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Structured finance: Into the Lite

Amendments to the US Bankruptcy Code have created a boom in derivative-driven structures, such as the SIV-Lite.

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site

A new type of structured finance vehicle, the SIV-Lite, has made its debut on the capital markets stage, and it seems to be taking the market by storm. The SIV-Lite (Structured Investment Vehicle-Lite) provides an innovative way to invest in certain pools of assets using a dynamic, market value strategy to increase return and reduce the need for external liquidity support.

In an environment of tightening spreads and costly third party bank liquidity, US and European capital markets participants are hungry for lucrative arbitrage opportunities. These dynamics are causing the capital markets to converge, and new types of structured finance vehicles are evolving from more traditional vehicles in an effort to obtain higher yields and reduce dependence on third party liquidity providers.

Compared to other vehicles in the market, the SIV-Lite's structure is easy to digest. A special purpose vehicle (SPV) issues securities into the capital markets to raise proceeds for investment in a pool of assets that can be reliably and regularly marked to market. The securities issued by the SPV can take the form of asset-backed commercial paper, medium-term notes and/or capital notes, providing the SPV administrator with appreciable flexibility in the cost of funding and the tenure of the SPV's repayment obligations.

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