Sigma fire-sale seen unlikely, creditors face loss
LONDON, Oct 2 (Reuters) - The collapse of Sigma is unlikely to trigger a fire-sale of assets that would weigh further on battered bank bonds, but creditors of the structured investment vehicle face heavy losses, analysts said.
Sigma Finance Corp, a $27 billion structured investment vehicle run by Gordian Knot Ltd., said late on Wednesday it would cease trading and expected a receiver to be appointed, blaming recent volatility in financial markets.
"In the meantime, both Gordian and Sigma are taking all necessary steps to ensure that the interests of all creditors of Sigma are safeguarded ... Sigma will not be making any payments to counterparties during this period," it said in a statement.
Credit ratings agencies, which slashed the SIV's ratings, said Sigma had received a notice of default from a securities repurchase (repo) counterparty, which could prompt other counterparties to follow suit.
They warned that Sigma's large repo commitments mean holders of its approximately $6 billion of medium-term notes are likely to suffer significant losses.
Analysts at Citi said three bid lists with Sigma assets -- largely bank debt -- had already been circulated, but that repo counterparties were probably seeking indicative pricing for future claims against Sigma rather than actual buyers.
"I don't think the repo counterparties will sell $25 billion into the market -- there is hardly any liquidity at present," said Citigroup securitised products analyst Birgit Specht.
"Repo banks are perhaps not fully but relatively well covered by the additional collateral they are holding. In current poor market conditions you don't sell unless you have to."
That means the SIV's demise might not hit bank bonds, already pummelled by Lehman Brothers (LEHMQ.PK) filing for bankruptcy protection last month and a string of European rescue operations and nationalisations.
Opinion varied as to what impact any sale of Sigma's assets would have, given already poor sentiment towards the sector.
"You couldn't pick a worse moment to flood the market with more paper it has no desire for," said Roger Appleyard, Head of Credit Research at RBC Capital Markets, pointing to the recent sharp widening in credit spreads.
The Markit iTraxx five-year senior financials index ITEFA5Y=IE was at about 147 basis points on Wednesday, traders said, wider from about 94 basis points on Sept. 12, just before Lehman Brothers defaulted.
The index of credit default swaps on subordinated bank debt ITEFS5Y=MP was at about 240 basis points, out from about 183 basis points on Sept. 12.
Another analyst foresaw a more muted effect, especially given Sigma's status as the last independent SIV.
"A distressed sale wouldn't be supportive for market value, but in the context of six banks needing support this week and the whole banking system under strain, who would care?" said the analyst, who declined to be named. "There might even be relief that there won't be any more forced selling from SIVs." Continued...
