Wednesday, August 29, 2007

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

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Anonymous Anonymous said...

I saw that story yesterday. I would say it is, or could be seen as, rather ominous, especially combined with the other problems at European financial institutions that have come to light recently. Yet after the US selloff yesterday Europe is, so far, not down as much as you'd expect. I think there is still some delusion of 'containment' out there. And this will last as long as these stories appear in dribs and drabs, as they are doing now. Look how blasé the markets apparently were about the news the Fed relaxed rules so that banks in the US could borrow from the discount window and give the money to their brokerage businesses. I would say that is rather ominous as well, yet it drew very little attention in the mainstream financial press. People hear 'Fed this, Fed that', or 'ECB this, ECB that', and they have come to believe that central banks can fix any economic/market problem by making credit available, or doing something -- that there exists a 'central bank put'.

It seems to be a many-footed monster, because the 'other shoe' has dropped often at this point, I would say.



12:48 AM  
Blogger jmf said...

Moin Eh,

I assume some are still in the "buy the dip" & "Fed to the resue" mode.

I think they will have lots of buying opportunities in the next few quarters....

They should start reading

2:11 AM  
Blogger Harleydog said...


Everyone scared to short Moodys(MCO) due to Buffett. Buffett or no Buffett, tape says down. With all these hedge funds going up in smoke, people forget they are the market for these derivatives. The holders of cred. default swaps think they have a protection, an asset with value. What happens when the counterparty to the asset is gone.

Great blog keep up the great work !

7:28 AM  
Blogger jmf said...

Moin Harleydog,

thanks for the kind words.

"The holders of cred. default swaps think they have a protection, an asset with value. What happens when the counterparty to the asset is gone"

I think the real stress test is coming soon and the "weapon´s of mass destruction" (also from Buffet) will show their ugly face...

7:39 AM  
Blogger jmf said...

SIVs set for $43bn asset ‘firesales’

A liquidity crisis in the commercial paper debt market could force “firesales” of as much as $43bn in assets, according to an analysis by the Royal Bank of Scotland. A swathe of off-balance sheet vehicles run by banks and asset managers that buy bonds backed by mortgages and other debt are facing forced asset sales to fund their short-term liquidity requirements. Such vehicles have faced a dramatic funding crunch in the short-term CP market after investors fled to safer instruments.

Analysts at Unicredit said the price declines due to forced sales could trigger sell-offs at other SIVs “in a domino-style action.”

1:05 AM  
Blogger jmf said...

Bank of England Loaned 1.6 Billion Pounds at 6.75%

The Bank of England loaned 1.6 billion pounds ($3.2 billion) at its penalty rate of 6.75 percent, suggesting commercial banks are still reluctant to lend to each other after the collapse of U.S. subprime mortgages.

The money lent yesterday is the most since July 2, when the central bank lent 1.93 billion pounds under the standing facility, according to Bank of England data. The facility was last tapped at 6.75 percent on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower.

4:30 AM  

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