October 17, 2007 9:10 pm
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.
But Neville Kahn, a partner at Deloitte, the administrator, said the insolvency would not force it to sell assets at firesale prices and would make it easier to push through a sale.
“It will mean that we will get to a solution quicker,” he said. “We hope to have a recommended deal very shortly to communicate to creditors.”
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.
Cheyne Finance, set up and managed by Cheyne Capital, the $12bn London hedge fund, is one of several vehicles either struggling to find new financial backers to support a restructuring or have triggered restrictions on their operations.
Two SIV-lites struggling to restructure have turned to Barclays for support, although Golden Key, set up by Swiss-run hedge fund Avendis, is in dispute with the bank about whether it has to repay a loan it drew down, reported to be worth $250m. Mainsail II, an SIV-lite run by London hedge fund Solent, had a rescue plan backed by Barclays turned down by investors.
In total, more than $42bn of assets in SIVs and SIV-lites are facing limits on their operations.
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