Extent of Sigma fall-out becomes clear

By Anousha Sakoui Published: November 27 2008 20:13 Last updated: November 27 2008 20:13 Most creditors of Sigma Finance, the last fund to collapse in a once $400bn investment industry that was decimated by the credit crunch, face complete losses when the assets of the structured investment vehicle are sold next week. Ernst & Young, the receivers to the vehicle who took charge when it ceased trading in early October, have a mixture of bank debt and structured bonds with a face value of $2bn to auction off in order to try to repay $6bn of senior medium-term note holders. EDITOR’S CHOICE Ernst & Young on standby for Sigma - Oct-02Sigma collapse ends shadow bank project - Oct-01Sigma collapse marks end of SIV era - Oct-01Ratings downgrades take their toll on Sigma - Sep-29Asset auction flies in face of turmoil - Sep-18SIV restructuring: New routes to keep vehicles on the road - Sep-15The market value of the assets in an auction is likely to be a fraction of their face value and the contract terms governing Sigma mean creditors are repaid in the order that their debt matures. This means that a few bondholders are likely to be paid in full while others, whose debt is due at a later date, get nothing. SIVs earned income from investments in bank debt, mortgage backed bonds and other structured credit, which they financed with very cheap, short-term commercial paper and medium-term notes. The credit crisis killed the SIV business model as collapsing asset values caused lenders to flee. Sigma Finance, an independent vehicle and the single largest SIV with almost $60bn in assets at its peak, kept going longer than most rivals by replacing short-term debt with repo, or repurchase, agreements with a string of banks. However, one of its biggest repo counterparties, JPMorgan, in effect pulled the plug on Sigma by seizing the assets it held when further big value declines meant it could be left facing losses. Other banks quickly followed suit and Sigma was forced to cease trading. At the time the structured investment vehicle had $27bn in assets, $25bn of which had been pledged to counterparties in exchange for $17bn in repo financing. Receivers Alan Bloom, Maggie Mills and Stephen Harris, each of Ernst & Young LLP, declined to comment on the auction and said “they hoped very much to share fuller information with creditors in early December”. Sigma also has $4bn of junior capital note investors who will be wiped out by the collapse. Last month, the receivers appointed UK money manager Henderson Global Investors as advisers to help sort out what creditors to the vehicle will recover. Henderson declined to comment. Sigma Finance, was managed by London-based manager Gordian Knot, which also manages another complex vehicle, Theta, that invests in credit derivatives