an encouraging sign for other troubled SIVs that are trying to refinance or restructure their portfolios,” Market Watch notes.

RBS in exclusive talks on Cheyne SIV assets: sources