Portus receiver gets little help from SocGen

The receiver in the bankruptcy of Portus Alternative Asset Management will be in court again on Friday, submitting its 27th report on the failed hedge fund company.

In its report, receiver KPMG details its efforts to recover the $529.3 million in assets that Portus invested in 15 notes issued by Société Générale (Canada) (SGC).

The receiver has little bargaining power, as it has no legal authority to compel the bank to buy back the notes prior to maturity, but the bank is obligated to provide a secondary market, under its initial deal with Portus.

“SGC has advised the receiver that Société Générale (Canada Branch) is prepared to purchase the SGC notes prior to maturity and [provided] the terms on which it is prepared to do so,” the report states, but the bank refused to explain how it calculated the repurchase price, deeming the information to be proprietary.

KPMG explains that if the sale had taken place on January 18, 2008, the average weighted annual return on the entire portfolio of notes would have been just 2.99%. Over a similar timeline, investors could have earned 4.41% on a zero-coupon Canadian government bond.

The receiver calculates that such a sale would have put $72.7 million into SGC’s coffers, for an average annual return of 3.95%. The bank denies this but has not provided KPMG with an estimate of its own.

“The ultimate sale proceeds would be dependent on prevailing market conditions at the time of a sale of an SGC note,” the report cautions. “The market risk in a sale of an SGC note to an affiliate of SGC is borne by the receiver on behalf of the Portus customers — not the affiliate.”

Due to the lack of transparency, the receiver says it would not be feasible to sell the notes to any other buyer.

The notes are principal protected, providing a return based on a fund of hedge funds known as the Portus Alternative Investment Master Fund (PAIMF). PAIMF assets are spread across 25 underlying hedge funds.

Three of the 15 notes include a 5% multiplier, so a 10% return from the underlying assets would return 10.5% to investors. Another note offers a 50% multiplier, while the remaining 11 include no such provision.

“It is important to note that, where there are months of negative performance in the PAIMF that reduce the return of each SGC note, the negative impact on the return of each SGC note cannot then be offset by positive performance in the PAIMF in subsequent months pursuant to the formula contained in each SGC note.”

The first tranche of two notes, with an aggregate principal of $77 million, matures September 30, 2008. Two more notes, worth $49.6 million, mature December 15, 2008.

A third tranche of four notes matures April 30, 2009, worth $171.4 million, with another four notes worth $163.9 million maturing August 31, 2009. Two notes, with an aggregate principal at maturity of $135 million, will come due on December 31, 2009. The final note, worth $14.2 million, matures December 31, 2011.

Because the notes were purchased at a discount, the initial investment of $529.3 million will be worth $611 million if all notes are held to maturity.

Despite the publication of the report on Thursday, representatives from KPMG declined comment before presenting the report to court on Friday.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com