The Financial Services Compensation Scheme looks set to stump up $10m to allow a controlled liquidation of Lifemark after the main contender for a rescue of the fund pulled out.
Keydata founder Stewart Ford had brokered a $150m rescue bid to put to bondholders who want to try to save the portfolio in the hope their investments will make a return at maturity, backed by US investment bank Seaport - the Seaport Proposal.
But the bank has now backed out of providing funding after KPMG, the provisional administrator of the portfolio, revealed the bank's name in a public note to bondholders.
The only other main option available to investors is a controlled liquidation supported by a temporary cash injection from the FSCS, one the biggest holders of bonds in the portfolio after assuming right from investors it compensated.
This would see the FSCS pump a $10m loan into the portfolio to ward off any immediate defaults of its secondhand life policy assets and keep some of its value intact, while the fund is wound down.
The $10m FSCS loan would rank in priority to the holders of the bonds, and must be repaid three months after the date investors agree to adopt it. If Lifemark fails to pay back the loan in time, interest will accrue on the overdue amount.
If the FSCS proposal is not passed and no direction is sought from the English courts, Lifemark will face the risk of running out of cash and be compelled to enter into 'judicial' liquidation.
Bondholders could receive nothing following a judicial liquidation, as certain creditors may rank ahead of them and the proceeds of sale are expected to be significantly worse than in a controlled liquidation.
KPMG's provisional administration of Lifemark will end on 10 November 2011 unless extended by the bondholder vote to complete the wind down of the fund.
The investors meeting to decide the future of the portfolio is at 10am on 10 November at The Barbican Hall, London.
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