Moody's Takes Ratings Action on Six of Citigroup's Seven SIV

By Shannon D. Harrington

Dec. 1 (Bloomberg) -- Moody's Investors Service may cut the top ratings on six of Citigroup Inc.'s seven structured investment vehicles as part of a review of $130 billion in SIV debt.

The net asset value of the $64.9 billion in Citigroup SIVs dropped to below or near 60 percent, prompting the ratings action, Moody's said in a statement yesterday. The junior notes of three of the funds have been downgraded to below investment grade.

SIVs, which sell short-term debt to buy longer-term, higher-yielding assets, were shut out of the short-term market as losses on subprime mortgage securities prompted investors to retreat from all but the safest of securities. Unable to finance themselves, three SIVs have defaulted and others are being bailed out by their sponsors. The world's 30 SIVs have more than $300 billion of assets.

``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.

Moody's said it surveyed 20 SIVs since Nov. 7 and expanded its review after noticing ``significant additional deterioration'' in asset values.

Moody's cut $14 billion in debt in all, mostly capital notes that rank below commercial paper and medium-term notes and are usually the first to absorb losses, Henry Tabe, managing director in charge of structured finance, said in a telephone interview. The ratings company placed $105 billion of debt on review for a downgrade and confirmed the ratings on $11 billion, Tabe said.

Links Finance Corp., a SIV sponsored by Bank of Montreal with $19.1 billion of debt, also had its junior notes cut and may have the remainder downgraded, Moody's said.

`Continued Deterioration'

SIV assets on average are 38 percent financial institution debt, 16 percent asset-backed securities and 12 percent collateralized debt obligations, Moody's said.

The downgrades are ``a reflection of the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities,'' Moody's said. Net asset values have slumped to 55 percent from 102 percent in June, Moody's said, including the NAVs of the three defaulted SIVs.

Citigroup, the largest U.S. bank by assets, provided $7.6 billion of emergency financing to the seven SIVs it runs earlier this month after they were unable to repay maturing debt.

Citigroup, based in New York, created the first SIV in 1988 and is the largest manager.

The SIVs' struggle for survival, and the threat of having their assets dumped on the market, prompted Treasury Secretary Henry Paulson to broker talks with Citigroup, JPMorgan Chase & Co. and Bank of America Corp. to form an $80 billion fund to help bail them out.

Centauri, Beta

HSBC Holdings Plc of London this week said it will take on $45 billion of assets from the two SIVs it manages after they were unable to finance themselves. SIVs set up by Dusseldorf- based lender IKB Deutsche Industriebank AG and London-based Cheyne Capital Management Ltd. defaulted last month after investors stopped buying their asset-backed commercial paper.

Citigroup said in a Nov. 5 regulatory filing that it ``will not take actions that will require the company to consolidate the SIVs.'' The strategy ``remains unchanged from the disclosures in the third quarter'' filing, spokesman Jon Diat said yesterday in an e-mail statement. ``We continue to focus on liquidity and reducing leverage,'' Diat said. Citigroup's SIV assets have dropped to $66 billion from $83 billion on Sept. 30, Diat said.

Centauri Corp., the largest SIV run by Citigroup with $16.9 billion of debt, had its P1 commercial paper rating placed on review for downgrade as well as its AAA medium-term note program, Moody's said. Centauri's net asset value dropped to 60 percent from 85 percent since Sept. 5, Moody's said.

Beta Finance Corp., the second-largest Citigroup SIV with $16 billion of debt, had its senior debt ratings placed on review for downgrade after its net asset value declined to 60 percent from 87 percent, Moody's said.

Sedna, Dorada

Four other Citigroup SIVs, Sedna Finance Corp., with $10.7 billion of debt, Five Finance Corp., with $10.3 billion, Dorada Corp. with $8.5 billion, and Zela Finance Corp., with $2.5 billion, had their P1 commercial paper rating and AAA medium- term note programs placed on review, Moody's said.

Sedna's net asset value dropped to 56 percent, Five's declined to 63 percent, Dorada dropped to 62 percent and Zela's fell to 61 percent. A seventh Citigroup SIV, Vetra Finance Corp., wasn't part of the review.

The capital notes of Dorada, Beta and Centauri were reduced 11 levels to Caa3 from Baa1.

Orion, Links

Orion Finance Corp., a SIV managed by Eiger Capital with $835 million of debt, had its P1 commercial paper ratings downgraded to Not Prime, and its AAA medium-term note program to Baa3. Orion's net asset value dropped to 54 percent from 61 percent since Sept. 5, Moody's said.

Links Finance's net asset value declined to 78 percent from 94 percent since a Sept. 5 review, Moody's said. The SIV's AAA ratings may be cut after a review that will be completed within a week, Moody's said. Links' standard capital notes were cut 11 levels to the fourth-lowest ranking.

Toronto-based Bank of Montreal spokesman Ralph Marranca didn't immediately return a call seeking comment.

Separately, Moody's downgraded $470 million in notes issued by Duke Funding High Grade II-S/EGAM I Ltd. and Duke Funding High Grade II-S /EGAM I LLC, managed by Greenwich, Connecticut- based Ellington Global Asset Management LLC. Duke's capital net asset value declined to 21 percent on Nov. 23 from 69 percent Oct. 26. Moody's cut $170 million of Duke's notes from Aaa to Caa2 the fourth-lowest junk rating. Duke is known as an SIV- lite, which are designed as temporary vehicles.

To contact the reporter for this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net .