London-based Solent Capital Partners has announced that it may have to sell off assets from its Mainsail II fund, which was launched with assets of USD1.5bn last year, after becoming the latest hedge fund manager to be left exposed by the drying-up of short-term funding.
Solent acknowledged this week that a fall in value of its investments in commercial mortgage-backed securities, residential mortgage-backed securities and collateralised debt obligations could oblige it to sell assets or close out hedging instruments at a loss.
The firm said it was being forced to draw on bank credit after failing to find buyers for its commercial paper in the marketplace. Mainsail II issues short-term debt to invest in higher-yielding longer-term securities such as mortgage-backed bonds.
'Current market volatility and lack of market liquidity with respect to sub-prime lending markets have caused adverse conditions with respect to the liquidity and market risk exposures on the company's underlying portfolio of investments,' Solent said in a statement reported by MarketWatch.
Solent was established in 2003 by Jonathan Laredo, a former managing director at JPMorgan Chase, Geoff Smailes, formerly of Credit Suisse, and Tim Gledhill from Merrill Lynch.
Mainsail II fund is a so-called 'SIV-Lite' vehicle, involving a combination of structured investment vehicle and collateralised debt obligation techniques. Mainsail II was one of as number of SIV-Lite structures underwritten by Barclays Capital, including Geneva-based Avendis Group's USD5bn billion Golden Key fund. Avendis also said it would be forced to sell assets because it could not find buyers for its short-term debt.
Golden Key's commercial paper rating was cut to B, one step below investment grade, from the highest level of A-1+. Ratings on parts of Mainsail II fell by 16 steps to CCC+ from the highest grade, and its commercial paper rating dropped three steps to A- 3, the lowest short-term investment grade ranking.
On Wednesday Standard & Poor's cut the rankings on a total of USD3.2bn in debt issued by Solent and Avendis funds to junk levels and threatened to cut the ratings further. Moody's has also reduced debt issued by both groups to sub-investment grade levels.
Two German banks, Leipzig-based Landesbank Sachsen Girozentrale and IKB Deutsche Industriebank in Düsseldorf, have had to be bailed out by publicly owned institutions this month after their so-called conduits, which sold commercial-paper to invest in asset-backed securities, found that their funding had dried up.