The Distressed Debt Alert

LBG Realty Advisors will tap public employee pension funds to raise $250 million for its LBG Real Estate Opportunity Fund to purchase distressed retail real estate assets and loans in the western U.S.

The Los Angeles-based commercial real estate investment firm expects to close the fund by the year's end and begin purchasing assets and loans in early 2010, President Leslie Lundin said. LBG Realty Advisors will target portfolios and one-off purchases from $10 million to $50 million and seek cash-on-cash returns in the 12% to 15% range. The investor will secure bank lines to provide leverage at about 75% and will hold properties for six years.

LBG Realty Advisor's strategy will be to purchase distressed loans secured by properties and reposition or lease up the properties to improve returns. However, the investor will not buy vacant space.

LBG will use institutional consultants The Townsend Group and Courtland Partners to help line up public employee pension fund investors, which may include the New York State Teachers Retirement System, the California Public Employees Retirement System, the California State Teachers Retirement System and the Illinois State Teachers Retirement System.

Lundin said that public employee pension funds have opened the door to her new venture through an initiative by many institutional investors to co-invest with women-owned firms.

Although LBG Realty Advisors' expertise lies in retail, it will consider industrial, office and multifamily loans and properties, she said.

Private equity investor MidOcean Partners has formed a middle market credit fund that will allocate capital to bank loans, high yield bonds, mezzanine debt, and special situations.

MidOcean Partners manages $3.5 billion in investor commitments. The firm generally makes control investments in companies in the U.S. and Europe and has offices in New York and London.

The credit fund will be run by president Steve Shenfeld, who was previously a PE fund manager for MD Sass, which handles $6 billion in assets.

Joining Shenfeld from Deerfield Capital are managing director Mike Apfel and principal Jim Wiant.

Source: Press Release

Gambling will continue after the bankruptcy of the Twin River slot casino and dog racing track, but the restructuring plan is likely to put the hounds out of business.

Rhode Island's Twin River ran out of options for dealing with about $589 million in debt owed to Merrill Lynch Capital and other lenders that participated in a 2005 deal to purchase the track, and spend $200 million renovating it.

Formerly known as Lincoln Park, the entertainment attraction was renovated and renamed after being purchased by BLB Investors in 2005. BLB was formed as a partnership between Waterford Group, Kerzner International and Starwood Capital Group, which joined forces to make the $435 million acquisition. Greyhound race tracks and a horse track in Colorado were also included.

The company filed for Chapter 11 protection on Tuesday in the U.S. Bankruptcy Court for Delaware. In recent months, Rhode Island's governor and treasurer had both discussed the possibility of the state getting involved in casino's restructuring or buying the property out of bankruptcy.

The restructuring proposal calls for cooperation between the company, lenders, and the state. The company found support from enough first and second lien lenders to allow for the elimination of $290 million in debt in exchange for the equity interest of parent company UTGR Inc. But the proposal also requires the Rhode Island state Legislature to allow the facility to remain open on a 24-hour basis and to eliminate greyhound racing, which is currently required by statute to take place on a certain number of days per year.

Dog racing is unprofitable, according to the bankruptcy filing, which says the track loses $10 million per year.

Meanwhile, revenues from video terminal gaming were $410 million last year.

The proposal would also require the state not to increase taxes on the slot revenues. Rhode Island already receives 61% of the slot revenues.

Encore Enterprises, a Dallas-based commercial real estate investor, launched its second opportunity fund to purchase distressed real estate assets and loans shortly after closing its first fund, the $150 million Encore Opportunity Fund I.

Encore will raise from $150 million to $300 million for Encore Opportunity Fund II to purchase mostly distressed retail, multifamily, and hospitality assets and loans in Texas and the Southeast. The fund's parameters mirror Opportunity Fund I, as it seeks returns in the 14% to 18% range for its investors.

Encore hopes to close Opportunity Fund II in six months which would match the speed of the first fund's closing.

