More SIVs to come

Latest vehicle precursor for a number of innovative structures

Details were announced last week of the latest structured investment vehicle (SIV) under preparation: Rhinebridge Plc – a SIV incorporated in Ireland – and Rhinebridge LLC, its wholly owned subsidiary incorporated in Delaware, are to be sponsored by IKB and managed by the London branch of IKB Credit Asset Management. More such vehicles are expected in the coming months, showcasing varying degrees of innovation.

The impending launch of Rhinebridge and the expectation of more SIVs to hit the market is a result of the current spread environment combined with the vehicles' structure, according to Douglas Long, evp business strategy for Principia Partners. "From the SIV manager's point of view, because it's a leveraged business they are better positioned to take advantage of tight spreads than someone who doesn't have leverage and has to utilise capital."

He continues: "Obviously, it is harder getting returns than in a wider spread environment, but the SIV model allows you to outperform other investments if you have the appetite, experience and can source the right assets. At the same time, in a tight environment it's generally easier to find capital investors because a SIV is a proven conservative structure but, again, the leverage provides good returns relative to other products."

These factors, coupled with the fact that the market has more recently begun moving to three-tier capital structures, means that there is also a broader pool of investors who are now investing in SIVs. Although the barriers to entry are still high, launching such a vehicle is an increasingly attractive proposition.

Indeed, the proposition appears to be being widely accepted by sponsor and investor alike. Three new SIVs have been disclosed already this year before Rhinebridge – Axon Financial Funding and Cortland Capital (see SCI issue 32) and HSBC's Asscher (see SCI issue 22) – and there are rumours of more to come from firms such as AIG and Eaton Vance.

"In my view if we don't see six or seven more SIVs this year it will be disappointing," says Long. New deals may bring some diversification in terms of assets if new managers choose to leverage off experience in other sectors, but differentiation from existing structures is more likely to come in other ways.

"I don't think there will be huge amounts of innovation surrounding the assets within SIVs. Instead, I think innovation will come in the capital structure or capital model and the increasing size of deals," Long concludes.

Fitch Ratings has assigned Rhinebridge Plc's commercial paper and medium-term notes expected ratings of F1+ and triple-A respectively. The agency has also assigned its senior capital notes, mezzanine capital notes and combination notes expected ratings of triple-A, single-A and triple-B respectively.

The vehicle's unusual three-tier capital structure is designed to reduce the probability of enforcement and will allow an expected launch size of US$2.5bn. IKB has a strong co-investment commitment in the capital notes.
Although a new SIV manager, IKB has successfully advised an ABCP conduit for five years. The team has a strong track record in managing the asset classes targeted for the portfolio, which is expected to launch with a high home equity loan exposure.

Rhinebridge's portfolio will comprise approximately 33% of seasoned triple-A, double-A and single-A bonds, as well as 67% new issue triple-A bonds.

MP