Firms across the Street are looking to replicate Citigroup's novel structured investment vehicle, Zela Finance, the first SIV to go short credit by using some of its returns to buy credit-default swap protection. Officials at Citi declined comment. Zela came to market late last month. Ratings agency officials said they have seen a string of similar proposals, declining to give details.
Including a short credit portfolio reduces the overall volatility of the SIV's net-asset value. That earned Zela income notes a rating of A minus from Standard & Poor's, higher than it would otherwise have been. The funds available for the short portfolio, known as the running yield, are restricted to the excess spread generated by the long portfolio, minus the minimum coupon of LIBOR plus 25 basis points paid to income note holders, according to a rating agency official.
"What's happening is more investors are looking for protection," said one CDO analyst. He noted the introduction of CDS on asset-backed securities has opened the door for non-traditional players. SIV investors, among some of the more conservative participants in the credit markets, requested additional protection in the structures, officials said.