Update, July 26, 2008:
Cheyne's assets are reportedly receiving only about 62.9 cents on the dollar. Moody's downgraded the SIV by five levels in response. This Bloomberg article has more details.
Update, Oct 30, 2007: FT reports on troubles with refinancing Cheyne:
A critical deal for troubled credit markets faced fresh uncertainty on Tuesday when doubts emerged over the proposed refinancing of the $6.6bn Cheyne Finance structured investment vehicle.
Deloitte & Touche, acting as receivers for the SIV, said that an exclusivity period for Royal Bank of Scotland to arrange a deal between new investors and current creditors had lapsed without success. Deloitte said it would continue to discuss with RBS a viable refinancing solution.
However, one person familiar with the situation said that senior creditors were holding out for a better price after an initial offer that would have led to them losing some money.
Which would mean, of course, Cheyne's creditors are doing what just about everyone else in high finance is doing right now, in reaction to this credit crunch. As that phenomenon is in our opinion chiefly a solvency crisis, many may find themselves holding their breaths 'till kingdom come.
The article has further comments on how the Cheyne situation would appear diagnostic for troubled SIVs in general:
Failure to strike a deal on Cheyne Finance could be a blow to the more than $40bn worth of creditors in the handful of similarly troubled vehicles, say industry observers. Cheyne had appeared to be the first SIV close to completing a full refinancing.
“The proposed restructuring of Cheyne appeared to be a good solution for senior investors,” said Paul Kerlogue, analyst at Moody’s. “If it does not succeed I would expect that senior investors in other troubled SIVs will be disappointed as it seemed to give some hope should their SIV also go into enforcement.”
Update, Sept 6, 2007: The TimesOnline article points out that Cheyne Finance has now been put into receivership:
An $8.8 billion (£4.35 billion) investment fund managed by the London-based Cheyne Capital Management was put into receivership yesterday as the short-term credit famine looked set to intensify.
Control of Cheyne Finance (CF), a special investment vehicle (SIV) financed by short-term borrowings and invested in sub-prime mortgages and other assets, was handed over to Deloitte.
Neville Kahn, one of the receivers, said: “We are trying to bring some stability to the situation while we see what the refinancing options are.”
He denied a report from Moody’s, the rating agency, which said that the fund was in “irreversible wind-down mode”. Mr Kahn said that one option was to find an investor prepared to pump in fresh liquidity.
Original post: Cheyne Capital Management released a notification yesterday that they had breached the Major Capital Loss Test, which appears to be a covenant that essentially forces the fund to wind down. The letter Cheyne sent notifying the rating agencies and banks has been published by Financial Times and is included below in its entirety:
CHEYNE FINANCE PLC
CHEYNE FINANCE LLC
CHEYNE FINANCE CAPITAL NOTES LLC
CHEYNE CAPITAL MANAGEMENT (UK) LLP
28 August 2007
To: Moody's Investors Service Limited, Standard & Poor's Ratings Services, Morgan Stanley & Co. International plc, Morgan Stanley & Co. Incorporated, AIB/BNY Fund Management (Ireland) LTD, Danske Bank A/S, Merrill Lynch Capital Corporation, The Bank of New York, The Bank of New York, London Branch, Barclays Bank PLC, Barclays Capital Inc., Lehman Brothers International (Europe), Lehman Brothers Inc., Merrill Lynch International, Merrill Lynch Money Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated
We refer to the Investment and Funding Management Agreement (the "Management Agreement") dated 3 August 2005 among Cheyne Finance PLC, Cheyne Finance LLC, Cheyne Finance Capital Notes LLC (collectively, the "Investment Vehicle"), Cheyne Capital Management Limited (now Cheyne Capital Management (UK) LLP, the "Manager"), Cheyne Capital International Limited and The Bank of New York as Custodian, Security Trustee and U.S. Security Agent. Unless otherwise specified, capitalized terms not otherwise defined shall have the meanings ascribed to them in the Management Agreement.
Due primarily to mark-to-market losses experienced in its Investment Portfolio, today, 28 August 2007, the Investment Vehicle experienced a breach of the Major Capital Loss Test, as described in Section 2.1(b) of Schedule 8 to the Management Agreement.
In accordance with our responsibilities as Manager under Section 16.1(a) of the Management Agreement, this notice is to inform you that due to the breach of the Major Capital Loss Test, an Enforcement Event has now occurred.
As a result of this Enforcement Event, in accordance with the terms of the Investment Vehicle's Operating Manual (the "Operating Manual"), today is also a Defeasance Date on which the Investment Vehicle will enter into the Defeasance Process.
As required by the Operating Manual, among other actions, the Manager has now on behalf of the Investment Vehicle drawn down on all Committed Liquidity Facilities and expects to receive the proceeds from such facilities today, and is also prepared to draw on its Money Market Funds and Breakable Deposits as they become needed.
Beginning tomorrow, 29 August, the Manager will commence a gradual orderly sale of the Investment Portfolio as described under the General Preferred Order of Sale (as defined in the Operating Manual). By Thursday, 30 August, the Manager will estimate the total potential proceeds from the sale of the Investment Portfolio over time, and determine the Defeasance Strategy (as defined in the Operating Manual).
The Investment Vehicle currently has sufficient cash, proceeds from Liquidity Facilities, Money Market Funds and Breakable Deposits to cover its scheduled maturing liabilities into November 2007. We will continue to work on re-capitalization alternatives or other funding solutions.
Finally, we also note that the Investment Vehicle has undergone a Restricted Investments Event today, the consequence of which is that additional investments may not be made.
By: Cheyne Capital Management (UK) LLP, the Manager
A Bloomberg article reports that Cheyne Capital Management may be "forced to liquidate $6 billion in assets backing a commercial paper program." The article notes:
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.
Cheyne also runs the Queen's Walk Investment fund, which has suffered steeps losses in the credit turmoil and is currently listed as "ailing" on this site. We have not heard more on the fate of that fund since listing it.