The slow and painful process of restructuring the various structured investment vehicles in receivership inched forward last month with details emerging on plans for the Cheyne portfolio and news that Blackrock may take over as replacement manager on the stricken Whistlejacket vehicle. These are two of five SIVs in receivership that Goldman Sachs is restructuring, the others being Avendis’s Golden Key, Solent Capital’s Mainsail and IKB’s Rhinebridge vehicles. Receiver on four of the restructurings is Deloitte, with KPMG handling Mainsail.
Blackrock’s rumoured appointment as alternative investment manager for Whistlejacket follows Standard Chartered’s decision not to stand behind the vehicle. While many other banks, such as Citi, HSBC and Dresdner, have taken SIV assets on balance sheet, StanChart, which had $250 million invested in Whistlejacket capital notes but took its money out via a vertical slice, took the decision that the cost of supporting the vehicle was too great.
The challenge with restructuring any SIV is the establishment of the best price for the assets and to avoid the sale of the entire portfolio. The route that Goldman has taken involves creditors having the option to either sell the assets for cash and crystallize their loss or accept pass-through notes to a new vehicle that Goldman will establish in the hope that some of the lost value, resulting from depressed prices for ABS, can be recovered. This vehicle will not be funded or actively managed but will attempt to achieve better value from the assets than could be realized by a forced liquidation now.
Under this structure, only those creditors electing for cash will be liquidated. Clearly its success depends on sufficient creditors accepting the pass-through option for the establishment of the vehicle to be viable. There is a mechanism embedded in the structure whereby Goldman can be aware whether the two options are feasible. But given that in some of the smaller SIVs the investor base in a mere handful of institutions, presumably just one investor deciding to opt for the pass-through structure would be enough to justify its establishment. But in Cheyne’s case, the $6 billion portfolio is being sold as an open auction of specific buckets, with investors being asked to bid on entire buckets rather than individual assets. However, Goldman appears to be prepared to handle individual orders itself.
Complex technical issues in the SIV documentation have slowed the restructuring of these vehicles. Problems seem to have revolved around the relative value of the different creditors’ claims on the estate. Senior creditors in the vehicles normally rank pari passu but it appears that some have different claims than others in Cheyne’s.
The last resort
Earlier in the crisis, restructuring efforts focused on renegotiating triggers to prop up the vehicles. But as the dislocation continued there came a point at which asset values had fallen so far that the market-value triggers were so underwater that there was no point in trying to support the vehicle. Indeed, an earlier attempt to salvage the Cheyne SIV saw RBS bidding for the portfolio. However, this plan was scuppered by the continuing collapse in asset values. The Cheyne portfolio was very aggressively selected for a SIV: more than 42% of the assets are non-prime RMBS and 16% are monoline-wrapped ABS. On September 30 2007, 31% of total SIV assets were financial institutions, 10% sub-prime or Alt-A mortgage assets and just 2% structured finance CDOs.
The Golden Key and Mainsail vehicles were SIV-lites (essentially market-value CDOs funded in the short-term CP market) and as such are much less complex vehicles to restructure. Another asset manager, Cairn Capital, restructured its SIV-lite, Cairn High Grade Funding, via a cash injection from Barclays Capital.
If the Cheyne restructuring is successful, it will act as a blueprint for the rest of the industry. But senior investors opting for pass-through notes rather than cash will need to be patient if they are to realize much more than the liquidation price for their assets. Eighteen SIVs are now being supported by their parents but are still trying to sell assets – so the secondary market flow will continue for some time. And overhanging the whole sector is the spectre of Gordian Knot’s $40 billion Sigma vehicle, which has managed to survive so far by calling in as much repo as it can but seems an inevitable candidate for a restructuring as well.