"Opportunity Fund I closed a lot sooner than we thought it would, especially for this difficult market," Encore Managing Director Lawrence Jones said. "We would like to think we can close [Fund II] by the end of the year, but it will be a challenging market to raise funds."

Encore expects to see high demand for Fund II from high net-worth individuals who were also the driving force behind Fund I. Both funds will initially invest in one-off assets and loans, but will also purchase portfolios once they become available at more "realistic" prices, Jones said. A significant amount of assets and loans may not hit the market for 30 to 90 days, as many lenders are still figuring out pricing, he said.

"Skeptics think banks are sitting on loans that aren't worth what banks think they are worth," Jones said. "Until banks get realistic, we'll look at one-off distressed loans that banks don't want."

Encore will seek co-investment partners for larger transactions and may also invest with partners in the federal government's Public-Private Investment Program once it is under way.

In a costly footnote to the Chrysler Group's restructuring, former dealership operator Dennis Hecker is accused of fraud after seeking Chapter 7 protection from $476 million in defaulted loans from Chrysler.

Trustee Brian Leonard claims that entities controlled by Hecker misappropriated over $100 million, according to a lawsuit filed against several Hecker businesses on Tuesday.

The lawsuit and bankruptcy were both filed in the in the U.S. Bankruptcy Court for Minnesota.

Hecker, a Crosslake, Minn., resident who operated numerous car dealerships and auto rental outlets, defaulted on the loans in October of last year, according to Chrysler's court filings. In April, Chrysler obtained a judgment against Hecker, and on June 4 he filed his Chapter 7 petition, listing debts in the range of $500 million to $1 billion and assets of $50 million to $100 million.

Hecker ran 17 dealerships in Minnesota and California, and also operated auto leasing businesses in several states.

The bankruptcy trustee alleges that Hecker used several leasing companies in a scheme that ultimately allowed the improper transfer of $111 million to entities controlled by Hecker and others who were not entitled to the funds. Over $80 million in transfers took place in 2008 alone, according to the trustee's lawsuit.

The trustee is seeking to void the payments, which he says were made when Hecker's company was insolvent.

Hecker's attorney disputes the lawsuit's claims. "We believe there is no misappropriation," Fredrikson & Byron bankruptcy chair Clinton Cutler said in an email. Cutler maintains that the complaint characterizes legitimate lease payments as fraudulent transfers.

Chrysler is also objecting to an attempt by another creditor, Crown Bank, to obtain relief from the bankruptcy stay and take possession of Hecker's boat slip lease agreements with a marina located in Bayport, Minn.

Flu treatment developer Protein Sciences Corp. was forced into bankruptcy by creditors, one of whom is suing company executives over an asset purchase deal that fell through.

Three creditors of the Meriden, Conn.-based vaccine maker filed an involuntary Chapter 7 petition on Monday in the U.S. Bankruptcy Court for Delaware.

A week earlier, Protein Sciences had said in a statement that it was using recombinant DNA technology to make PanBlok, which the company claimed was the only vaccine effective against the H1N1 flu virus.

Creditors Emergent Manufacturing Operations Meriden (EMOM), PSI Services, and Impact Clinical Trials said in the filing that Protein Sciences owed them a total of about $11.7 million. Most of the debt stems from an asset purchase agreement with an EMOM subsidiary.

EMOM's parent company, Emergent BioSolutions Inc., is suing Protein Sciences executives. The lawsuit claims that the executives committed fraud in a 2008 agreement designed to keep Protein Sciences running until its assets were to be purchased by Emergent in June 2008. Emergent said in a regulatory filing on June 9 of this year that Protein Sciences did not complete the sale and that it did not repay $10 million in operating funds loaned in anticipation of the purchase. When the purchase was not completed last year and Protein Sciences defaulted on the $10 million loan, Emergent twice agreed to extend the deadline, ultimately agreeing not to foreclose until May 29 of this year. The forbearance agreement also put a lawsuit Emergent had filed on hold until the end of May.

