Moody's May Cut Ratings on $105 Billion of SIVs as Values Sink

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By Shannon D. Harrington

Dec. 3 (Bloomberg) -- Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market, foreshadowing losses for investments that pay Florida teachers and money market funds.

Moody's may lower ratings on $105 billion of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by banks including New York-based Citigroup Inc. and ING Groep NV declined to 55 percent from 71 percent a month ago, Moody's said in a statement Nov. 30. The assets were valued at 102 percent in June.

``The assets that SIVs hold are continuing to decline in value,'' said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group, Switzerland's second-biggest bank by assets. ``As they do that it's creating more problems for the holders.''

School districts, towns and cities across Florida were denied access to their money after the State Board of Administration halted withdrawals from the Local Government Investment Pool on Nov. 29 to stem a run on the fund, which had $2 billion in SIVs and other debt tainted by the subprime collapse, state records show.

Legg Mason Inc., based in Baltimore, said two money market funds run by its Western Asset Management Co. unit had almost 1 percent of their assets in an SIV sponsored by Amsterdam-based ING, the biggest Dutch financial-services company.

Super-SIV Fund

Downgrades would make it more difficult for SIVs, companies that use short-term debt to invest in higher-yielding assets, to obtain financing. Three of the funds defaulted in the past four months. Treasury Secretary Henry Paulson is working with Citigroup, New York-based JPMorgan Chase & Co. and Bank of America Corp. in Charlotte, North Carolina, to form an $80 billion fund to help bail them out.

Moody's cut the ratings $14 billion of SIV debt last week, mostly capital notes that rank below commercial paper and medium-term notes. The New York-based company also placed $105 billion on review for a downgrade and confirmed the rankings on $11 billion.

Citigroup SIVs with $64.9 billion of debt were reduced or put on review. Bank of Montreal's $19 billion SIV had its ratings cut or placed on review. Some of the evaluations will be completed within a week, Moody's said.

`Material Declines'

``In recent weeks, Moody's has observed material declines in market value across most asset classes in SIV portfolios,'' the ratings company said in the statement.

Values on Citigroup's six SIVs under scrutiny fell as low as 56 percent, Moody's said. Orion Finance Corp., managed by Eiger Capital Corp., has a net asset value of 54 percent, down from 61 percent on Sept. 5. Eiger is sponsored by ING.

SIVs had about $320 billion of assets as recently as October, according to the ratings companies. Investors are concerned that the funds will sell holdings at fire-sale prices if they are forced to liquidate, further roiling credit markets that seized up in July and August.

The net asset value represents the amount that would be left over for investors if a SIV was forced to sell holdings and repay debt. SIV assets on average are 38 percent financial institution debt, 16 percent asset-backed securities and 12 percent collateralized debt obligations, Moody's said.

``We need to see the purging process result in a cleaning up of the bad debt,'' said Scott MacDonald, head of research at Aladdin Capital Management LLC in Stamford, Connecticut, which has $21.5 billion in assets. ``This is a painful, but necessary healing process.''

Florida Rejection

The SIV debt Moody's placed on review includes the top- ranked notes held by money market funds and local government investment pools.

A new advisory panel of Florida school and local government officials said on Nov. 30 they won't accept a return of less than 100 percent of their investment from the Local Government Investment Pool. The agency that runs the fund had proposed surveying participants to see if they would accept as little as 90 cents on the dollar of their deposits in order to access their money this month.

The two money funds run by Legg Mason owned debt of Orion. Moody's last week cut Orion's top P1 commercial paper rating to ``Not Prime,'' and its AAA medium-term note program was slashed to Baa3, the lowest investment grade. Commercial paper is due in 270 days or less.

Citigroup, the largest U.S. bank by assets, provided $7.6 billion of emergency financing to its SIVs last month. London- based HSBC Holdings Plc said last week it will take on $45 billion of assets from the two SIVs it manages. SIVs set up by Dusseldorf-based lender IKB Deutsche Industriebank AG and London-based Cheyne Capital Management Ltd. defaulted in October.

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