Barclays SIV-lite hit the market

--Barclays has been forced to draw on money from bank facilities recently because SIV-lites it arranged with clients were in trouble. --Barclays' risk will be hedged at the cost of investors in the fund and the fund itself, Diamond says. "We had no obligation," --The market has worried that Barclays would be forced to bail out the Cairn vehicle and at least three other so-called SIV lites that it had set up for clients. But Diamond insists that Barclays' exposure is no more than about $150 million. Rating agency Standard & Poor's agrees, saying: "Liquidity lines provided by Barclays cover only a small proportion of the outstanding commercial paper." --SIV-Lites are the latest structured finance vehicles to hit the market, combining aspects of both CDO and SIV technologies. --So what is driving this (SIV-lite) development? Edward Cahill, European head of CDOs at Barclays Capital in London, says his desk is focusing on SIV-Lites because traditional SIVs are not as profitable as they used to be. "The reality of the market is that spreads have tightened, so traditional SIV structures, with a very thick 10% BBB tranche and then commercial paper (CP) above it, don't work. I think it would be very difficult to start an SIV from scratch right now," he says. --So what distinguishes an SIV from a CDO? Greg Drennan, London-based vice-president of Morgan Stanley's CDO structuring team, explains that there are two fundamental differences between the two vehicles: "SIVs have a cheaper cost of financing because they can raise money in the CP market with limited liquidity. The second difference is the operating company-type characteristics an SIV has." --Unlike a CDO, an SIV is an ongoing open-ended vehicle; it can change size and re-finance. "SIVs can increase or decrease leverage on a daily basis," says Cian Chandler, European structured finance analyst at Standard & Poor's in London. Also, unlike those CDOs that are funded through the CP market, SIVs do not have to be backed up with a full liquidity facility. Before a closed-end CDO that funds through CP can achieve good credit ratings on its notes, liquidity agreements with banks have to be in place. --There are other key differences between an SIV and an SIV-Lite. "SIV-Lites are much more highly levered than the traditional SIVs," notes Edward Reardon, a London-based structured finance analyst with JP Morgan. A traditional SIV will generally offer investors 12 to 16 times leverage, but SIV-Lites have equity leverage of 40 to 70 times, depending on the collateral. http://www.risk.net/public/showPage.html?page=328506