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FACTBOX-What are conduits, SIVs and SIV-lites?

(Reuters) - Rampant fear of risky U.S. mortgages has put the spotlight on little-known financing vehicles known as “conduits”.

Investors have grown concerned about conduits and related entities called structured investment vehicles, or SIVs, because their troubles could leave banks on the hook to bail them out, sparking broader troubles in financial markets.

Here are some facts about conduits and how they differ from SIVs and riskier structures called SIV-lites:

* Conduits are entities set up by banks to provide short-term financing for U.S. companies or fund investments. Banks earn fees for setting up and running the conduits.

Such vehicles sell short-term debt called commercial paper and use the proceeds to buy financial assets including auto loans, credit card receivables and mortgages. The assets then serve as collateral for investors. For example, Ford Motor Credit, the finance arm of Ford Motor Co F.N, runs the FCAR Owner Trust, which buys the loans that dealers extend to buyers.

* Commercial paper often matures in 30 days and conduits regularly use the proceeds of previous sales to meet obligations as they come due. Credit rating agencies require conduits to have agreements with banks to provide backup credit lines in the event the conduit can’t pay back investors.

* In recent years, “securities arbitrage” conduits have mushroomed as Wall Street investment banks and hedge funds used them as a way to profit from the gap between short-term borrowing costs and returns on long-term investments. They raised cash in asset-backed commercial paper ABCP markets to buy higher-yielding securities, sometimes tied to U.S. mortgages.

* As off-balance sheet vehicles, such conduits have been used by banks to boost returns without being required by regulators to set aside additional cash in case of losses.

* Structured investment vehicles, or SIVs, follow a similar strategy to “securities arbitrage” vehicles, although they rely on borrowed seed cash from third-party investors. They also do not depend entirely on banks to provide backup credit in times of stress, like ABCP conduits do. Instead, they must “mark to market,” or place a value on their investments on a regular basis, meet specific performance tests, and sell portfolio assets to pay back investors when trouble hits.

* SIVs account for roughly 6 percent of the outstanding $1.2 trillion (600 billion pounds) in U.S. asset-backed commercial paper, or about $63 billion, according to JPMorgan. By contrast, traditional corporate financing, such as funding receivables, along with securities arbitrage conduits have issued about $890 billion of asset-backed paper.

* SIV-lites are a riskier cousin of SIVs and much less numerous. Rating agency Standard & Poor’s has rated only five SIV-lites. These vehicles are less restricted in what investments they may hold and many snapped up the securities linked to subprime mortgages that have spooked investors. Traditional SIVs, by contrast, have invested in mostly non-subprime mortgage assets, along with other types of debt.

* In late August, Standard & Poor’s cut ratings on two SIV-lites, Golden Key and Mainsail II, by up to 17 notches after the U.S. mortgage market crisis hit the value of the securities they bought and their short-term funding dried up. Golden Key is managed by Guernsey-based structured finance specialist Avendis Financial Services, while Mainsail II is managed by UK hedge fund Solent Capital Partners.

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