Citi Cuts Investment Vehicle Size by $15 Billion: FT

Citigroup has reduced the size of its structured investment vehicles (SIVs) by more than $15 billion in the past two months, the Financial Times said on Tuesday.

The reduction was achieved through deals under which junior investors bought portions of the SIVs' assets in exchange for their note holdings, the FT said, citing people familiar with the matter. As a result the size of the SIVs has shrunk to $66 billion from more than $80 billion at the end of September.

It said Citigroup had refused to comment on asset sales by its seven SIVs. Officials at Citigroup did not immediately return a call seeking comment on Tuesday.

SIVs raise funding by issuing short-term senior debt and longer-term capital, and invest the proceeds in securities, mainly bank debt and asset-backed securities.

The off-balance-sheet vehicles have been caught out as investors have shunned complex debt instruments and refused to supply short-term funding, forcing them to sell assets to repay maturing debt. At the same time, the value of the assets in the market has fallen across the board.

"Vertical Slice"

The deal described by the paper is known as a "vertical slice" and has been employed by a number of banks who sponsor SIVs, most recently Standard Chartered, which took $1.7 billion of assets from its SIV, Whistlejacket, onto its balance sheet in exchange for $140 million of capital notes.

However, ratings analysts at Moody's Investors Service said recently that such deals did little to remove the key risks associated with SIVs -- in particular their exposure to market-value risk.

Ratings agencies have threatened to downgrade vast swathes of SIV debt, leading to a flurry of activity as bank sponsors seek to stand behind the struggling vehicles.

However, while others like HSBC and Societe Generale have taken their SIVs back on balance sheet, Citigroup has publicly stated that it will not do so.

Citigroup, along with Bank of America and JPMorgan , is arranging a fund dubbed the "SuperSIV" that could act as a buyer for the assets of the vehicles.

Analysts however have started to question the relevance of this fund as banks have announced their own solutions for the struggling vehicles.