The Financial Times and Bloomberg report tonight that the formerly $8 billion Cheyne Financial Plc, an SIV managed by hedge fund Cheyne Capital Management, will not longer pay debtors and will either liquidate or refinance. Four banks are bidding on the assets.
Cheyne was in receivership as of September when the SIV needed to sell assets when it could not roll maturing commercial paper. The SIV had invested mainly in residential mortgage securities. The Financial Times coverage suggests the move might affect the CP market.
The troubling item, which the FT does not tease out, is that the fund was declared insolvent even though it had enough cash to continue to pay creditors until at least the end of the month because its assets were deemed to be insuffiient. Other SIVs are likely in the same position.
Under UK law, if a business is “trading insolvent,” that is, continuing to operate even though it cannot repay its creditors, the directors are personally liable. Thus the managers of any SIV that is on the ropes and organized under UK law may think more seriously about winding up as a result of this ruling.
From the Financial Times:
Cheyne Finance has become the first structured investment vehicle to stop repaying its short-term debt after the administrator of the troubled fund won court backing to declare it in breach of insolvency tests.
The move came as Cheyne Finance entered final negotiations with four banks bidding for its assets, which stood at $6.6bn (£3.2bn) at the start of last month.
The hold on repayments of the SIV’s commercial paper will hit short-term debt markets just as they had begun to show some signs of recovery from the ravages of the summer credit squeeze….
The SIV still has $1.3bn of cash and could have continued to repay maturing commercial paper until at least the end of this month.
The administrator won backing from the High Court in a sealed judgment on Wednesday, said people present at the hearing.
However, the court’s interpretation of the insolvency test – using a balance sheet measure, in spite of the SIV’s cash pile – could prove controversial, as many SIVs would be insolvent if a similar measure was applied.
Mr Kahn refused to say which banks were bidding or at what prices, but said it was wrong to assume the holders of mezzanine debt – the lowest-rated tranche – would be wiped out.
That suggests holders of the top-rated commercial paper will be repaid in full, in spite of the insolvency….
In total, more than $42bn of assets in SIVs and SIV-lites are facing limits on their operations.
And a tidbit from the Bloomberg story:
Moody’s cut the SIV’s top credit ratings on Oct. 4 by as many as 12 levels to Ba3, three steps below investment grade, citing the deterioration in the market value of Cheyne’s portfolio.