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Credit crunch seen easing but funds continue to stumble

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The first signs that the fall-out from the collapse of the US sub-prime mortgage sector may be easing came this week, with BNP Paribas reopening three funds after resolving asset valuation

The first signs that the fall-out from the collapse of the US sub-prime mortgage sector may be easing came this week, with BNP Paribas reopening three funds after resolving asset valuation issues and the hard-pressed Carlyle Capital fund hoping to restore its dividend in the fourth quarter.

However, the list of casualties in and around the hedge fund industry continued to lengthen, with a number of firms announcing losses in July or early August, reporting problems with the valuation of asset-backed securities, undertaking assets sales or filing for bankruptcy.

This week BNP Paribas Investment Partners said it was resuming NAV calculation, subscriptions and redemptions for its Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia, which are partially invested in AAA and AA-rated American mortgage-backed securities.

The funds were suspended on August 6 when the manager found itself unable to calculate asset prices because trading in the securities had completely dried up, but BNP Paribas Investment Partners says it has developed a pricing mechanism to allow subscriptions and redemptions to resume, while the market environment has also improved.

Meanwhile, Carlyle Capital chief executive John Stomber told analysts that there was a strong possibility the company would be able to pay a dividend in the fourth quarter, having earlier scrapped its second-quarter dividend. Stomber said credit markets appeared to have stabilised and prices were returning to normal levels.

Carlyle Capital raised USD322m from the flotation on the Euronext Amsterdam exchange on July 4, and with leverage invested in a USD22.7bn portfolio, mostly in mortgage-backed securities. It is selling some USD900m in assets at a loss of between USD30m and USD40m.

Uncertainty about the value of its assets and demand for collateral from lenders have forced its parent, Carlyle Group, to make two USD100m loan commitments in little more than a week to shore up the fund’s liquidity. The parent has also acquired mezzanine debt investments and four collateralised loan obligations from Carlyle Capital.

Earlier Stomber had told investors that the company’s business model had been designed to withstand a market shock as strong as the fallout from Russia’s default in October 1998, which resulted in the collapse of Long Term Capital Management, adding: ‘We believe the recent liquidity disruption is significantly worse than the events of 1998.’

The share price of Carlyle Capital, which was floated at USD19, stood at USD14 on August 30, but Stomber says the fund will definitely be able to achieve a 10 per cent return on equity in 2008 and 2009.

This week Standard & Poor’s cut its rating on Cheyne Finance, a structured investment vehicle managed by Cheyne Capital Management, from AAA to A- after it began to sell assets in order to pay down debt. Cheyne Finance, which is estimated to hold assets of USD6.6bn, just over half in mortgage-backed securities, says the declining value of its assets had forced it to undertake an orderly sale of its investment portfolio.

Rick Caplan, a managing director of Royal Bank of Scotland and co-head of collateralised debt obligations department, has left the bank, along with six colleagues, as RBS announced it was scaling back its CDO business to bring it into line with market volumes. Caplan is reported to be the architect of so-called SIV-lite structures like those created by Solent Capital Partners and Avendis Group that were revealed to be in difficulties last week.

Knight Capital Group, a New Jersey-based financial services group, saw its share price fall this week after it acknowledge in a regulatory filing that its subsidiary Deephaven Capital Management might have to repay a substantial proportion of the incentive fees it received from investors in the first half of the year after its funds suffered significant losses in the first three weeks of August.

HFA Holdings, an Australian provider of absolute return funds, has extended the period for completion of its proposed acquisition of Lighthouse Investment Partners, a fund of hedge funds provider based in Palm Beach, Florida, after its share price suffered from extreme turbulence, along with fluctuations in the US dollar-Australian dollar exchange rate.

Between July 27 and August 16, HFA’s share price fell from AUD3.07 to AUD1.61 on rumours that it was heavily exposed to US sub-prime mortgage-backed securities, before rebounding to AUD2.05. Together with a rise in the value of the US dollar, this has reduced the value of HFA’s part-cash, part-equity bid for Lighthouse, which would create a combined group with some USD8bn in assets.

Basis Yield Alpha Fund, a Cayman Islands-domiciled fund managed by Australia’s Basis Capital, has become the latest fund to file for bankruptcy, saying a significant devaluation of its asset portfolio had led to margin calls the fund could not meet and default notices from counterparties. Basis Capital was reported as managing more than USD1bn earlier this year, but in August it told investors one of its portfolios had suffered losses of more than 80 per cent.

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