FACTBOX: Facts about structured investment vehicles

(Reuters) - Fears that funds called structured investment vehicles, or SIVs, might have to dump billions of dollars of assets into jittery financial markets have led major banks, regulators and the U.S. Treasury to look at setting up a fund to buy assets.

SIVs use short-term funding, such as asset-backed commercial paper to buy longer-term assets such as bank debt and asset-backed securities. The freeze in the commercial paper market this summer has led to concerns they may have to sell assets at a loss as they cannot raise fresh funding.

Fitch Ratings last week slashed ratings on an SIV called Axon Financial, saying it had sold over $3 billion of assets, generating a loss of $89 million. It warned that future losses on asset sales could be of the same magnitude or worse.

* STRUCTURE

SIVs issue commercial paper, medium-term notes and capital and invest the proceeds in a portfolio of diversified assets, aiming to generate returns from the spread between the yield on the portfolio and the cost of funding.

* HISTORY

The first SIV was Alpha Finance Corporation, launched by Citibank in 1988. Since then a host of specialized asset managers and banks have set up SIVs. As of July, Moody's Investors Service rated 36 SIVs or SIV hybrids managing assets of $395 billion.

* RATINGS

SIVs achieve very high ratings for senior debt, typically at the triple-A level for long-term debt and Prime-1 or A-1+ for short-term debt, in order to benefit from low funding costs; they then invest in a range of mostly investment-grade securities. To do so they are bound by a set of limits on the assets they invest in and their liquidity; there are also tests on the value of the portfolios; and SIVs must report regularly -- at least weekly -- to the ratings agencies.

By the same token, if an SIV is downgraded it may be difficult for the vehicle to continue to raise financing.

* AVERAGE PORTFOLIO COMPOSITION

According to Moody's, as of the end of March the average SIV portfolio was 57.5 percent structured finance, 41 percent financial-sector debt, with the remainder made up of corporate and government securities. Of the exposure, 62.4 percent was Aaa rated, 27.9 percent double-A rated, 8.9 percent single-A rated and just 0.2 percent in the Baa or Ba categories.

* ENFORCEMENT

If an SIV breaches its major capital loss test, defaults on its debt or becomes insolvent, it enters a mandatory wind-down process whereby assets are sold to pay down debt. SIVs typically have a partial liquidity facility to help achieve an orderly sale process, with cash drawn down to cover near-term liabilities.

Sources: Moody's Investors Service, Standard & Poor's, Lehman Brothers.