Vol 4 (2007) - Issue 5

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SIVs and Conduits: The New Restructuring Arena

A few months ago I happened to be attending a conference about structured finance in Barcelona, when I spotted a pile of marketing literature from banks about conduits and structured investors vehicles (SIVs.) Idly, I picked up a few brochures and leafed through – and then reflected uneasily that the Financial Times really had not devoted as much attention as it should to this seemingly-arcane area of finance in the past year, partly because it seemed somewhat technical and dry, compared to other, fast-growing areas such as CDOs. ‘We must do something on SIVs,’ I muttered to a colleague, noting that it might be sensible to run a piece on the markets pages of the FT, perhaps in the traditionally quiet days of August.

The Gods of Finance might chuckle. For just two weeks after I first spotted the SIV and conduit literature, the credit markets were tipped into a dramatic bout of turmoil, that was initially triggered by problems in the sub-prime securities sector.

And as the problems spread, the seemingly-obscure issue of SIVs and conduits hit the headlines with a vengeance, as it became clear that one knock-on implication of the sub-prime panic is that investors have stopped buying commercial paper issued by some SIVs and conduits.

Indeed, by mid August two German lenders had been plunged into crisis as a result of related SIV and conduit problems. As a result, the world ‘SIV’ had suddenly become almost sexy, at least in journalistic terms. For whereas it used to be hard to find articles on the issue even the specialist financial trade press, by August mainstream, non-financial papers had started to write about SIVs and conduits. Indeed, we at the FT have written half a dozen pieces on the topic in recent weeks alone – or rather more than in the last few years. But this new-found plethora of interest in SIVs and conduits certainly has further to run. For though these vehicles have shot into the limelight in recent weeks as a result of their CP funding woes, they are now of great interest for another reason – namely the role in a bigger restructuring game.
In particular, as the financial world reels from this summer’s turmoil, it is becoming clear that one of the biggest challenges now facing the industry will be to find a smooth way of handling the potential investment losses – and funding mismatches – linked to SIVs and conduits.

Nobody in the industry expects that this will be particularly easy. After all, the structured finance universo has exploded at breakneck speed in recent years, as bankers have competed furiously to churn out products of breath-taking complexity and size. As a result, many of the SIVs and conduits involve complex financial flows. No wonder that David Dodge, the governor of the central bank of Canada, confesses that when he looks at structure of some Canadian conduits – many of which are now in the frame for restructuring – the picture leaves him shaking his head with bemusement. Yet, the issue of whether these vehicles can be restructured successfully – or not – is critical to determining how rapidly the financial system can exit from this summer’s credit turmoil. For financial history shows that crises are rarely solved purely as a result of central government intervention alone. Instead, what really enables a financial system to rebound is when anew pool of bottom-fishers and bargain-hunters start trading assets again, creating a floor for valuations that investors can truly believe in. And this process of private-sector bottom-fishing can usually only take place when restructuring gets underway – be it at a SIV or conduit, or anywhere else.

Hopefully this restructuring wave will start soon. Indeed a few cases of restructurings have already cropped up. Late in August, for example, Cairn Capital created on innovative scheme, together with Barclays Capital and Lehman Brothers, to restructure a SIVlite that it had created. Behind the scenes, bankers and lawyers are now frantically trying to create similar, alternative schemes which may be rolled out in the coming weeks. Meanwhile, policy makers in the US and UK are tacitly encouraging these initiatives – not least because they know that this will be key to exiting from this summer’s turmoil.

But, as this innovation war heats up, the key question now is just how quickly these techniques can be replicated across the industry as a whole – and how effectively they will act to quell the current sense of investor malaise. Either way, one thing is clear: the topic of SIVs and conduits will merit plenty more media scrutiny this winter, at the FT and elsewhere.