Highland Capital Management has formed a business development corporation and could list it as soon as the end of this week. Citigroup, Merrill Lynch and Wachovia Securities are lead underwriters for Highland Distressed Opportunities, Inc., which is offering 11,700,000 shares at $15 per share to raise $175.5 million before fees. A Highland official declined comment. Some in the market suggested this may be the first distressed BDC.
Highland entered into a warehouse arrangement with Scotia Capital and in a filing with the Securities and Exchange Commission says it plans to invest primarily in financially troubled or distressed companies that are either middle-market or unlisted companies. Highland defines middle market as those companies with annual revenues between $50 million to $1 billion.
One market player said this is "another example of an institutional manager and alternative investment strategy being made available to the retail investor. It's very topical right now."
As of Feb. 1, Highland had already invested $124.6 million in a number of term loans, including: Advanced Micro Devices, Boston Generating, Burlington Coat Factory, Celanese, Ford Motor Co., HCA, Lear Corp., Neiman Marcus, Time Warner, Trump Entertainment Resorts Holdings, Vanguard and Wenner Media, among others. The lowest priced coupon was LIBOR plus 1 1/2% for Cogentrix and the highest paying was LIBOR plus 6% for Generac Acquisition Corp.
The filing says Highland expects to use leverage of about 35% for total assets, but could use leverage up to 50% of total assets including the proceeds from the leverage.
Highland has never done a BDC before but has tapped the public markets. On Oct. 31, it filed an S1 with the SEC for the initial public offering of Highland Financial Trust, which could appear in the next two quarters. It is structured as a master limited partnership, focused on investing in structured products, specifically the equity in collateralized debt obligations, inclusive of things in the real estate space (CIN, 1/15). Last summer it raised a $690 million public fund, Highland Credit Strategies Fund (7/10). That was the first time Highland was the manager and not a sub-advisor.
According to the filing, Highland, along with Highland Capital Management Europe, has over $33.1 billion in assets under management, $3 billion of which is invested in distressed accounts as of Dec. 31.
