Another Alternative Way to Handle SIVs

So far SIVs have been liquidated, brought on to the balance sheets of banks, potentially purchased by a big bank bail out fund (M-LEC). Well, there is another, less preferred alternative. It is amazing the vehicles that financial people can come up with when their backs are up against the wall. Text in bold is my emphasis. From the WSJ:

Creditors in the $7 billion structured investment vehicle formerly known as Cheyne Finance are moving closer to a deal that would allow them to avoid being forced to realize hundreds of millions of dollars of potential losses in the short term, people familiar with the situation said.

The proposed deal would involve transferring the assets to a new vehicle, with senior creditors being offered the opportunity to refinance their debt into longer-term instruments or to take a discounted cash pay-out, the people said.

The full structure of such a deal remains unclear, and one person said it was only one of the options being considered. If successful, it could become a route for creditors in other troubled SIVs, two people familiar with the matter said.

SIVs are investment pools that issue short-term debt to buy portfolios of longer-dated assets, pocketing the difference on the interest paid and received. Many of the vehicles ran into trouble in August when commercial-paper markets shut down for most issuers, after investors became concerned about the quality of some of the underlying assets.

The SIV formerly known as Cheyne Finance was managed by London hedge-fund group Cheyne Capital Management (UK) LLP. Now called SIV Portfolio PLC, it was one of the first SIVs to have trouble funding itself in August.

Restructuring this and other vehicles has proved tricky because senior debtholders, which include money-market funds, don't want to book losses, despite the drop in trading prices on the SIVs' underlying portfolios of residential-mortgage-backed securities and bank debt. It has also been difficult to agree on a restructuring that satisfies the objectives of the group of investors in an SIV, people familiar with the matter said.

Cheyne Finance entered receivership Sept. 5 after having drawn down its three liquidity lines to help repay maturing debt. The SIV's receiver, Deloitte & Touche LLP, has been looking for a buyer of its portfolio or a refinancing agreement with creditors. A spokeswoman for Deloitte & Touche declined to comment.

If senior creditors agreed to the proposed interim solutions, they would have at least until next year to consider selling the portfolio of assets, one of the people said. The hope is that the market for the structured assets will have improved by then.

Only a minority of the senior creditors are expected to opt for the cash payout as it would be at a highly discounted price, one of the people said.

Receivers previously held exclusive talks with RBS about setting up an entity to buy Cheyne Finance's assets that would have led to senior creditors ultimately being repaid in full. Other banks proposing restructuring plans and reaching advanced talks with the receivers included Goldman Sachs Inc., J P Morgan Chase & Co. and Morgan Stanley.

However, those proposals stalled after the value of the portfolio of assets fell further and as the transaction would no longer result in senior creditors being repaid in full -- let alone some $720 million of more subordinated mezzanine and capital notes, people familiar with the matter said.