Cairn Capital seeks to capitalise on its sense of good timing
Story date: 2008.6.19
Sometimes market players get very lucky; sometimes they get wise. There has been endless market debate in recent months over which of these statements applies to Cairn Capital, the London-based asset managers. What is clear is that Cairn`s story provides a fascinating wrinkle in the bigger saga of structured investment vehicle restructuring. For as the shadow banking world has writhed in agony in recent months, Cairn has earned the distinction of being the only independent SIV fund to have hitherto reorganised itself - and thus avoid the humiliating fate besetting Cheyne`s SIV. Cairn is tight-lipped about how it pulled off this coup. However, timing played a crucial part. As soon as the money markets started to seize up last August, Cairn realised it needed to reorganise the funding profile for its SIV. So it started negotiating with investors, even though the SIV had not breached any triggers that might force this action. Corralling the investors was fiendishly difficult, since they were scattered around the world with divergent interests. However, eventually, Cairn struck a deal that entailed Barclays Capital - the main lender to the SIV - providing fresh financing. Equally crucially, Lehman Brothers and other banks assumed part of the credit risk of the Cairn portfolio via credit default swaps. Initially, some rival SIV managers thought Cairn had made a mistake by acting so fast. In subsequent weeks the credit markets rallied strongly, which made it appear that Cairn had overpaid for its credit protection. Cairn writhed in embarrassment when Barclays claimed it had "rescued" the fund. Partly as a result of this, other SIVs staved off their restructuring plans. However, when conditions deteriorated again in October and November, Cairn`s move looked more canny. When other SIVs subsequently tried to copy its deal, the window of opportunity had closed. By November last year, most investment banks were no longer willing (or able) to extend liquidity support or credit protection to ailing SIVs. That means there is little chance of replicating the "Cairn model" of restructuring at other SIVs, even though this model gave investors better protection from losses. However, Cairn itself is, opportunistically, trying to find ways to profit from its own lesson. It has offered advice on the reorganisation of SIVs and collateralised loan organisation, such as Golden Key and Coltrane, and has won a replacement manager mandate on a $1.2bn CDO called White Marlin. "We are interested in becoming portfolio managers of these orphan SIV assets, post restructuring", said David Littlewood, executive director of Cairn. "Much of our role is to determine intrinsic and market values on behalf of senior creditors, so they can establish what restructuring option is best for them." That, in turn, implies that a new evolutionary phase could be kicking off in the shadow banking world - namely a trend towards greater consolidation after the heady expansion of recent years. By Gillian Tett and Anousha Sakoui
