Archive for the “Peloton Partners” Category

From Citigroup to Bear Stearns, the list of major hedge funds that are on the brink of collapse or have halted investor withdrawals keeps growing by the day.

A number of news stories have given ink to the recent fall from grace of many hedge funds and the implications it has for other market participants. In an article in the Wall Street Journal, Liz Rappaport and Justin Lahart concluded that the pressures in one market no doubt render consequences in another. In this case, the troubles that some hedge funds are experiencing threaten to further weaken lending, borrowing, spending and investment in the U.S. economy.Â

According to a March 5, 2008, story in Business Week, at least 24 hedge funds have barred or limited investors from taking their money out of the funds, thereby tying up tens of billions of dollars for an indefinite period of time. A number of hedge funds have gone this route to avoid selling illiquid assets at fire-sale prices, which would almost certainly put a major dent of losses in their portfolios.

Other hedge funds are taking a different approach by liquidating their funds to maximize investor value or minimize losses rather than gamble on an uncertain future. For example, on March 5, Peloton Partners announced plans to liquidate its largest hedge funds due to various investments tied to subprime and Alt A mortgages. As these investments spiraled downward in value, the funds’ banks, Goldman Sachs, Merrill Lynch and UBS, demanded more collateral, leaving the funds with no alternative but to liquidate.

A few days later, on March 12, Drake Management announced the possibility of shutting down its largest hedge fund – Drake Global Opportunities Fund – and said it planned to evaluate closing two others, the Drake Low Volatility Fund and the Drake Absolute Return Fund.

Looking ahead, the liquidity problem for some major hedge funds is likely to continue, as more lenders, including Wall Street banks, demand that the funds put up more collateral to secure their loans. Bloomberg.com reports that since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, were forced to liquidate or sell holdings for this very reason.

In turn, the continuing meltdown of hedge funds will create a domino effect, producing not only more turmoil on Wall Street but on Main Street, as well.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.

The news is grim for Carlyle Capital. Unable to meet margin calls, the highly leveraged hedge fund and publicly traded affiliate of Carlyle Group is calling it quits. Investors in the fund are likely to lose $900 million.

Carlyle Capital’s troubles came to a head in early March, when margin calls from Deutsche Bank, J.P. Morgan Chase and other lenders reached more than $400 million. Some lenders then began to seize the fund’s collateral and its chief asset – AAA-rated mortgage-backed securities.

David Rubenstein, along with William E. Conway Jr. and Daniel D’Aniello, is a co-founder of Carlyle Group, and reportedly was planning a restructuring arrangement to invest up to $500 million in Carlyle Capital. The idea was that lenders would hold off from seizing the company for up to a year to allow time for the securities to increase in value.

The securities – which were from Fannie Mae, Freddie Mac and Ginny Mae – had a historic record as safe investments, according to Rubenstein, and therefore unlikely to decline in value. But as the credit crisis took hold, the banks demanded more money, which Rubenstein and the others could not produce.

After the fund defaulted on more than $16 billion in assets, shares in Carlyle stock dropped 93 percent, closing at 35 cents on March 16.Â

The demise of Carlyle Capital is a shock to many. The fund holds a record of returning an average of 26 percent – net of fees – to investors of nearly 60 funds. Its parent company, the Carlyle Group, manages $81 billion in assets for unions, pensions, endowments, individuals and foreign governments. In the past two years, it returned $18 billion in profits and equity to clients.

Rubenstein reportedly will outline additional details of the fund’s fall from grace for investors at a later date. He also has gone on record saying that the Carlyle Group remains healthy.

Looking ahead, Carlyle Capital could be the first in a long line of funds in trouble. Among those that have suffered collateral damage thus far:

• Peloton Partners of London was forced to liquidate its funds earlier this year.

• Drake Management’s three hedge funds – nearly $5 billion under management – are looking at liquidating assets and have suspended investor redemptions.

• Nuveen Investments faces lower profits and slower growth because of higher borrowing costs brought on by tightened credit markets.

• Citigroup has committed $1 billion to support its hedge funds.

• Thornburg Mortgage failed to meet lenders’ margin calls recently.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.

The motto for UBS these days seems to be “if at first you don’t succeed, try, try and try again.”Â

After recently writing off billions of dollars on losses in the U.S. subprime lending market, UBS is again representing subprime securities backed by option adjustable-rate mortgages as a great value for investors.

Known as exotic mortgages, option adjustable-rate mortgages, or option ARMs, give borrowers flexibility in the way they meet their monthly mortgage payments. If borrowers decide to pay less than the monthly interest charges, the mortgage balance increases. If borrowers defer paying interest charges equal to 10% to 15% of the original loan amount, payments generally become mandatory.Â

The payment flexibility of an option ARM mortgage appeals to many homeowners, especially first-time buyers. But there’s a downside, as well. Interest-only or option-ARM minimum payments can be extremely risky if homeowners think they won’t be able to afford the higher monthly payments later down the road.

Moreover, option ARM mortgages can easily become “upside down,” meaning the mortgage balance is greater than the actual value of the house.  These kinds of mortgages are particularly dangerous when housing prices are flat or declining, not to mention their high potential for default when interest rates increase.

These facts make it all the more surprising that UBS says subprime securities backed by option adjustable-rate mortgages represent a “great value” for investors.  Even more surprising: UBS’ proclamation comes on the heels of Peloton Partners’ recent announcement that it was putting assets of its $2 billion flagship fund – the Peloton ABS Fund – up for sale in order to meet cash calls from its bankers, led by UBS, Goldman Sachs, and 12 other lenders.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.Â

The latest casualties in the credit crisis are investors in Alt-A residential mortgage loans – referred to as “liar loans” by industry insiders because borrowers don’t have to prove their net worth. As more and more of these mortgages go into default, the value of the securities backing these mortgages plummets, causing significant losses to investors.

