Cheyne Capital Management is pleading with investors for a stay of execution for its structured investment vehicle (SIV) after the crisis in the commercial paper market pushed the SIV close to meltdown.
The hedge fund is asking investors in its $6.6bn (£3.3bn) Cheyne Finance SIV to agree to a refinancing to prevent an enforced sale of assets. The investment vehicle's credit rating was cut by Standard & Poor's on Tuesday because of the falling value of its assets, which it has been forced to sell.
Cheyne Finance has drawn on three funding facilities totalling nearly $300m, giving it enough funds to pay off commercial paper liabilities until the end of November. The funding facilities were arranged with Bank of New York, Merrill Lynch and Danske Bank.
A SIV is a fund that sells cheap short-term debt called commercial paper to investors and uses the money to fund holdings of long-term, higher-yielding assets such as mortgage-backed securities. With credit markets in a state of panic, SIVs are caught in a pincer as the value of their assets plunges and investors refuse to buy commercial paper on fears that they will lose money on the SIVs' assets.
"Market conditions remain difficult, with asset prices continuing to be marked lower... We hope to agree with various debt holders or financial firms on a recapitalisation to extend the maturity of our debt," Cheyne said.
Cheyne is trying to convince commercial paper investors that it is in their interests to wait until the abnormal market conditions subside rather than forcing a sell-off of assets. The fund is hoping to arrange a refinancing of the commercial paper into longer-term debt, along the lines of a deal arranged by banks and investors in Canada earlier this month.
The credit rout started when defaults on US sub-prime mortgages rocketed as homebuyers with bad credit ratings could not afford mortgage payments. Sub-prime mortgages and other assets had been parcelled up and sold round the world as securities and complex derivative products that investors found themselves unable to understand, leading to wholesale avoidance of all but the safest and simplest debt investments.
Cheyne Capital Management is based in London and was founded in 2000 by Jonathan Lourie and Stuart Fiertz, two former Morgan Stanley bankers. Morgan Stanley helped the hedge fund set up the SIV and takes a small cut of the fees generated by the SIV.