The lawsuit claims that Protein Sciences CEO Daniel Adams and Chief Operating Officer Manon Cox fraudulently induced Emergent to provide bridge financing for the proposed purchase, which the two executives had no intention of completing. The suit was filed last year in the U.S. District Court for Connecticut. Adams and Cox are also accused of misleading Emergent about the company's financial condition and the viability of its FluBlok vaccine. The complaint also alleges that the executives stalled on performing due diligence, tried to turn shareholders against Emergent, and misrepresented prospects for funding from the government's Biomedical Advanced Research and Development Authority. Emergent also accuses the pair of violating an "anti-shop" provision of the agreement by soliciting interest from at least one other potential buyer, GlaxoSmithKline.

Adams and Cox are interested in settling the lawsuit out of court while Emergent is prepared to litigate, according to a June 15 legal filing. An attorney for Adams and Cox did not immediately return phone calls from The Distressed Debt Alert.

Telecom company Metromedia International Group is seeking Chapter 11 protection to avoid immediate liquidation as required by a judgment in a lawsuit.

The company filed in the U.S. Bankruptcy Court for Delaware on June 18.

Two weeks earlier, the Delaware Court of Chancery had issued a $188 million judgment against Metromedia on behalf of a group of preferred stockholders. The judgment would have required the company to pay several years of dividends that had accrued over years leading up to a 2007 merger. Debts from the lawsuit include $50 million owed to investment firm Zazove Associates, $40.9 million owed to Private Management Group, $14.1 owed to Gracie Capital, $10.8 million owed to JPMorgan Chase, and $10.9 million owed to Farallon Capital.

Metromedia owns illiquid emerging market assets and has about $50 million in cash, according to its bankruptcy filing.

The Charlotte, N.C.-based company has been in various businesses for decades. After a business combination in 1995, Metromedia began focusing on telecommunications in Eastern Bloc emerging markets, including the former Soviet Union, Georgia and the Caucus region adjoining Russia, Turkey and Azerbaijan.

Beset by cash flow problems, Metromedia restructured in 2007. Salford Capital, a firm controlled by Metromedia's management, paid $400 million for the company's assets in a complex transaction.

Preferred shareholders did not agree with the deal's valuations, however, and sued, citing rights they had to have Metromedia's assets appraised.

An immediate foreclosure under the Delaware state court's judgment would prevent an orderly restructuring of Metromedia and limit recovery for all of its investors and creditors if illiquid telecommunications assets are sold in a hurry, the company said in its bankruptcy filing. Metromedia is appealing the judgment, and filed for Chapter 11 to gain time to file its appeal and market its assets.

Peter Lupoff recently left his portfolio manager position with Millennium Management and is raising capital for his new distressed debt hedge fund, Tiburon Capital Management.

Tiburon will invest in distressed debt starting in August, Lupoff told The Distressed Debt Alert. Lupoff said that he ultimately hopes to raise $100 million, but will start doing business out of New York with capital available at the beginning of August.

Tiburon Capital will later move to the San Francisco Bay Area, Lupoff said.

The firm will offer different share structures to suit the time horizons and liquidity needs of different types of investors.

Lupoff acknowledged the current popularity of distressed debt investing, but he cautioned against approaching current credit markets with a simplistic value-investing approach.

"Frankly, I would be taking money off the table now and I wouldn't be long credit other than in very select trade ideas that we have," Lupoff said. "The technicals of the markets will create another downdraft, and we'll get another bite at the apple."

Lupoff said that while he does not plan to use leverage, he is willing to take short positions in some issues. "It pays to have not just a value sensibility but a trading sensibility in these markets, and proper risk controls to facilitate taking money off the table when it's clear that that's the right thing to do, and potentially to collectively go short when you see those opportunities on a hedged basis," he said. 

A lack of liquidity in the distressed debt market poses serious problems for investors, according to Lupoff. "The idea that there's a lot of money in distressed right now is not entirely accurate," he said. "There's a lot of interest and a lot price appreciation, but liquidity is a façade. There can come a time and place when things can go wrong, and a bond or a bank position can trade down 10 or 20 points because $5 million or $7 million worth is for sale."

