Goldman agrees $7bn SIV restructuring

Goldman Sachs has finalised a plan to restructure a $7bn investment vehicle formerly run by London-based hedge fund Cheyne Capital, in a move that could potentially usher in a crucial new phase in the credit turmoil.

The US bank’s proposed reorganisation of the so-called structured investment vehicle is set to be just the first of a number of deals that could see about $18bn worth of SIV assets restructured in the coming months.

The deal is likely to be closely watched by the financial industry, since Cheyne is one of the largest independent SIVs – and the deal marks the first time that any collapsed SIV has been restructured in this way.

Deloitte & Touche, which was brought in as receiver for for SIV Portfolio (formerly known as Cheyne Finance), said a restructuring and portfolio sale agreement had been signed on Tuesday with Goldman.

The SIV went into receivership last autumn when the value of its credit assets, such as mortgage-linked securities, plunged.

The Cheyne restructuring, which has been brokered after nearly 10 months of negotiations, will require the receivers to organise an auction of the Cheyne assets in the coming weeks, to establish a transparent price for these instruments. This is important because in recent months it has often proved impossible to value these murky assets.

Once this price is established, Goldman will then create a new off-balance sheet vehicle to buy the assets, with the transfer of assets being funded by the US bank for just one day before being sold on to the new vehicle. Under the plan senior creditors in the SIV will be given a range of options including reinvesting in this new vehicle.

In addition to the Cheyne fund, Goldman Sachs has been lined up to restructure two other failed SIVs formerly run by hedge funds, called Golden Key and Mainsail, as well as Whistlejacket and Rhinebridge, which were formally managed respectively by Standard Chartered and IKB, the German bank. The same Cheyne model is expected to be applied in some form to all these.

Consequently, the move will bolster hopes that banks are starting to create solutions to the long-running woes of SIVs, and the plethora of other, shadowy credit entities that have exploded in size this decade, in the so-called “shadow banking world”.

The Cheyne deal comes after a protracted debate among policy makers and bankers about the most effective manner to deal with the problems that have been gripping the shadow banking world.

In recent years, institutions such as SIVs have exploded at a dramatic pace, largely unnoticed by regulators or investors. However, when the money market seized up last summer, these entities found their funding sources cut off.

The US Treasury, together with banks such as Citigroup, attempted to organise an industry-wide bail-out of these funds last autumn, to prevent them embarking on an asset firesale. However, this plan floundered, and the SIV problems have subsequently cast a heavy shadow over the credit markets and the banks in recent months.

There have been numerous attempts to restructure this portfolio of assets since it was placed under the control of receivers last year, and proposals from other investment banks but constantly falling markets made them too difficult to execute.