S&P Viewpoint

We reviewed the portfolios specifically with an eye toward mortgage assets and CDO of ABS assets, which have recently experienced considerable pricing pressure in the markets. In the aggregate, SIV portfolios remain well diversified. Portfolio exposure to residential mortgage assets and CDOs of ABS average 24%. The exposure to subprime and home equity-backed RMBS assets forms a small proportion of the portfolios. Assets backed by prime RMBS form the largest proportion of the portfolios. On average, portfolios hold approximately 21% exposure to the U.S. RMBS prime markets, of which the vast majority is 'AAA' rated prime assets.

Two vehicles have significant above-average exposure to home equity and subprime assets. On Aug. 28, Standard & Poor's took a rating action on Cheyne. The other vehicle, Rhinebridge, recently received an infusion of capital.

In aggregate, across the portfolios of all rated SIVs, the weighted averages of the portfolio rating exposures are rounded to approximately 61% invested in 'AAA' rated assets, 27% invested in 'AA' rated assets, 12% invested in 'A' rated assets, and a residual of less than 1% in lower-rated assets. These numbers exclude Eaton Vance because it focuses on the non-investment-grade corporate market and has lower leverage guidelines.

The financial sector comprises a weighted average of 41.5% of SIV portfolios.

The chart below shows the average asset distribution by sector across all SIV portfolios. It is our view that, overall, SIV portfolios remain highly diversified.

 Chart 1

We are working toward publishing additional portfolio breakdowns in future commentaries.

As of Aug. 24, 2007, all SIVs rated by Standard & Poor's were passing their net asset value (NAV) tests. In SIVs, the NAV is essentially the percentage of capital that would remain if a portfolio of assets was to be liquidated in "excess" of what was required to pay senior liabilities. It may be expressed as a percentage or as a capital amount.

As we indicated in the Cheyne media release, prices have been moving dramatically, and these tests could change on a daily or weekly basis. If appropriate, we will inform the market as we receive updated information. NAV tests range from the 90s to the 60s. We are monitoring all SIVs and have frequent contact with SIVs that have NAVs in the 60s.

While we continue to analyze the portfolios, we can generally say that SIVs with NAVs in the 60s have larger exposures to the mortgage and CDO markets. Of the four SIVs with NAVs below 80 (as of Aug. 24, 2007), one has received a capital infusion, two are in the process of receiving new capital, and the ratings on one (Cheyne) were lowered on Aug. 28. One additional SIV is reporting NAVs in the 80s; we expect that to fall below 80 this week, and we will update the market as we receive more information.

All SIVs are passing their liquidity tests. SIVs have liquidity facilities in place. It is expected that facilities may be drawn and, if appropriate, we will update the market as we receive new liquidity facility information. These liquidity tests serve to provide information on SIV managers' ability to fund for peak periods of cash outflows as detailed in our recent commentary, titled "Structured Investment Vehicle Ratings Are Weathering The Current Market Disruptions" (see "Related Articles").

As we noted in our prior commentary (cited above), SIV liability structures, coupled with their current cash, access to third-party liquidity, and asset diversification, are positioned for an orderly de-leveraging if necessitated by funding stress. That said, the decisions the money fund investors make in the coming months, with regard to continuing to fund these structures invested in the highest levels of portfolio quality, will be of high importance to managers' ability to manage their asset-liability profiles.

Since no SIVs are failing any tests and specifically are not failing NAV or other capital adequacy, liquidity, or portfolio tests, we are taking no rating actions at this time.

These are unprecedented times in the global commercial paper (CP) markets, and this is true for SIVs as well. Prices on all assets, particularly ABS, which previously had not moved significantly, have moved fairly dramatically over the past month. Certain asset classes, where a move of 1/8 of a basis point would have been considered unlikely, are now experiencing price moves of 5, 6, or more basis points in one week. Historical data that includes the post-Sept. 11, 2001, and LTCM trading markets, and the previous positions in time-series analysis where price volatility significantly spiked, shows that these are the most severe price movements seen in the ABS sector to date.

SIVs remain active in the markets, even today, in large part because the assumptions used to measure capital sufficiency were stressed from worst-case historical assumptions. In addition, the structures provide for "slow landings" if some liquidations are eventually required; and managers, in general, have been focused on management of capital, leverage, and liquidity resources. SIVs are managed vehicles, and each manager is different and has made different portfolio, leverage, and structural choices.

SIVs have diversified asset portfolios, liability structures, and liquidity support that support high creditworthiness and an orderly de-leveraging in the case of market disruption. The vehicles have some vulnerability to sustained funding stress and consequent disorderly or forced asset sales coupled with extreme asset price degradation and strong correlation in structured securities pricing. The passing of tests, as well as other credit considerations, support the current ratings. Standard & Poor's will continue to monitor asset portfolio performance and access to funding.

Our rating actions on Cheyne, while unprecedented, reflect the fact that Cheyne was concentrated in those sectors of the real estate markets that are under the most dramatic price pressure. The Cheyne manager informed us that there will be ongoing discussions with the security trustee, senior and junior investors, and the administrator and receiver. While the rating actions reflect uncertainty regarding the manner in which Cheyne will resolve this situation, it is important to note that Cheyne has cash to pay maturing CP through mid-November and its current market value of assets was reported as sufficient to pay CP.

Standard & Poor's multiple-notch rating actions reflect the rapid pace at which prices moved in that portfolio and the fact that the vehicle moved rapidly from "Restricted Investment" to "Enforcement." Ratings will be updated as we receive information about decisions reached among the interested parties, including whether liquidations of the 'AAA' and 'AA' rated assets must begin, or whether an alternative is proposed.

• "S&P Lowers Ratings On Cheyne Finance SIV And Places On Watch Neg" (published Aug. 28, 2007).
• "Structured Investment Vehicle Ratings Are Weathering The Current Market Disruptions" (published Aug. 15, 2007).

All related articles are available on RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com.