This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com
--------------------------------------------------------------------------------------------------------
Aladdin Capital watched the havoc wreaked by the credit crunch from the front lines in 2008 as selloffs in leveraged loans hammered CLOs, Debtwire reports. This year, the asset manager is betting it can use a wave of corporate defaults, and its own familiarity with those credits, to generate some outsized returns.
The asset manager known primarily for its issuance of CLOs plans to launch a USD 500m DIP-focused fund in 2Q09. Odds are, Aladdin won’t be the last to invest in a DIP lending strategy, according to multiple restructuring industry veterans.
The massive pull back of legacy DIP lenders – read commercial banks – since last fall has left numerous companies burning cash as they scramble to find financing to fund their reorganizations. It was just a matter of time before the supply/demand imbalance attracted new private capital into the game.
“Clearly there is a void of lenders willing to service the middle market right now, even though that’s where most of the businesses that need DIP financing are located,” said Michael Bruder, Head of Macquarie’s Restructuring Advisory and Special Situations Practice in New York.
Aladdin has signed up two CIT Group veterans, Victor Russo and Luke Gosselin, to run the fund mandated to invest exclusively in DIP facilities. Gosselin also most recently spent five years at Goldman Sachs. The fund is expected to launch in 2Q09, sized initially at about USD 500m, according to Neal Neilinger, Vice-Chairman and Chief Investment Officer of Aladdin.
It remains to be seen how well new entrants will execute when forced to compete with pre-petition lenders. In the past, distressed direct lending has been the playground of a few well-capitalized specialists like Cerberus Capital and Silver Point Capital who tend to fund entire loans on their own and have a reputation for playing hardball.
Starting from pole position
Aladdin could run into difficulties if it ends up butting heads against existing prepetition lenders who have been funding many of the DIPs financing bankruptcies in recent weeks, said Samuel Star, Senior Managing Director in FTI’s Corporate Finance. It takes pretty sharp elbows to offer priming DIPs versus post petition facilities that roll up existing secured debt, and it is not a strategy that wins you many friends, according to Star.
But as a pre-existing lender itself in many of the imminent restructurings in the leveraged loan market, Aladdin is in pole position to provide DIP funds. Aladdin’s exposure to hundreds of credits via its CLOs provides it with a detailed picture of the market and rising default rates this year will inevitably expose several of its holdings to restructurings, Neilinger said.
According to Neilinger, the DIP fund will play to Russo’s and Gosselin’s expertise in structuring and managing ABL facilities. While investing in DIP facilities is not a new concept for many hedge funds, Neilinger stressed that Aladdin’s approach will be much more focused on situations where it can exert significant influence.
Aladdin will participate in more club style deals where it is easier to understand the motives of co-lenders, Gosselin added. The fund will start out with a staff of about 10 people, and will also draw on the expertise of Aladdin’s CLO analyst team. Over time, Neilinger hopes to be able to expand the fund’s mandate into ABL finance to expand its longevity beyond the current distressed cycle.
Attractive risk-reward
In this environment, a fund willing to put capital to work to help the growing list of DIP hungry borrowers will likely draw an audience, Gosselin said. The road to liquidation is littered with borrowers that could not get DIP financing from existing lenders.
Born out of reverse inquiry from existing clients, Aladdin will target the fund at endowments and pension funds by highlighting the security of DIP lenders’ super priority status, the loans’ shorter durations, and their relatively low price volatility, said Neilinger.
And given the broad drought of liquidity afflicting the markets, that relatively low risk can pay outsized returns. “Right now DIP pricing is attractive, so we have a generational opportunity to capture an unlevered return in the mid-teens,” said Gosselin.
Aluminum plate manufacturer Aleris, for example, inked a USD 1.075bn DIP with legacy lenders as part of its bankruptcy filing last week. The new money portion of the USD 500m one-year term loan is priced at Libor+ 1000bps, and features a 3% Libor floor. Deutsche Bank is the bookrunner on the new money term loan, with Oaktree Capital and Apollo also participating in the facility. The rest of the DIP is structured as a USD 575m ABL revolver tranche.
Pliant also filed for bankruptcy last week after a group of first lien bond holders led by Wayzata and DDJ Capital agreed to back a USD 75m Libor+ 1200bps DIP.
Finally, Spectrum Brands received interim approval for access to a USD 235m Libor+ 450m DIP loan provided by its existing ABL lenders on 5 February. The debtor also received court approval to tap a USD 45m Libor+ 1,400bps subordinated participation facility being provided by DE Shaw, Harbinger and Avenue Capital. The trio of funds beat out a competing USD 75m DIP proposal from a Goldman Sachs-led TL lender group, after the debtor cited uncertainty about the financing being committed and concern that its largest bondholders would withdraw support for the pre-negotiated plan of reorganization, as reported.
“Given the desire among investors to focus on senior-most instruments and the void currently in the market, I think it’s a smart strategy and I think the market needs it now,” said Michael Reilly, co-chair of Bingham McCutchen’s Financial Restructuring Group. Like most good games on Wall Street, it is bound to be copied if it produces outsized returns, he added.
--------------------------------------------------------------------------------------------------------
For more information or to inquire about a trial please email sales@debtwire.com or call Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731
