Vol 5 (2008) - Issue 4

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Structured Investment Vehicles: A New Chapter?

One of the first and most high-profile casualties of the credit crunch was the structured investment vehicle otherwise known as the ‘SIV’. For the last ten months all eyes have been focused on two SIVs that fell into receivership: Cheyne Finance Plc (‘Cheyne Finance’) and Whistlejacket Capital Limited (‘Whistlejacket’). With an agreement reached recently in relation to the restructuring of Cheyne Finance there are signs that troubled SIVs may be entering into a new phase in their restructurings.

SIVs originally spawned out of the Asset Backed Commercial Paper Conduit (‘ABCP’) developed over a decade ago. This provided a simple model whereby a particular financial structure was based upon (cheaper) short-term debt which was then invested into bonds held on a longerterm basis backed by underlying assets. These structures allowed banks to take advantage of the capital adequacy rules by placing assets, such as mortgage-backed securities, in off-balance sheet vehicles. The underlying assets included high-risk (or ‘subprime’) US mortgages which had been repackaged and sold on.

Due to the onset of the credit crunch and the resulting erosion of market confidence certain SIVs began to struggle. By September 2007 the inter-bank lending rate had soared. LIBOR was more than 1% over the then Bank of England base rate of 5.75% (a more usual spread would be in the region of 1⁄8 of one percent). Consequently funding began to dry up as investors steered clear of commercial paper issued by certain SIVs and conduits. As the market value of the assets held by SIVs fell the situation became critical for some SIVs resulting in Cheyne Finance and Whistlejacket entering into receivership. Indeed, by 12 September 2007 the Financial Times had branded the SIV the ‘latest whipping boy’.

Now that a deal has been struck in relation to Cheyne Finance the outlook is a little more encouraging for those SIVs waiting in the wings to be restructured (i.e. Golden Key, Mainsail II, Whistlejacket and Rhinebridge). Is there now a model in place that can be adapted to suit their restructuring needs or will there be an equally long delay before agreement is reached in relation to these vehicles? It is worth taking a look back over the last few months to understand why it took so long to roll out a model for Cheyne Finance.

SIVs are highly complex and sophisticated vehicles. One of the initial challenges faced by the receiver in Cheyne was to form an (informal) committee comprising a representative sample of senior creditors, mezzanine and junior capital noteholders and liquidity providers. The purpose of the ‘Senior Creditors’ Committee’ is simple: it provides a forum in which the receiver can liaise and consult with the creditors in relation to all aspects of the receivership.

However, it was clear at the outset that not only were the interests of the senior creditors at odds with those of the capital noteholders, but that there were differences between the senior creditors themselves. Soon there was a split between short-term noteholders (who wanted the receivers to continue to pay maturing notes) and long-term noteholders (who wanted all outstanding notes to become immediately due and payable). These two positions respectively became known as the ‘Pay-as-you-go’ and ‘Pari passu’ arguments. The receiver was effectively left with no choice but to seek directions from the High Court of England and Wales in order to resolve these issues.

In the first application for directions by the receiver, the court (in essence) decided in favour of the Pay-asyou- go construction and directed that the receivers manage Cheyne Finance’s assets with the express objective of achieving the timely payment in full of debts to senior creditors as and when they fell due for payment. In the second application, the court declared that an insolvency event had in fact occurred and in doing so took account of Cheyne Finance’s prospective liabilities. Essentially, Mr Justice Briggs was of the view that it would not be acceptable to create a priorities agreement in favour of shorter maturity notes and showed a willingness to disregard the express wording of the contract in order to reach a commercial result.

Following these decisions, the path was open for the receivers to progress the restructuring. Various proposals were put forward buy leading investment banks for the consideration of the creditors of Cheyne Finance. A proposal put forth by Goldman Sachs was accepted after a lengthy period of deliberation by the senior creditors committee.