Contrarian Joins Hedge Funds In Building Direct Lending Biz

  • 28 Sep 2003
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Contrarian Capital Management is looking to build a direct lending business that invests in first and second-lien debt, marking the latest entry on a growing list of hedge funds jumping into the lending market. Hedge funds are positioning themselves to capitalize on the continued pullback of commercial banks from lending and the growing need for Chapter 11 exit and rescue financings. Soros Fund Management recently announced an initiative to target this space, while market participants cited Citadel Investment Group and SilverPoint Capital as becoming increasingly active.

"In the last six months we have seen more hedge funds, such as SilverPoint, come in starting an origination business," said Micheal Fishman, an executive v.p. at Wells Fargo Foothill, which partners with hedge funds on senior loan deals. There has been a void in the market for cash flow lending and these funds are replacing what the bank market in better times used to do, he said. Art Penn, of Apollo Advisors, agreed, noting commercial banks are pulling back from lending as they seek to skim fees rather than hold commitments. But hedge funds are willing to own these risks, Penn said.

Contrarian is planning to launch a fund next year called Contrarian Capital Finance, according to a document obtained by LMW sister publication Alternative Investment News. In addition to rescue financings and Chapter 11 exits, the fund will also participate in debtor-in-possession deals, bond repurchases, term loan amortization relief, leveraged and management buyouts and dividend recapitalizations. Investments will also be made in fully secured, increasing rate notes and subordinated debt. The document states, "Contrarian believes there is a large and growing opportunity to provide debt capital to North American and European issuers who no longer meet the profile of traditional bank debt and mezzanine investors, despite the fact these loans would be adequately collateralized by fundamentally sound companies."

The fund has brought on board Steven Czech, who headed up Credit Suisse First Boston's mezzanine finance group, said managing partner Jon Bauer, in a statement. Czech will be responsible for building the direct lending business, which is targeting 12-18% annual returns. In addition to Czech, Contrarian can draw on the experience of Janice Stanton, who ran the bank debt team at Oppenheimer & Co.

Fishman noted that banks are not doing highly leveraged deals due to the lower credit ratings of the companies and their bankruptcy or restructuring risk. But one head of lending at an investment bank disagreed, noting funds such as Contrarian are large investors in deals that banks have put together. The funds are targeting smaller deals for companies that are not getting investment banking coverage, he argued. "The larger houses have difficulty allocating resources to these smaller companies," he said.

  • 28 Sep 2003

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Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 Citi 7,171 21 10.72
2 Bank of America Merrill Lynch (BAML) 6,901 20 10.32
3 JP Morgan 4,776 10 7.14
4 Credit Suisse 4,718 9 7.05
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1 Wells Fargo Securities 68,611.22 170 11.38%
2 Bank of America Merrill Lynch 59,056.08 169 9.80%
3 JPMorgan 56,861.85 163 9.43%
4 Citi 56,521.05 165 9.38%
5 Credit Suisse 44,888.95 123 7.45%