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Six months on from a crisis at Queen’s Walk Investment, another listed vehicle sponsored by Cheyne Capital, a London-based hedge fund, has hit the skids. The diagnosis is not identical: Queen’s Walk suffered after steep declines in net asset value, while the latest casualty, Cheyne Finance, relied on short-term commercial paper, a market that has completely seized up. But the slowly unfolding crisis in the US housing market basically did for them both.
Cheyne Finance moved into disaster recovery mode a while ago, selling assets equivalent to 40 per cent of liabilities. But having tripped covenants at the weekend, Cheyne is now negotiating with investors an orderly wind-down over three years.
The episode raises several questions – not least over the judgment of Standard & Poor’s, the rating agency, which downgraded Cheyne Finance’s senior debt by six notches in a day on Tuesday, having ranked it at the highest investment grade just two weeks ago. It also casts doubt on the prospects of those structured investment vehicles sponsored by asset managers rather than banks.
Cheyne Finance did have an emergency credit line but this has already been drawn down, giving it sufficient cash to carry on only until November. Bank-sponsored SIVs, on the other hand, may be able to turn to the parent bank in the event of credit spasms. Last week, UK bank HBOS said it had stepped in to repay short-term debt issued by Grampian, its £18bn credit arbitrage fund, “until such time as market pricing improves”. Not all banks will step in: Standard Chartered has specified its only exposure to Whistlejacket, the credit arbitrage fund it manages, is the $250m sliver of capital it owns. But one lesson from Cheyne Finance may be that SIVs without the backing of sponsoring banks are less likely to survive similar crises.