Amid woes over subprime busts, hedge funds prepare to buy

Rising subprime mortgage delinquencies and pulled leveraged loan deals are roiling global credit markets, but some big hedge funds are preparing to buy and others have already begun stepping in to scoop up distressed assets.

August 5, 2007 09:54
2 minute read.


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MarketWatch: In-depth global business coverage Rising subprime mortgage delinquencies and pulled leveraged loan deals are roiling global credit markets, but some big hedge funds are preparing to buy and others have already begun stepping in to scoop up distressed assets. Last week, $15 billion hedge fund firm Citadel Investment Group LLC bought most of the portfolio of Sowood Capital Management LP, another hedge fund that lost more than $1b. in the corporate credit market in July. Other firms, including Marathon Asset Management and Silver Point Capital LP, are raising money to invest in distressed assets in the credit market. "What we're beginning to see now are indications that there's a lot of smart money on the sidelines looking to buy this paper," said Kingman Penniman, president of KDP Investment Advisors, an independent research firm focused on high-yield bonds and leverage loans. The Dow Jones Industrial Average ended July with its worst week in more than four years as investors worried about delayed debt sales for leveraged buyouts and subprime mortgage losses. Corporate credit spreads widened sharply. The KDP High Yield Daily Index, which tracks rates on high-yield corporate debt, stood at 8.79% on Monday, roughly four percentage points above 10-year Treasury bond yields. Two months ago, spreads were roughly half as wide. But markets have stabilized a bit as buyers emerge. Marathon is planning a new fund that will buy distressed mortgage-related assets to take advantage of "carnage" in the subprime home loan business, according to a letter the $9b. hedge fund firm wrote to clients recently. "There is a significant investment opportunity unfolding," Marathon President Bruce Richards said in the letter. The new Distressed Sub-Prime fund "has been established to capitalize from the fallout and carnage in the sub-prime mortgage market with a core investment strategy to opportunistically purchase distressed mortgage-related and sub-prime assets." Silver Point Capital LP, a $7b. credit-focused multi-strategy firm founded by former Goldman Sachs executives, is opportunistically raising more money from current investors to track down mis-priced assets across credit markets. A spokesman for the firm declined to comment. Goldman itself is also responding to the turmoil. The investment bank has been raising money for a new so-called mezzanine fund, but has expanded the size of the vehicle recently because of credit market woes. Mezzanine investments are a cross between equity and debt investments. The debt portion pays interest and ranks senior to a company's common stock. The equity part provides the potential for extra gains. Goldman has been a leading player in mezzanine finance for several years. In 2003, the bank raised a $2.7b. mezzanine fund, which it claimed was the largest one ever at that time. MarketWatch: In-depth global business coverage

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