Standard & Poor’s announced in late February it may drop its ratings on $13 billion in Alt-A mortgage-backed securities, including 1,887 debt classes issued in 2006 and early 2007, a direct result of loan delinquencies. This would come on top of a downgrade of more than 400 Alt-A securities issued in 2005, about 1,000 from 2006 and 900 issued last year. A sharp decline in valuations for securities forces investment funds to unwind or meet margin calls.

Meanwhile, investors in Alt-A mortgages may be at more risk than they realize.

Mortgage-backed securities head south

In the beginning, Alt-A mortgages attracted investors because of their diversity. While some lenders issued Alt-A mortgages to borrowers with less-than-desirable credit histories, others made the loans available to more creditworthy individuals, diversifying the Alt-A market as a whole. That made the market more attractive in terms of risk: Alt-A loans generally have fallen somewhere between prime and subprime. In addition, the market includes a good mix of fixed-rate and adjust-rate mortgages, or ARMs, which carry lower minimum payments for borrowers – and thus are more likely to be repaid.

In today’s economy, though, default rates have increased even among more creditworthy borrowers, putting more investors’ funds at greater risk.Â
Valentine’s Day 2008 may have marked the start of the current decline in Alt-A mortgage-backed securities. It’s when rumors that UBS would sell a significant portion of its Alt-A holdings began to spread.  One week later, AAA-rated securities backed by 30-year fixed-rate Alt-A loans exceeding $417,000 were valued at 12 cents less per dollar of principal than similar securities – more than double the 5.5-cent dip of just a few weeks earlier.Â

Firms act now to stem losses

Some firms already are trying to minimize their losses. London-based Peloton Partners LLP is liquidating a $1.8 billion hedge fund. Expect UBS and Merrill Lynch to take action soon. Merrill Lynch owns $2.7 billion of Alt-A debt, primarily securities. UBS, which owned more than $21 billion of top-rated Alt-A securities at the end of 2007, already has discounted them by $800 million.Â

With $950 billion of Alt-A mortgage-back securities outstanding in the market, these moves may be just the first of many.Â

Stuart Goldberg, a managing director at Marathon Asset Management LLC, cautions investors not to take too much comfort in the past performance of mortgage-backed securities. Today’s Alt-A securities are a riskier investment than securities backed by subprime debt because the latter may have more investor protection built in.Â

Investors in mutual funds and other investments backed by Alt-A mortgages would do well to take note of larger, like-minded investors such as Peloton. Unless they can afford significant losses, investors may want to consider taking steps now to protect their funds.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Â

Analysts say the subprime mortgage crisis is now spreading to another segment of the credit market: Alt-A residential mortgages.Â

Alt-A mortgages are the middle ground of loans between subprime mortgages and prime mortgages. Because Alt-A mortgages don’t require the standard income verification process, some Alt-A borrowers may exaggerate their income to buy a home they can’t afford. For that reason, Alt-A mortgages are often coined as “liar loans.”Â

Many Alt-A mortgages were issued to subprime borrowers, but individuals with better credit also have taken advantage of them. In recent months, valuations for securities backing Alt-A mortgages have fallen sharply, causing certain investment funds to unwind or meet margin calls.

Case in point: London-based Peloton Partners LLP. The fund owns both subprime and “safer” Alt-A mortgage debt, and is in the process of liquidating a $1.8 billion hedge fund. UBS and Merrill Lynch also may be looking trouble in the future, since both hold Alt-A mortgages.

Problems for Alt-A securities might be traced back to Feb. 14, 2008. UBS revealed for the first time its full exposure to Alt-A holdings. Speculation then took hold that the firm would be selling a large amount. A Feb. 22 JP Morgan Chase report said that securities rated AAA and backed by 30-year fixed rate Alt-A loans in excess of $417,000 fell to 12 cents less per dollar of principal than similar securities guaranteed by Fannie Mae or other government-related entities.  That’s more than twice the loss of 5.5 cents for the securities a few weeks prior.Â

The decline of Alt-A mortgage-backed securities is particularly troublesome because approximately $950 billion of Alt-A mortgage securities are outstanding. This compares to about $650 billion of outstanding subprime securities. Merrill Lynch owns $2.7 billion of Alt-A debt, primarily securities. UBS, which owned more than $21 billion of top-rated Alt-A securities on Dec. 31, 2007, marked them down by $800 million.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.Â

Lenders have seized assets held by London hedge fund Peloton Partners, LLP. Banks are moving quickly to recoup their money from the troubled borrower. Six banks have seized assets while three are giving the hedge fund time to try and find buyers for the securities.

This week Peloton told investors that it had liquidated a fund that specialized in mortgage securities and Peloton is shutting down their ABS Fund and suspending redemptions in their Multi-Strategy Fund.

Peloton has been in talks to sell some of its holdings but at least one rival money manager, Citadel Investment Group, has declined to buy. Selling its holdings would help Peloton raise money to pay off the loans but banks are in no mood to negotiate with borrowers.

In the past six months, banks and brokers have written down more than $100 billion in sub-prime securities while also dealing with the higher expense of funding. Loans that were provided cheaply in recent years are being reeled back in quickly. However, banks too will find it difficult to find buyers for the assets they seize back.

Bond investors have very little interest in securities tied to the U.S. mortgage market especially as ratings companies increase their scrutiny of borrower defaults. On Friday, Standard & Poor’s put on credit watch with negative implications nearly 2,000 mortgage securities backed by Alt-A loans. Alt-A rank between sub-prime and prime. S&P also recently downgraded 3,839 securities backed by sub-prime loans.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.