Moody’s Moves on to SIVs and Starts Downgrading

Surprised?  You shouldn’t be.  Moody’s announced today that it would downgrade $33 billion worth of structured investment vehicles (SIVs).  For an excellent description of what SIVs are and why they matter listen to the interview I did with Yves Smith of Naked Capitalism.

From Market Watch:

Moody’s downgraded, or placed on review for a possible downgrade, the ratings of 28 debt programs run by 16 SIVs, including Victoria Finance, Harrier Finance Funding, and Kestrel Funding, the agency said on Wednesday. Some of these SIVs can’t refinance themselves in the asset-backed commercial paper market because investors won’t buy the new debt. That’s forced some to sell assets at depressed prices, realizing big losses, Moody’s explained. “The situation has not yet stabilized and further rating actions could follow,” Moody’s said in a statement. “SIV senior note ratings continue to be vulnerable to the unprecedented large and sustained declines in portfolio value combined with a prolonged inability to refinance maturing debt.

This should not come as any surprise.  These SIVs rely on a regular renewal of commercial paper loans that need to be renewed every 90 to 270 days.  If the commercial paper market loses confidence in the assets that make up the long term debt held by the SIV they will be reluctant to renew that short-term loan.  When the short-term loan is not renewed the SIV is forced to dump assets on to the open market (marking them to market) and causing losses.  Downgrades are inevitable as part of this chain reaction.

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