By Sebastian Boyd and Gregory Viscusi

Dec. 10 (Bloomberg) -- Societe Generale SA, France's second-biggest bank by market value, will bail out its structured investment vehicle by taking on $4.3 billion of assets to avoid a fire sale.

The rescue will cause Societe Generale's ratio of Tier 1 assets, a measure of financial strength, to fall by 5 basis points, the Paris-based lender said today in an e-mailed statement, citing ``market conditions'' for the decision. Societe Generale said last month that its Tier 1 ratio was 7.7 percent at the end of September.

``The modest impact on the capital ratio shows that this move makes good sense,'' said Salah Seddik, a fund manager at Richelieu Finance in Paris, which oversees $7.3 billion. ``The worst seems to be over and we are heading back to normalcy, but it's still a sector to be cautious about,'' said Seddik, who doesn't hold Societe Generale shares.

Societe Generale's Premier Asset Collateralized Entity Ltd., or PACE, is among $105 billion of SIVs that Moody's Investors Service is considering downgrading in its biggest wave of rating cuts since subprime mortgages caused credit markets to slump. Standard & Poor's warned last week that PACE was close to breaching capital tests that would trigger the appointment of a trustee to protect senior debt holders.

SIVs are being forced to cut assets as investors shun the short-term debt they used to finance purchases of higher- yielding securities because of concern about holdings related to U.S. mortgages.

Societe Generale joins London-based HSBC Holdings Plc and Rabobank Groep NV in Utrecht, Netherlands, by taking on SIV assets.

`More Manageable'

The value of the French bank's own $103.5 million investment in capital notes sold by PACE slumped to $27.6 million at the end of November, the bank said.

Bonds backed by home loans, including subprime debt, comprise 12 percent of PACE's holdings, Societe Generale said. Collateralized debt obligations make up another 19 percent. Debt guaranteed by monoline bond insurers accounts for 18 percent and bonds backed by other debt such as student loans represent 26 percent.

``This is more than manageable in terms of size for Societe Generale, albeit it is not of the best quality,'' said Tom Jenkins, a credit analyst at Royal Bank of Scotland Group Plc. ``The match-funding avoids fire sales.''

Societe Generale fell 0.5 percent to 105.99 euros ($155.41) as of 10:30 a.m. in Paris trading. Credit-default swaps, contracts used by investors to speculate on credit quality, were unchanged at 36.5 basis points, or 36,500 euros to cover 10 million euros of Societe Generale's debt, according to Deutsche Bank AG.

French Banks

French banks so far have reported smaller losses from subprime holdings than U.S. and European competitors. Moody's said in a Nov. 23 report that no changes in ratings are warranted at this point.

UBS AG, Europe's largest bank by assets, said today it will write down U.S. subprime mortgage investments by $10 billion, the biggest loss by any European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East.

-- With reporting by Neil Unmack in London. Editor: Adrian Cox, Gavin Serkin

To contact the reporter on this story: Sebastian Boyd in London on sboyd9@bloomberg.net ; Gregory Viscusi in Paris at gviscusi@bloomberg.net