Wednesday, February 20, 2008

Whistlejacket one day from MTM default

(FT Alphaville) So either they couldn’t make it work, or in the end they didn’t want to. Nine days ago, Standard Chartered withdrew the liquidity support promised (conditionally) to its $7bn Whistlejacket SIV, after the vehicle breached its net asset value trigger, and appointed a receiver, Deloitte.

The U-turn by the bank raised the prospect of the kind of rapid firesale - and subsequent contagion through spread-widening across the SIV sector - that banks such as HSBC and Citi have moved to avoid by taking their respective vehicles onto their balance sheets.

On Wednesday, though, Standard Chartered withdrew the proposals it had made to Deloitte to help avoid a wind down of Whistlejacket and expressed its disappointment that it had been “unable to find a viable solution to ensure flexibility for Whistlejacket due to these changes in circumstances.”

This is as a result of a number of factors, including the pace of continuing deterioration in the market for certain asset classes and the impracticality of completing any proposal within the confines of the receivership as it has evolved.

Oh dear. This looks doubly bad. Whistlejacket tripped its trigger because the value of its assets fell below 95 per cent of par - or 50 per cent of the face value of the notes after leverage - triggering automatic receivership and liquidation.

Standard Chartered was thought to have made two offers to Deloitte. Firstly that it could buy Whistlejacket’s assets as they mature and transfer them to a separate vehicle, which it would manage. That though is rather the status quo - and as asset values continue to fall would presumably merely transfer the problem to a new structured vehicle. The second option was that it could buy all of Whistlejacket’s assets at current market prices, which would allow investors to realise what remains of their investments and get them more than in the event of a firesale, but would presumably leave Standard Chartered entirely exposed to the downside of those assets going forwards.

Either way, continuing rapid falls in asset values was going to prove problematic. Moody’s latest update on the SIV sector in January showed how average NAVs had fallen precipitously, the average reaching 52.6 per cent last November. The deterioration has continued apace since then.

While Deloitte say that a firesale is not an option (”absolutely categorically no need“), and that is still seeking other solutions, time is getting tight. The receiver elected last Friday not to pay the medium term notes maturing that day. S&P lowered its rating on the notes to CCC-, and its issuer rating on Whistlejacket, as a result - and said that as the notes have a three-day grace period payment default will take place on Thursday 21. Or tomorrow.

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