Basis Yield Files Bankruptcy Over Subprime Defaults !

Discussion in 'Wall St. News' started by Cdntrader, Aug 29, 2007.

  1. Basis Yield Files Bankruptcy Over Subprime Defaults

    By Tiffany Kary and Jenny Strasburg

    Aug. 29 (Bloomberg) -- Basis Capital Fund Management Ltd., the Australian firm that said losses in its Basis Yield Alpha Fund could exceed 80 percent, filed for bankruptcy protection for the hedge fund, citing defaults in U.S. subprime mortgages.

    The Sydney-based firm's Basis fund asked a court in the Cayman Islands yesterday for permission to liquidate its assets, according to a petition filed in New York today. The George Town, Grand Cayman-based fund has assets and liabilities of more than $100 million, according to today's petition, which asked a federal bankruptcy judge to bar lawsuits in the U.S. while it liquidates in the Caymans.

    Basis Capital, founded in 1999 by Steve Howell and Stuart Fowler, who worked together at Australia Bank and County NatWest, had more than $1 billion in assets as recently as May. It lost money as defaults in home loans to the riskiest borrowers spread to broader credit markets. Basis followed Bear Stearns Cos. in seeking bankruptcy protection in the Caymans for a fund with clients located in the U.S. and elsewhere. Bear Stearns' request for two hedge funds is pending.

    ``There will be issues as to whether it's a foreign main proceeding, just as there are with the Bear Stearns case,'' said Kurt Mayr, a lawyer in the financial-restructuring group at Bracewell & Giuliani in Hartford, Connecticut.

    Bear Stearns Setback

    A federal judge refused this month to grant permanent protection from U.S. lawsuits to the two bankrupt Bear Stearns Cayman Islands funds, saying he needed more time to determine whether the Cayman Islands was the proper jurisdiction for the liquidation given that most fund assets were located in New York.

    The Basis Yield Alpha Fund's creditors and assets appear to be mostly U.S.-based, Mayr said.

    Creditors of the Basis fund include JP Morgan Chase Bank NA, Goldman Sachs International, Citigroup Global Markets Ltd., Morgan Stanley, Lehman Brothers International (Europe) and Merrill Lynch International, according to court documents. Those creditors all issued default notices to Basis Yield following its June 2007 devaluations.

    Basis halted redemptions last month from its Yield Alpha Fund and Aust-Rim Opportunity Fund after the investment pools lost 9 percent and 14 percent in June, respectively.

    The Basis Capital funds had the highest five-star ratings from credit-rating firm Standard & Poor's before the ranking was put ``on hold'' July 17. That meant it was under review because of ``issues potentially affecting the management of the fund,'' S&P said.

    Basis earned the ``Fund of the Year'' title at the 2005 AsiaHedge awards and Macquarie Bank Ltd.'s ``Skilled Manager of the Year'' in 2004.

    `Significant Devaluation'

    ``Following the well-publicized volatility in the market related to the U.S. subprime lending defaults, by June 2007, Basis Yield began to suffer a significant devaluation of its asset portfolio,'' the fund said in its New York petition that explained why it was liquidating.

    The surge in U.S. home-loan payment defaults has forced more than 100 mortgage companies to close, seek bankruptcy protection or put themselves up for sale. Defaults on subprime loans in the first quarter climbed to the highest since 2002, according to the Mortgage Bankers Association. The defaults led investors to shun securities backed by subprime mortgages.

    Basis Yield Alpha has fewer than 49 creditors, according to the petition, which was filed under Chapter 15 of the U.S. bankruptcy law. Using Chapter 15, a foreign-based company can win protection from U.S. creditors while it liquidates or reorganizes overseas.

    Court Hearing

    Judge Robert Gerber in Manhattan will hear a request on Sept. 6. to temporarily bar U.S. lawsuits while the company makes its case for permanent Chapter 15 protection. Today, Basis was granted a restraining order protecting it from lawsuits until that hearing.

    Basis Yield, incorporated in 2005, invested in high-yield corporate and structured credit securities, including mortgage- backed bonds and collateralized-debt obligations, according to court documents.

    In July, Basis Capital hired Blackstone Group LP as an adviser in an effort to avoid a fire sale of assets. Bear Stearns also hired Blackstone to liquidate the two hedge funds that collapsed following losses in subprime mortgages. Bear Stearns sought bankruptcy protection for the funds last month.

    Basis Yield's Operations

    According to a Basis Capital Web site, Basis Capital Alpha is a regulated Cayman Islands mutual fund. The portfolio is described in the New York petition as a ``master fund'' that has two ``feeder funds,'' Basis Yield Alpha Fund for U.S. taxable investors and Basis Yield Alpha Fund for all other investors.

    The Basis Yield Alpha Fund has an office at Fortis Prime Fund Solutions, a U.K.-based fund that also serves as an administrator to the so-called feeder funds, the company said.

    Basis Yield Alpha said the devaluation of its assets led to margin calls from ``trade counterparties'' that it was unable to meet. The counterparties then issued default notices and seized the assets that had been subject to repurchase agreements.

    Sandra Corbett, Basis Yield's lawyer with Cayman Islands- based law firm Walkers, said in a court declaration the funds plan to liquidate with Hugh Dickson, Stephen John Akers and Paul Andrew Billingham acting as joint provisional liquidators.

    The case is in re Basis Yield Alpha Fund (Master), 07- 12762, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

    To contact the reporters on this story: Tiffany Kary in New York bankruptcy court at ; Jenny Strasburg in New York at

    Last Updated: August 29, 2007 17:19 EDT
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