Published: August 30 2007 03:00 | Last updated: August 30 2007 03:00
A liquidity crisis in the commercial paper debt market could force "firesales" of as much as $43bn (£21.3bn) in assets, according to an analysis by the Royal Bank of Scotland.
A swath of off-balance sheet vehicles run by banks and asset managers that buy bonds backed by mortgages and other debt are facing forced sales of assets to fund their short-term liquidity requirements.
Such vehicles have faced a dramatic funding crunch in the short-term commercial paper market after investors fled to safer instruments.
At the same time, the valueof their assets has fallen, as investors concerned over the US subprime crisis have also shunned asset-backed securities.
"By our estimates, somewhere around $43bn is the [face] value of the assets that those vehicles, which have publicly disclosed issues, might have to sell-off," said Tom Jenkins, banking and financials analyst at RBS.
This has raised worries that selling by structured investment vehicles (SIV) and their cousins, SIV-lites, could help depress the value of assets held by peers.
Analysts at Unicredit said the price declines due to the forced sales of assets could trigger sell-offs at other SIVs "in a domino-style action."
Rhinebridge, a $14bn SIV managed by Germany's troubled industrial bank IKB, has so far sold $176m of its assets to finance its debt requirements. Cheyne Finance, a vehicle managed by hedge fund Cheyne Capital, was forced to begin selling its $6.6bn portfolio after a downgrade by Standard & Poor's, the ratings agency.
Mr Jenkins said it was difficult to gauge what the market value of assets disposed of in a "firesale" would be.
RBS estimates the bulk of the assets held are AA or AAA rated, and the vehicles could recover up to 95 cents on the dollar. Riskier investments, such as those in the lower-rated tranches of a subprime-backed collateralised debt obligation, might attract less than half of that.
Copyright The Financial Times Limited 2007