Thursday, December 13, 2007

Citigroup Rescues SIVs With $58 Billion Debt; Ratings Get Cut

Finally...... This is for sure the end of the Superfund. But it will be hard even for the spin-masters from Wall Street to spin this as a sign of strength. But they will try hard for sure....... When you view news like this it should be clear that it maybe just took too long to implement the superfund. Another motivation is that the market could stigmatized the participation when other banks are able to consolidate their SIV´s on their balance sheet. Next step will to cut or eliminate the dividend.... Overall i think this are good news.

Endlich........Das ist mit Sicherheit das Ende der von Anfang an wahnwitzigen Idee des sog. Superfonds. Es dürfte selbst den Spinerprobten von Wall Street schwerfallen das als ein Zeichen der Stärke hinzustellen. Auch wenn das heute sicher krampfhaft probiert werden wird.....Nach Meldungen wie diesen sieht es vielmehr danach aus als wenn der Citigroup einfach die Zeit davon gelaufen ist. Eine weiter Motivation ist sicherlich auch das jede Partizipation mit einem Makel versehen wäre. Wie sonst soll die Citigroup erklären das es die Bilanzen anderen Banken erlauben die Risiken zu schultern und Sie selber anscheinend nicht dazu in der Lage sind. Nächster längst überfälliger Schritt dürfte die Streichung oder Kürzung der Dividende sein.... Insgesamt sicher gute News um die Verunsicherung etwas zu mindern

Dec. 14 (Bloomberg ) -- Citigroup Inc. will take over seven troubled investment funds and assume $58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.

Citigroup follows HSBC, Societe Generale SA and West LB in bailing out SIVs to avert fire sales of assets. The funds, which sell short-term debt and invest the proceeds in higher-yielding securities, cut their holdings by more than 25 percent since August to $298 billion, according to Moody's. The decline may reduce the urgency for a bailout sponsored by the U.S. Treasury, Citigroup, Bank of America Corp. and JPMorgan Chase & Co.

``That was really the last major outstanding piece of the SIV problem,'' said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of Money Fund Intelligence. ``The SIV problem is very close to resolution.''

Moody's lowered Citigroup's credit rating to Aa3, the fourth-highest level, from Aa2 late yesterday. The bank will probably ``take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations, Moody's Senior Vice President Sean Jones said in a statement.

``Citigroup's weak earnings should prohibit the bank from rapidly restoring weak capital ratios,'' which may lead to further downgrades, Jones said.

Biggest Threats
SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record high defaults on subprime mortgages. Financial institutions have since reported more than $70 billion of losses and writedowns. Citigroup invented SIVs in 1998 and was the biggest manager of the funds.

The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody's. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt. Moody's said Nov. 30 that it may cut the credit ratings on $105 billion of SIV debt.

Concerns about asset values contributed to the sudden increase in corporate borrowing costs by driving investors away from all but the safest government bonds. The amount of U.S. asset-backed commercial paper that SIVs rely on to finance investments fell about 34 percent since August, to $791 billion this week, the lowest since October 2005, the Federal Reserve in Washington said yesterday.

The decision to bring the SIVs onto the balance sheet marks a turnaround for Citigroup. In a Nov. 5 regulatory filing, the company said it ``will not take actions that will require the company to consolidate the SIVs.''

Wiping Away Sins
``After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs,'' Vikram Pandit, who was named chief executive officer on Dec. 11, said in the statement.

Citigroup has reduced the assets of the SIVs from $87 billion in August. Last month, the company provided $7.6 billion of financing after the SIVs were unable to repay maturing debt. The disclosure in a filing with the U.S. Securities and Exchange Commission came a day after the company announced as much as $11 billion of writedowns on debt linked to subprime mortgages and the resignation of Chief Executive Officer Charles O. ``Chuck'' Prince III.

Sixty percent of the assets in Citigroup's SIVs are debt owed by financial institutions. Another 13 percent is in mortgage-backed bonds and collateralized debt obligations, which are securities created by packaging bonds and loans. The company said 54 percent have Aaa ratings by Moody's and 43 percent are ranked Aa. The rest is rated A.

The debt Citigroup is assuming consists of $10 billion in commercial paper that matures in an average of 2.4 months. The other $48 billion is in medium-term notes that come due in 10.1 months on average.
Tier 1 Capital
Citigroup didn't give details of how it will finance the assets other than to say it will provide a ``support facility'' that will be in place early next year.

Taking on the SIV assets will reduce the capital ratio that regulators monitor to gauge the bank's ability to withstand losses on bad loans. The so-called Tier 1 ratio will drop by 0.16 percentage point from 7.32 percent as of Sept. 30, according to the company's statement. Citigroup expects the ratio to return to its target level of 7.5 percent by the end of the second quarter of 2008.

Citigroup got a $7.5 billion cash infusion last month by selling a 4.9 percent stake to the ruling family of Abu Dhabi after the bank's capital ratio fell below the company's target.

CIBC World Markets analyst Meredith Whitney says the bank still needs to raise $30 billion more, and may have to cut its dividend.

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Blogger jmf said...

What America’s shrinking asset-backed market tells us….

The size of the US asset-backed commercial paper market has shrunk for an 18th consecutive week, reducing a key source of funding for financial institutions to its lowest level in two years and dropping below the volume of outstanding financial commercial paper for the first time since 2001, the FT reports on Friday.

With banks anxious to conserve funds in the interbank market, the usual year-end demands for cash have exacerbated an already tense situation. For the week ending Wednesday, the amount of outstanding ABCP declined $10.3bn to $791bn. The week before, ABCP declined $23bn and since the market peaked at $1,200bn in early August, it has shrunk by more than one-third.

The overall commercial paper market also continued to contract last week, with the outstanding total lower by $5.3bn to $1,839bn. The market shrank $10.2bn the previous week. The amount of outstanding commercial paper is now at its lowest level in more than a year, the FT notes.

Meanwhile, the issuance of financial commercial paper rose $9bn last week and now totals $863.5bn. Since late November, the volume of outstanding financial commercial paper has increased from $827.6bn, while the total amount of ABCP has shrunk below $800bn. Not since 2001 has financial CP been greater than ABCP.

According to analysts, this shows that banks are funding more assets directly, rather than through SIVs and other off-balance sheet entities. The shrinking commercial paper market is one factor behind the current elevated money rates in the interbank lending market. In spite of a co-ordinated plan to inject more liquidity into the markets by central banks this week, dollar, sterling and euro denominated Libor remains well above the overnight borrowing level set by central banks.

12:01 AM  

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