Lupoff said that he also suspects that some distressed debt players will enter the market because of its sudden popularity, not because of experience and expertise in the arena. "There are people that are really in this business, and there are people that say 'Oh this is the flavor of the moment. Let's put it on the chalkboard in front of the restaurant--now serving credit strategies,'" he said.

Cantor Fitzgerald & Co. hired former Merrill Lynch leveraged debt specialist David Stith as part of a plan to add 50 to 70 bankers over the next 12 to18 months to specifically target middle market clients.

Stith joins Cantor as managing director and head of leveraged finance and financial sponsor coverage. He was most recently a managing director in Merrill's leveraged finance group.

Cantor CEO Shawn Matthews told Bloomberg News that the company may hire as many as 100 people to capitalize on an environment where $1.5 trillion in write-downs and losses could lead to a 25% default rate.

Cantor's debt capital markets business offers services in repo and securities lending, mortgage-backed and asset-backed securities, corporate bonds, interest rate products, agencies, and structured products.
Sources: Press Release, News Story

Middle market investor Insight Equity is raising $250 million for its Mezzanine I fund and $500 million for its Insight Equity II fund, according to regulatory filings.

The Dallas-based firm manages about $700 million in two buyout funds and the mezzanine debt fund. Insight specializes in partnering with companies in complex or challenging situations, including corporate divestitures, bankruptcies, restructurings, and liquidity events, according to the firm's website. 

Insight has already raised $99 million for the mezzanine fund and $312 million for the equity fund.

UBS Securities is involved in marketing the funds.

Jason Mudrick, former manager and founder of the Contrarian Equity Fund, is gathering capital for a new distressed fund.

Mudrick said the current distressed debt climate is different than it has been in the past, the trade publication Absolute Return reported. Unlike in past distressed cycles, bank debt is the fulcrum security in many restructurings rather than high-yield bonds, Mudrick said. He also said that in the past nine years the bank debt market has more than doubled in size to $1.6 trillion.

A bankruptcy judge put a stop to plans for the National Hockey League's Phoenix Coyotes to move to Canada, at least for now.

The team's owner, Jerry Moyes, filed a petition for Chapter 11 protection last month in the U.S. Bankruptcy Court for Arizona. Moyes is the largest unsecured creditor, and the organization owes him over $100 million.

Jim Balsillie, co-CEO of Blackberry maker Research in Motion, made a $212 million offer to buy the financially strapped Coyotes, whose uninspiring performance has cost Moyes millions. But Balsillie's bid featured a June 29 deadline, and Judge Redfield Baum wrote in a ruling on Monday that the deadline did not allow enough time to consider all the ramifications of the proposed sale.

The judge wrote that the case presents "novel and unique issues" to the bankruptcy court because it is the first time a sports team has sought to use the bankruptcy code to force the sale and relocation of the team.

The judge's order dismissed the sale proposal without prejudice, meaning that the sale might fly with sufficient time to consider legal questions, especially those involving the relocation of the team and possible applicability of antitrust laws.

The National Hockey League; the city of Glendale, Ariz., where the Coyotes play; and creditor Aramark Sports and Entertainment Services are objecting to the sale and relocation.

Wrinkle cream maker Isolagen Inc. declared bankruptcy Monday, leaving almost $90 million in debt and virtually no assets.

The company filed its petition in the U.S. Bankruptcy Court for Delaware.

The Exton, Pa.-based company said in a regulatory filing that the Chapter 11 petition would put the company in default on $79 million in convertible subordinated debt, all of which is consequently due along with $1.9 million in interest.

At the end of April, Isolagen borrowed $500,000 in anticipation of bankruptcy by issuing 20% secured notes to eight lenders. Viriathus Capital served as placement agent.

