The Distressed Debt Alert

Avenue Capital Raising $3B Distressed Fund

Avenue Capital Group, a New York-based investment firm that specializes in distressed debt, is raising a $3 billion distressed debt fund that should close in about three months, Bloomberg News reported.

Source: News Story

The Congressional Oversight Panel said in its February report that an impending wave of commercial real estate loan defaults over the next four years could create up to $300 billion in losses for banks, weighing most heavily on mid-size and community banks and extending the financial crisis for several more years.

The panel, which was created by the U.S. Treasury Department to monitor the Troubled Asset Relief Program, said that nearly half of the $1.4 trillion in commercial real estate loans coming due from 2010 to 2014 are worth less than their balances as commercial property values have fallen by 40% since their peak in 2007. This situation will make it difficult to refinance these mortgages. The panel's report said that in a worst-case scenario, a wave of defaults could force hundreds more community and mid-sized banks into insolvency that would "disrupt local communities, undermine the economic recovery and extend an already painful recession."

The panel said that the financial crisis will not end until the Treasury Department and bank supervisors address the state of the commercial real estate markets and the potential impact that a break-down in those markets could have on local communities, small businesses, and individuals.

The panel warned that "delaying writedowns in advance of a hoped-for recovery in mid- and long-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang."

Homebuilder Lennar Corp. teamed with the Federal Deposit Insurance Corp. to purchase two portfolios of residential and commercial real estate loans with a total unpaid balance of $3.05 billion.

Lennar said in a filing with the Securities and Exchange Commission that it purchased a 40% interest in the limited liability companies that will hold the loans in a $1.22 billion package that includes equity and debt financing from the FDIC. The Miami-based homebuilder contributed $243 million of equity and secured $365 million in equity from the FDIC, as well as $627 million in non-recourse financing underwritten at about 50% of cost for seven years at 0% interest. The financing package includes an $18 million FDIC guarantee fee that is not included in the purchase price.

The FDIC will retain 60% ownership in the LLCs that will hold the loans.

The two portfolios, known as the KBW and Pentalpha portfolios, consist of about 5,500 distressed residential and commercial real estate loans, from 22 failed-bank receiverships, with an average balance of $555,000. The loans are 90% non-performing. Lennar's subsidiary Rialto Capital Advisors will conduct day-to-day management and workouts of the portfolios.

Source: SEC Filing

Wegner Motorsports, a Markesan, Wis.-based manufacturer of engines and parts for NASCAR racing and other motorsports, filed for Chapter 11 bankruptcy, the Milwaukee Journal Sentinel reported.

The 35-year-old company listed assets of about $1 million and liabilities of $2.6 million, including $2.2 million owed to First National Bank of Berlin.

Source: News Story

Four affiliates of the Lembi Group's CitiApartments Inc., which is San Francisco's biggest apartment owner, filed for Chapter 11 bankruptcy, Reuters reported.

The four entities that filed Chapter 11 include Citi Properties I DE, Hermann Street DE, Sutter Associates DE, and Trophy Properties I DE. The four entities collectively own 16 apartment properties, which secured a $132.4 million loan.

The Lembi Group had financed approximately $1.2 billion in apartment loans before the economy turned and the company began handing back properties to banks and other lenders.

Source: News Story

Winston & Strawn said that it added attorneys Lawrence A. Larose and Samuel S. Kohn to the law firm's restructuring and insolvency group in its New York office.

Larose was previously the lead counsel at MBIA Insurance. He also previously led the corporate restructuring practice at the law firm of Dewey & LeBoeuf.

Larose will focus on the restructuring of companies in and out of court. He will represent major financial institutions in the acquisition and disposition of businesses and will represent companies issuing securities.

Kohn specializes in business reorganizations, including Chapter 11 cases and out-of-court restructurings. Kohn also joined the firm from Dewey & LeBoeuf.

Source: Press Release

Penton Media, publisher of trade magazines including Business Finance and National Real Estate Investor, said it reached an agreement with its lenders and will file a prepackaged Chapter 11 plan of reorganization, which will eliminate $270 million of the company's debt.

Source: Press Release

The default rate on bonds issued by U.S companies with speculative-grade credit ratings fell by .3 percentage points in January from the previous month, to 13.6%, Moody's Investors Service said. The global speculative-grade default rate declined by .5 percentage points to 12.5%.

Source: Press Release

Hedge funds that mainly invest in distressed assets outperformed other funds last month, according to Hennessee Group.

Hennessee's index of distressed-investment hedge funds generated a return of 1.06% in January, while the Hennessee Index of hedge funds of all strategies turned in a loss of .50%.

Source: Press Release

LBC Credit Partners said it hired Douglas L. Goodwillie, a former operating director at private equity firm Arsenal Capital Partners, as a director in its Chicago office.

Source: Press Release