AIG Bails Out Nightingale SIV
American International Group Inc. (AIG) announced today that it's bailing out a $2.5 billion structured investment vehicle, or SIV, managed by its derivatives arm. Under the rescue plan, the AIG arm will repay the senior debt of the SIV, Nightingale, as it matures and keep financing its portfolio of bank debt and asset-backed securities with repurchase agreements, a type of short-term funding.
The rescue of the SIV follows similar moves by managers of other such investment vehicles as the ongoing credit crisis makes it virtually impossible for the vehicles to fund themselves.
Other financial institutions have engineered much bigger bailouts. Citigroup Inc. in December announced it would provide support to structured investment vehicles it sponsored, a move that required the bank to consolidate assets and liabilities totaling around $59 billion on its own books.
Nightingale Finance is managed by London-based AIG-FP Capital Management Ltd., part of AIG's derivatives arm, AIG Financial Products Corp.
The rescue plan led Moody's Investors Service to affirm top triple-A and Prime-1 ratings on Nightingale's medium-term notes and commercial paper yesterday, saying the support would avoid "any realization of current or future mark-to-market losses."
The ratings agency didn't comment on the recovery prospects for Nightingale's $301 million in capital notes -- a type of junior debt that cushions senior debt holders against losses. Moody's cut the notes to a junk rating of B3 on Nov. 30, from Baa2.
Vehicles such as Nightingale have struggled to raise financing since investors started shunning their IOUs in August, as concerns grew about potential defaults on the mortgage-backed securities that typically make up about a third of an SIV's portfolio.
SIV managers haven't been obligated to take responsibility for the troubled vehicles, because they are structured so that they aren't owned by or directly controlled by the banks or sponsors. But managers risk damaging their reputations and angering clients who stand to lose money from liquidations.
That reputational risk has prompted most of the banks with SIVs to move them onto their balance sheets, while SIVs managed by hedge fund managers and boutique investment group have for the most part been left to fail.
An AIG spokesman said the company doesn't expect to report realized losses on the SIV.
Source: Souce: Wal Street Journal | Published on January 24, 2008
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