Cheyne Finance, a structured investment vehicle managed by one of London's biggest hedge fund companies, has started selling assets to repay debt, adding to the glut of U.S. mortgage-backed securities being dumped by investors.

In a filing Wednesday with the Irish Stock Exchange, Cheyne Finance said it breached covenants Tuesday measuring the value of its assets against its liabilities, forcing it to start liquidating.

But the vehicle, managed by Cheyne Capital Management LLP, which has $12 billion under management, said that it has enough cash on hand to pay back debt that will mature before the end of November, and that it will try to avoid winding down completely by reaching an agreement with lenders to recapitalize and extend debt maturities.

Cheyne Finance was set up in 2005 to issue up to $20 billion of commercial paper and notes to fund a portfolio of U.S. subprime residential mortgage-backed securities and other long-dated assets.

It had $9.7 billion of senior debt as of June 30, according to a report Standard & Poor's Corp. published Aug. 15. But now the face value of the portfolio is around $6.6 billion.

The vehicle also has nearly $2 billion of cash, including $275 million of liquidity lines that were drawn down fully last week.

A number of structured investment vehicles have collapsed recently after declines in the value of mortgage-backed bonds they held. Because of the declines, investors who have provided short-term funding by buying the vehicles' commercial paper or entering repurchase agreements are refusing to lend against the securities or are requiring higher margins, meaning the vehicles are having to pay more to fund investments that are losing their value.

"Market conditions remain difficult, with asset prices continuing to be marked lower," Cheyne Finance said.

The breaches led S&P to cut all of Cheyne Finance's ratings Tuesday, and they remain on review for further downgrade.

Shortly after the regulatory filing, Moody's Investors Service Inc. put some of Cheyne Finance's ratings on review for downgrade. The agency cited "the deterioration of the market value of Cheyne Finance's portfolio … the potential impact of crystallized losses on capital notes following asset sales … [and] Cheyne Finance's prolonged inability to issue sufficient commercial paper to meet its funding requirements."

About 48% of the vehicle's portfolio is in residential mortgage-backed securities, and the majority of those are U.S. subprime assets, Moody's said.

Moody's and S&P said recently that structured investment vehicles were in good shape to weather disruptions in the short-term funding markets.

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