Lower-ranking creditors of Mainsail II have been told that they will lose all their cash after the $1.6 billion (£800 million) structured investment vehicle (SIV-lite) managed by Solent Capital Partners went into the hands of receivers yesterday. Mainsail II was one of several SIV-lites structured by Barclays Capital and managed by banks and hedge funds that ran into trouble early in the credit crunch.

The impact of the collapse of the fund has spread to Merrill Lynch, the US investment bank, which had brokered the sale of $20 million of Mainsail II commercial paper to the US state of Maine. That debt is effectively worthless. David Lemoine, the Maine treasurer, said yesterday that he had banned the bank from participating in future bond deals with the state until “the Mainsail II matter is fixed”.

However, KPMG, which was appointed as receiver to the fund yesterday, has indicated that a swift resolution of the matter was not expected. Mainsail II invested heavily in securities backed by US sub-prime mortgages.

In a statement issued this week, Mainsail II said that a sale of its damaged investments would not generate enough cash to repay its senior secured debtholders in full. “Accordingly, there is no prospect of the holders of mezzanine notes or capital notes receiving any payment in respect of amounts owing to them,” the SIV-lite said.

Kris Beighton, of KPMG’s Cayman Islands office, and Richard Heis and Mick McLoughlin, of KPMG in the UK, were called in by Bank of New York Mellon, Mainsail II’s trustee, after falls in the value of the SIV-lite’s investment portfolio caused it to breach preset triggers.

The receivers will assess the fund’s assets and decide how to restructure Mainsail II’s debt. KPMG is expected to attempt to agree a refinancing package with the senior secured creditors, who make up the majority of the fund’s noteholders. Sources said that some creditors were likely to demand immediate cash repayment but that a fire sale of the assets would be a last resort. “Others will think that the market can’t get any worse so that they may as well participate in a repackaging of their notes,” the source said.

SIV-lites were created by BarCap as a way for investment funds to achieve higher yields in benign credit conditions. The funds are usually invested in long-term assets, such as mortgage-backed securities, funded by the sale of short-term commercial paper.

But a collapse in the US mortgage market meant that the value of the SIV-lites’ investments plunged and they were unable to roll over their debts to the paperholders because investors wanted to dump any mortgage-related holdings. The funds were forced to start selling their assets cheaply to cover repayments to creditors.

Soon after the SIV-lites began to falter, Edward Cahill, the BarCap employee who had designed the investment vehicles, resigned.

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