Troubled leveraged funds are likely to sell almost $100bn worth of asset-backed bonds and financial company debt by the end of the year as they struggle to avoid defaulting on their own debt, according to analysts at Citigroup.
Sales of asset-backed securities, such as mortgage-backed bonds and collateralised debt obligations, have gathered pace in recent weeks, pushing prices down further and keeping the market shut for new issues.
However, selling pressure looks set to increase as structured investment vehicles (SIVs) face a wave of medium-term debt repayments over the next few months, with more than $10bn due in each of the next seven months, up from the $4bn that matured in February, according to Citigroup analysts.
“Just less than $100bn, or 65 per cent, of the existing medium-term note [MTN] debt is due to be repaid in 2008, leaving around $50bn of MTN outstanding at the end of the year,” Birgit Specht at Citigroup said. “This looks like a good proxy for both the magnitude and the pace of a potential wind-down this year.”
SIVs have been at the centre of the credit crunch in the past six months as fears about potential losses from subprime mortgages have sent prices down on all kinds of structured bonds and led investors to flee the short-term debt markets that SIVs relied on.
Since Dresdner Kleinwort and Bank of Montreal joined other banks to pledge full support to their SIVs this month, all but one of the vehicles have either been bailed out by bank sponsors or have defaulted on their debt.
The final independent vehicle still standing, Gordian Knot’s $41bn Sigma Finance, was put on watch for downgrade by Moody’s on Wednesday.
“While the SIV crisis may have few surprises left, we remain firmly of the view that bank bail-outs are unlikely to stem the flow of asset sales,” said Ganesh Rajendra, head of securitisation research at Deutsche Bank. He added that recent weeks had already seen a notable pick-up in selling pressure.
It is not just SIVs that are being forced to sell such bonds. Yesterday, news arrived about the collapse of Peloton, a London-based hedge fund specialising in asset-backed bonds, and there is rising concern about who might be next.
Of the $100bn due in MTN repayments, Citigroup estimates that almost $85bn is due by the end of September. There will also be repayments due on short-term commercial paper and repo facilities with other banks.
In addition, there is about $25bn-$30bn of debt that defaulted SIVs have already failed to repay.