Isolagen currently has $88 million in debt on the books and assets of less than $50,000. In 2004, the company issued a 3.5% convertible subordinated note in a private placement that raised $90 million, according to PrivateRaise, DealFlow Media's data service. Court records show that Isolagen's secured debtors now include private placement participants Highbridge Capital Management and Wolverine Capital Management. Other current holders of the notes include Credit Suisse, JPMorgan, and Akanthos Capital.

Other debts include $8 million relating to a dispute with Agera Laboratories.

The 3.5% debentures were quoted at approximately 15% of par at the end of last year, according to regulatory filings stating that the fair value of the debentures was approximately $13.5 million at that time. The securities traded during January of this year at less than 5% of par value.

The Judicial Conference of the United States told Congress that the nation needs more bankruptcy judges.

The Judicial Conference is the principal agency charged with the administration of the federal court system.

Barbara Lynn, a judge with the U.S. District Court in Dallas and chairman of the Judicial Conference bankruptcy committee, told a House subcommittee yesterday that Congress should authorize 13 new permanent bankruptcy judgeships and make another 22 temporary bankruptcy judgeships permanent. Lynn noted that the rate of bankruptcy filings has been on an upswing since 2006, the Judicial Council said in a statement.

"Without congressional action on the judicial resources recommended by the Conference, the bankruptcy courts could face record filings at the same time as a reduction in judicial resources to handle them," Lynn told the House subcommittee on commercial and administrative law.
Source: Press Release

Edra Blixseth, principal of bankrupt Montana resort Yellowstone Mountain Club, was ordered by a bankruptcy judge to liquidate her personal assets.

Blixseth had asked U.S. Bankruptcy Judge Ralph Kirscher for time to reorganize her affairs and market her property, including a 240-acre estate in California. Yesterday, the judge rejected her request to convert her Chapter 7 personal bankruptcy proceeding to Chapter 11.

Court documents indicate that Blixseth has debts of about $157 million. But in court she stated that she owed as much as $357 million, according to an Associated Press account of the proceedings. Blixseth reportedly said that she fears that a forced liquidation of her assets will attract "bottom feeders."

Blixseth and her ex-husband Timothy Blixseth founded the upscale Yellowstone Mountain Club, a ski resort and residential community near Big Sky. The resort was sold in a bankruptcy auction last month to CrossHarbor Capital Partners.
Source: News Story

Centrecourt Asset Management, a provider of financing for middle market companies, intends to launch a fund that will seek out distressed opportunities.

Representatives of the New York-based fund manager did not return phone calls from The Distressed Debt Alert, but Centrecourt revealed plans to create the fund in a monthly performance review of its CAM Horizon Fund sent to investors on June 9.

Centrecourt said that its chairman and CEO, Richard Smithline, would serve as portfolio manager of the new fund, to be known as CAM Distressed Opportunities Fund.

Centrecourt said it was seeing senior leveraged debt issued by public companies trading at around 66 cents on the dollar. Additionally, Centrecourt suggested that conventional capital providers have abandoned some companies, leaving a vacuum. It also said would take an active role in troubled companies.

"What differentiates what we are planning on doing from what many others are doing is that we will have the capability to take a stake in the business through debt or otherwise, and [we] will have the restructuring operational expertise within our Fund to help straighten out the operations of the business and maximize our investment.," Centrecourt said.

Meanwhile, the fund manager said that its CAM Horizon Fund generated a negative total return of 2.94% in April and a negative total return of 3.94% for 2009 to date. However, the Horizon fund still had generated a total return of nearly 70% since its launch in February 2007, Centrecourt added.

Concerns over commercial property financing are dominating the thoughts of real estate private equity fund sponsors, according to a survey of more than 40 major funds conducted by Ernst & Young.

The survey's results, detailed in the firm's 2009 Market Outlook – Trends in the real estate private equity industry, indicate that three of the top five strategic priorities or challenges this year center on debt issues. Mortgage financing and refinancing maturing debt in the next 12 to 18 months is the No. 1 worry of fund sponsors, while the availability of acquisition financing and the deleveraging of fund portfolios are the fourth and fifth biggest priorities or challenges, Ernst & Young said.

