Cheyne May Liquidate Commercial Paper Plan on Losses, S&P Says

Too bad that Cheyne didn´t have a larger parent bank or the German taxpayer to bail them out. Will be interesting to see at what levels the markets will step in and place the bids. Needless to say that the downgrade from AAA to A- (six levels) is "amusing". I´m pretty sure that the business model from the rating agencies won´t look the same in the year 2008. The chart from Moody´s is giving a clear signal. Hard to see how Buffet ( largest shareholder) sees value in Moody´s

Schon dumm wenn man keine Mutterbank oder besser noch den deutschen Steuerzahler hat der einen "raushaut". Es dürfte sehr spannend werden zu welchen Preisen diese Papiere einen Abnehmer finden werden. Das die Ratingagenturen über Nacht festgestellt haben das AAA auf einmal A- bedeutet ist schon fast wieder komisch. Ich bin mir ziemlich sicher das deren Geschäftsmodell und deren Struktur im Jahr 2008 nicht mehr mit den heutigen zu vergleichen sein werden. Der Chart spricht Bände. Verwunderlich das Buffet (größter Aktionär) hier immer noch als Valueplayer engagiert ist.

S&P had said this two weeks before......

In Standard & Poor’s Ratings Services’ view, SIV managers recognize the importance of managing price volatility in the asset pool. These investment vehicles have weathered the difficult credit conditions of 1990-1991, the Long-Term Capital Management collapse, and the Sept. 11, 2001, terrorist attacks. SIVs responded to each event by diversifying into multiple funding markets, such as Europe and the U.S., and by having access to the best available liquidity sources, including banks and easily traded assets. SIVs also maintained access to the CP and MTN markets through each crisis during those 19 years

position SIVs to manage very differently than, for example, mutual funds or traditional CDOs. The market value tests and related assumptions penalize less-liquid, less-transparent, and less-understood asset selection. The tests encourage diversification, best-of-class asset selection, and defensive leverage management….As markets go through volatile periods, such as the current one, SIVs are not immune to eventually failing a test. However, SIVs are generally structured to have incentives to maintain asset portfolio and liability profiles that would help them in the face of volatile markets.

Aug. 29 (Bloomberg) -- Cheyne Capital Management Ltd., a London-based hedge fund, may be forced to liquidate $6 billion in assets backing a commercial paper program after the global credit rout reduced the value of the securities, Standard & Poor's said.

The Cheyne Finance LLC fund, which can hold as many as $20 billion in assets, breached a test based on losses in the portfolio, S&P said in a statement. Cheyne Capital also runs Queen's Walk Investment Ltd., a fund that invested in mortgages and which reported in June a loss of 67.7 million euros ($92 million) in the year ended March 31.

``Even though you are a well-regarded investment vehicle, if you can't roll over your paper and the market is concerned about the asset value of rolling over that paper, investors are not going to refinance you in this environment,'' said Craig Saalmann, credit strategist at JPMorgan Chase & Co. in Sydney.

Commercial paper conduits have faced funding shortages as investors balk at buying asset-backed, short-term debt after losses on U.S. home loans to risky borrowers caused turmoil in global credit markets. The retreat has caused commercial paper yields to soar to five-year highs.
Profits Cut
Structured investment vehicles like Cheyne Finance purchase long-term securities on money raised from short- and medium-term debt. The profit typically delivered from this strategy is being cut by rising yields.

HBOS Plc, the U.K's largest mortgage lender, said last week that it would step in to repay about $35 billion of commercial paper owed by its Grampian Funding LLC unit as contagion from the subprime slump drove up the cost of borrowing.

Cheyne Capital may begin liquidating assets and by Aug. 30 will estimate expected proceeds from future asset sales, S&P said. ....

There are about $385 billion outstanding in structured investment vehicles and 23 percent of their assets are mortgage securities or collateralized debt obligations that often hold mortgages, according to an Aug. 9 report by Bear Stearns Cos.

The Cheyne portfolio is primarily invested in ``real estate securitizations'' and none of the assets have had downgrades, S&P said. Structured investment vehicles often aren't backed by credit lines from banks like asset-backed commercial paper programs, of which there are $1.05 trillion outstanding.

S&P lowered the credit rating on the commercial paper issued by Cheyne Finance by two levels to A-2 from A-1+. The rating on senior debt was cut six levels to A- from AAA, the highest rating.

The average yield on the highest rated asset-backed commercial paper with one-day maturity has risen 0.71 percentage point this month to 6.04 percent as investors have fled funding linked to subprime mortgages, according to Bloomberg data.
Securities of subprime mortgages to people with poor credit or high debt have lost value because of the highest delinquency rate in four years. Commercial paper is debt due in 270 days or less.

> Here is the Cheyne Letter to clients via the FT

> Hier der Brief an die momentan wohl ziemlich aufgebrachten Cheyne Investoren via der FT