The hedge fund refashioning risky corporate debt
A quiet corner of financial markets that had worried regulators before the pandemic for sharply increasing issuance of risky corporate debt is back in vogue. And one of Wall Street’s hottest hedge funds of the past few years is hoping to capitalise on the new found enthusiasm.
Scott Goodwin and Jon Lewinsohn have had a good run since launching Diameter Capital in 2017 and posted returns north of 20 per cent in their main hedge fund last year, writes the FT’s Joe Rennison.
Now, they’re hoping a $250m seed financing from backers including Apollo Global Management and Corbin Capital will help them take collateralised loan obligations mainstream.
CLOs bundle up loans made to lower-rated companies and use them to back interest payments on a stack of new debt with cascading exposure to the default of the underlying loans.
It means risky debt typically bought by specialist investors is re-crafted into higher-rated securities bought by more traditional asset managers (typically at a lower risk).
These managers get comfortable investing in the CLO because they are insulated by a smaller group of investors willing to bear the brunt of the losses should companies renege on their loans (in exchange for the potential of much higher returns).
Regulators had become concerned before the pandemic that CLO managers hungry for new loans to package up had spurred a degradation in underwriting standards in the leveraged loan market that could exacerbate a credit crisis if the economy faltered.
But over a year on from the worst of the coronavirus induced sell-off, CLO managers feel vindicated after the market survived largely intact, even if it was helped along the way by record intervention in credit markets by the Federal Reserve.
The Fed had provided a new lease of life to the market, with investors drawn to the potential for higher returns in an otherwise low-yielding world.
Managers are responding by seeking out funding sources for a number of new deals, rather than raising new capital for each new CLO, as was once more common.
Diameter intends to use the money it has raised to issue six CLOs, building on a partnership made after Apollo supported Diameter’s move into the similar market for collateralised debt obligations.
It will also look to build on Goodwin’s long-held relationship with his first boss when he worked at Citigroup, and now Apollo co-president Jim Zelter.
Activists face the music in the battle against Vincent Bolloré
French media conglomerate Vivendi’s proposed spin off of Universal Music Group is set to be the event of the season.
The deal features a crème de la crème cast of characters from Vivendi’s billionaire controlling shareholder Vincent Bolloré to the hedge fund tycoon Bill Ackman, whose blank-cheque company Pershing Square Tontine Holdings is in talks to buy a 10 per cent stake in the record label behind artists such as Lady Gaga and Taylor Swift. (It’s a complicated deal — DD breaks it down in detail here.)
But there will be some uninvited guests, too.
Third Point, the New York activist investor run by Dan Loeb, has built a “significant” stake in Vivendi, as reported by the FT’s Leila Abboud and DD’s Ortenca Aliaj. The fund declined to comment on how it planned to use its holding, as the June 22 Vivendi shareholders’ vote looms.
Meanwhile, shareholders including little-known hedge funds Bluebell Capital and Artisan Partners have come out against the Ackman deal. If Loeb opts to side with his fellow activists, it could turn into a face-off between two titans of the investing world.
But as Lex points out, the odds aren’t in Bluebell and Artisan’s favour. Vivendi only needs a 50 per cent majority to approve the spin-off, and Bolloré’s holding company already owns nearly 30 per cent of the vote.
Rebellious minority shareholders would need more than just Loeb in their corner. And even that is uncertain.