"It seems that, despite the widespread infusions of capital into various lending institutions through economic stimulus programs, there is still very little lending taking place in the real estate industry right now," said Gary Koster, head of the Real Estate Fund Services Practice at Ernst & Young.

Raising capital for new funds and property sales also are among the top five strategic priorities or challenges in 2009.

Survey respondents anticipate that commercial property values will continue to fall this year and that declining real estate fundamentals will reduce net operating income.

Additionally, 92% of the survey's participants don't think the U.S. economy will recover this year.

Source: Press Release

Middle market lender CIT Group issued almost $1 billion in notes as part of an equipment-lease securitization that qualified as collateral under the federal Term Asset-Backed Securities Loan Facility (TALF).

This is the company's 16th equipment-lease securitization, CIT said in a statement yesterday.

The TALF program is intended to invigorate securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). Improving liquidity in the ABS market could make it easier for small businesses to raise financing.

CIT issued $954 million in three classes of fixed-rate notes in an offering to institutional investors. The notes feature a weighted-average coupon of approximately 2.67% and are backed by TALF-eligible small ticket equipment leases.

Small ticket leases usually involve office equipment.

Proceeds from the securitization will primarily be used to refinance an asset-backed commercial paper conduit facility. That will increase CIT's capacity to provide more vendor financing.

New York-based CIT Group specializes in lending, leasing, and advisory services to small and middle market businesses. The company typically provides asset-based loans of $3 million to $20 million to mid-sized businesses with annual sales of $100 million or less.

Barclays Capital and Deutsche Bank Securities served as joint bookrunners on CIT's transaction. Bank of America Securities, J.P. Morgan, and Wachovia Securities served as co-managers.

Source: Press Release

Distressed debt is the primary driver of double-digit returns this year in junk bonds, according to Merrill Lynch.

Merrill's High Yield Master II index has risen 25.4% this year through May, according to a report by credit strategists Oleg Melentyev and Mike Cho. Yields on distressed debt were responsible for 95% of the gains in May. So far this year, the distressed high-yield component of the index is up 39.5%.

The spread level for the distressed component of the index was most recently 1,975 basis points over treasuries. The best high-yield performers were GMAC bonds due 2012 and 2015, with total returns of 189% and 158% respectively. For the five months ending in May, some of the sectors with the highest total returns were financials (54.8%), broadcasting (49.2%), and entertainment (39.3%). In the shorter term, gaming was up 22% in May, while banking was up 73.5% over three months ending in May.

Some deeply distressed bond issuers were able to issue new debt and achieve higher valuations in their existing bonds, the analysts wrote.

The Federal Deposit Insurance Corp. said today that it will delay the planned pilot sale of toxic bank assets under the proposed Public-Private Investment Program.

The announcement underscores widespread doubt over whether enough interest exists to support PPIP's Legacy Loan Program considering that banks have raised billions of dollars in equity over the last several weeks.

"Banks have been able to raise capital without having to sell bad assets through the [Legacy Loan Program], which reflects renewed investor confidence in our banking system," FDIC Chairman Sheila Bair said in the statement. "As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector."

Under PPIP's legacy loan plan, private investors would buy non-performing whole loans made for land acquisition, home construction and other real estate deals that are generally held by banks. In some cases, the program would use more than 90% in taxpayer money to fund the purchase, and the FDIC would guarantee up to 86% of the debt involved.

PPIP's other proposal, the Legacy Securities Program, is still moving forward. Under that plan, private investors would have access to public funds to purchase residential and commercial mortgages held by banks, insurance companies, insurance funds and other institutions.

The FDIC said it would test the "funding mechanism contemplated" by the Legacy Loan Program in a sale of receivership assets this summer. That concept would be similar to the Resolution Trust Corp. program in the 1990s, the agency stated.

The agency also said it would continue to develop the Legacy Loan Program despite the pilot sale's delay.

It could yet be "an important tool to cleanse bank balance sheets and support the credit needs of the economy" in the future, Bair said.

Source: Press Release