03 Jul 2008, Mark Pengelly, Risk magazine
For noteholders, the differences between the proposed plan and last year’s restructuring of London-based asset manager Cairn Capital’s High-Grade Funding vehicle, or those of various bank-sponsored SIVs, are stark.
Cheyne Finance is now in the hands of receiver Deloitte, which is administering an anticipated auction and sale of the SIV’s assets on or around July 17. A portion of the vehicle’s $7 billion in assets will be sold to Goldman Sachs and bids for the remainder of the pool will be taken from market participants, according to a regulatory news service announcement dated June 17.
Proceeds from the sale will go into a trust, with senior noteholders having the option to either cash out, switch their investments into a new vehicle arranged by Goldman, or accept zero-coupon notes issued by the bank.
“The receivers do not anticipate that such net cash proceeds will be sufficient to allow any payment to be made to the holders of the capital notes or to any other party that is subordinate to the senior creditors,” the announcement said.
Birgit Specht, head of securitised product strategy at Citi in London, said the choice offered to investors essentially reflected the conundrum the broader market was dealing with – namely, whether market values for such assets would recover or not.
Whichever route they take, senior noteholders are expected to endure losses. “For the defaulted SIVs, it’s very difficult to see senior creditors being made whole in the current environment, although it clearly depends on the quality of the underlying assets,” she commented.
According to Citi research, 72% of the portfolio’s holdings during March comprised assets trading at distressed levels. This includes a total of 42% in US subprime residential mortgage-backed securities, 17% in various monoline-wrapped securities, and 8% and 5% in collateralised debt obligations (CDOs) made up of asset-backed and commercial real estate credits, respectively.
The fresh plan for Cheyne comes after Royal Bank of Scotland won a mandate for restructuring the vehicle in October last year, but ultimately failed to do so.
The Cheyne auction and Goldman restructuring might herald the probable solution for a number of other defaulted SIVs and SIV-lites. Golden Key, an SIV-lite originally managed by Geneva-based investment firm Avendis, is also in receivership and being administered by Deloitte. A regulatory news service announcement on May 14 indicated it would go through a similar restructuring process involving the US dealer, leaving senior noteholders in the vehicle with the same three options as those in Cheyne.
Noteholders in other restructured SIVs and SIV-lites have seen a better return; for instance, many bank-sponsored SIVs have guaranteed repayment of senior debt.
Cairn’s faltering SIV-lite was restructured into a de facto cashflow CDO in August 2007. The restructuring, which won the firm Risk’s Deal of the Year award, left senior noteholders with AAA and AA ratings for principal only from Standard & Poor’s, and an unrated yet positive coupon. In December last year, Cairn predicted capital note investors would probably see a recovery of their investments at maturity.
The manager subsequently won advisory mandates from the receivers of Golden Key and Mainsail II, an SIV-lite formerly managed by London-based investment firm Solent Capital, in June.
SIVs and SIV-lites profit from funding themselves in short-term commercial paper markets and buying longer-dated assets. But both short-term funding markets and the value of their underlying assets – some of which were linked to subprime mortgages – have been hit hard since the credit crisis commenced last July. SIV-lites, the brainchild of arranger Barclays Capital, are similar to SIVs, but are typically structured with a finite lifespan and are more heavily leveraged.