44 Cents on the Dollar for Cheyne SIV Auction

The results of the auction of the Cheyne SIV portfolio do not portend well for other SIV restructurings. From the Financial Times:

A benchmark auction of distressed debt assets has given investors a gloomy guide to the prospects of recovering cash from the troubled structured investment vehicles that have been at the heart of the credit crunch.

The assets auctioned from a $7bn (£3.5bn) SIV formerly known as Cheyne Finance this week drew bids that would pay only 44 cents in the dollar if investors opted for a cash exit from the vehicle, it was revealed on Thursday.

Cheyne, now known as SIV Porfolio, was one of the first of its kind to enter receivership and its restructuring is being watched by investors in global markets for complex debt products as a pricing guide….

Under the restructuring, the auction will fund cash payouts for investors who want them. Any unsold assets will be transferred to a new fund set up by Goldman Sachs.

Receivers at Deloitte & Touche put up assets with a face value of $1.8bn for auction this week.

In spite of the low prices at the auction, more creditors in Cheyne Finance are expected to opt for the cash payout than indicated interest before the auction, illustrating that it is a better result than initially expected.

More than $170bn is still stuck in SIVs, which have been decimated by the credit crisis as the value of their holdings of financial debt and structured bonds has fallen and their sources of cheap short-term funding have dried up…

Creditors have also received cash pay-downs during the process – and could recover more than 60 cents in the dollar overall for their claims.

I would be curious to get reader input on this one, but my impression, based on looking back to some of the discussion of the famed, stillborn rescue plan sponsored by the Treasury, the MLEC, the results of this restructuring are even worse than anyoe would have contemplated back then.

Now admittedly, Cheyne hit the wall, so one must assume that its assets or its leverage were worse than the norm for SIVs. And since it declared bankruptcy, it is possible, indeed likely, that it tried selling assets to satisfy its creditors. Companies in trouble usually have to sell their best assets first. So what remained was almost certain to be worse than the norm.

Having given those caveats, let’s go over why this is still a truly dreadful outcome. Remember, SIVs funded short. Most of their funding (over 90% in the common structures) was commercial paper; 4-5% was medium term notes; the rest was equity. Some structures had more layers under the CP; older structures had a much higher percentage of MTN and less CP.

To give some benchmarks: as of mid-November, when the SIV crisis was in full swing, Fitch reported that the net asset value of SIVs it rated had fallen to 69.7% versus 71% the month prior.

That does not mean what you think it means (unless you happen to be a structured finance professional). The net asset value figure represents the value to capital note holders (in most structures) who are subordinate to senior debt and medium term note holders, NOT the value of asset of the vehicle as a whole (“net asset value” roughly means “value net of [senior] debt”). As Fitch explained:

As the prices of the underlying assets of the SIV decline the NAV of the capital note reduces at a magnified level due to the 14 times leverage found on average within the SIV market. Hence, a 0.5% price drop on all assets across the portfolio would result in the NAV declining by 7%.

Thus the 69.7% NAV is tantamount to the vehicle’s entire assets being at 97.7% of face value.

Another benchmark: in December, one of the reasons that the SIV rescue fell apart was the inability to agree on terms that would satisfy SIV sponsors (ie, they wouldn’t take too much of a bath, or better yet, could disguise losses) yet price the SIv assets at a level that would be enticing to potential investors. BlackRock, to have been the manager of the entity, was going to acquire only the better assets out of the SIVs (what sort of solution was that?) and pay only 92 cents on the dollar in cash of a “market” price (based on the sale of a small amount, so it would be somewhat flattering), the rest being in notes whose value depended on how the assets fared. Blackrock’s fees were also a sticking point.

Nevertheless, say the fees were 2%. 90 cents on the dollar is a far cry from 44.

Some elements of the overall SIV situation differ from those facing Cheyne, so the two are less than directly comparable. Nevertheless, the fear of the backers of the failed MLEC plan was that SIV liquidations would lead to fire-sale prices. I imagine that 44% of fund value falls below what they would have seen last autumn as a worst case scenario.

Other banks may be carrying similar assets at higher marks. If so, the Cheyne auction will lead to writedowns.

Any readers who know this space are particularly encouraged to speak up.