# ISTC downgraded - defers certain payments under financing obligations



## Brendan Burgess (12 Nov 2007)

*ANNOUNCEMENT FROM *​*INTERNATIONAL SECURITIES TRADING CORPORATION PLC*​​International Securities Trading Corporation (ISTC), the lender of capital to financial institutions, today (12th November 2007) announces a number of matters in relation to part of its loan portfolio, its September 2007 financial results and its funding arrangements.  

The turmoil experienced in financial markets since July last is unprecedented, and has represented one of the most difficult and challenging market environments experienced by the banking sector over the past 30 years. Against this backdrop, ISTC’s high quality bank capital loan portfolio and conservative funding, capital and liquidity policies had put the company in a position to weather the market disruption, albeit with negative consequences, including an ongoing reduction in its liquidity position.

In addition to its bank capital portfolio, ISTC has also invested a total of US$305 million (approximately €210 million) in Structured Investment Vehicle (SIV) capital notes, where the SIV’s are sponsored and managed by leading international banks.  The SIV assets represent 7% of ISTC’s loan portfolio. All of these SIV assets were either downgraded, or placed on review for possible downgrade, by Moodys Investor Services on 8th November last.  These rating actions have had a number of consequences for ISTC:

(i)  ISTC believes that it will now have difficulty in retaining the existing financing or alternatively obtaining new financing for the SIV capital note portfolio. 
(ii)    Prior to the rating announcement, the Board of ISTC was satisfied that it would be appropriate to value the SIV assets in its financial statements at cost. The Board now believes that a market value approach is warranted. Consequently it will be necessary to take a provision in its September 2007 financial statements of not less than €70 million, based on the underlying net asset value of the SIV capital notes.
(iii)   The finalisation and publication of the financial results for the year ended 15th September 2007 will, we believe, be delayed by a matter of weeks, while a thorough valuation of the SIV capital note portfolio is completed. 

Following the deterioration in the credit rating of the SIV portfolio, *DBRS announced on 9th November that it had downgraded the senior rating of ISTC to BB from BBB and the subordinated rating of ISTC from BBB (low) to B.*

Given the uncertainty to ISTC’s funding position precipitated by the SIV credit rating action, the company now intends to enter into discussions with its providers of finance with the objective of making appropriate amendments to their respective financing terms. To assist in these discussions, ISTC has today appointed Hawkpoint Partners Limited to act as its financial adviser.

Pending the outcome of these negotiations, *ISTC has decided to defer certain payments under financing obligations*.

As the publication of the 2007 financial results has now been delayed, ISTC has decided to stop marketing of the convertible bond issue which it launched on 26th October last.

*ISTC has asked Goodbody Stockbrokers to suspend the operation of the grey market in ISTC’s ordinary shares with immediate effect.* 

*For reference:*
Tiarnan O Mahoney, Chief Executive, ISTC
Tel: 353 1 642 4500

Frank Gaynor, Director, ISTC
Tel: 353 1 642 4500

Paul Somers, Director, ISTC
Tel: 353 1 642 4500


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## BudFox (14 Nov 2007)

ISTC seems very much like a SIV itself. From wikipedia definition of a SIV:

*A structured investment vehicle (SIV)* is an evergreen credit arbitrage fund, similar to a CDO or Conduit. They are usually from around $1bn to $30bn in size and invest in a range of asset-backed securities, as well as some financial corporate bonds. An SIV is formed to make profits from the difference between the short term borrowing rate and long term returns. The risk that arises from the transaction is twofold. First of all, the solvency of the SIV may be at risk if the value of investments falls below the equity part. Secondly, there is a liquidity risk, as the SIV borrows short term and invests long term, that is the debt comes due before the asset falls due. Unless the borrower can refinance short-term at favorable rates, he may be forced to sell the asset into a depressed market.

Sounds awfully similar to ISTC business model.

ISTCs investments have probably fallen below equity value (risk #1 above) and due to recent rating downgrades it is likely they'll be unable to re-finance short term borrowings (risk #2 above)

But why was the company issuing such optimistic statements until very recently?


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