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Highland Capital Management - Leveraged loans

2009-02-20

Count of distinct funds: 3
Capital base: $40 bn for all Highland Capital funds; >$1.5 bn for Crusader and Credit Strategies combined; $361M for CDO fund as of June 2008
Loss: 30% YTD for Highland Crusader ca. Oct. '08; ? for Highland Credit Strategies; total loss for CDO fund

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stories: bloomberg.com, bloomberg.com

CDO Opportunity Fund Implosion, 2009-02-20

Highland has now declared its CDO fund, Highland CDO Opportunity Fund LP, insolvent. More details from Bloomberg:

The managers and directors of Highland CDO Opportunity Fund LP, comprised of a U.S. partnership and an offshore affiliate, determined that “it is in the best interests” of the fund to wind down, according to a Feb. 4 letter to investors. Remaining assets will be distributed to creditors, leaving nothing for shareholders.

...

The fund became insolvent after assets values were eroded by “the unprecedented market volatility and disruption to the financial system, and the market for structured products assets in particular,” Highland Capital said in the letter, a copy of which was provided by an investor to Bloomberg News. Assets were valued at $361.6 million, according to a June 2008 regulatory filing.

...

Highland Capital was one of the largest sponsors of CDOs in the U.S., having formed 30 such vehicles since 1996, according to documents filed in May 2007 for an initial public offering tied to its CDO business. The firm issued $3.2 billion of CDO securities in 2005 and $8.5 billion in 2006, the filing said. The IPO was later withdrawn.

Crusader, Credit Strategies Implosion, 2008-10-16

Highland Capital Management is officially closing its Highland Crusader Fund (the flagship!) and Highland Credit Strategies after seeing significant losses, some 30% on the year for the Crusader Fund (compared to a 40% gain in 2006 and a 4.5% loss last year) according to a recent Bloomberg article.

Per the article:

The Highland Credit Strategies fund suffered from "unprecedented market volatility and disruption," according to a letter to investors that was obtained by Bloomberg News. Barclays Capital Inc. seized $642 million of leveraged loans from Highland yesterday and is offering the debt for sale in an auction today, according to a person with knowledge of the situation.

Highland Capital was the world's "largest non-bank buyer of leveraged loans" in 2007.

Original Ailing/Watch Write-up, 2008-03-06:

story story

The Texas-based highland is in choppy waters, but has not yet gone as far as suspending redemptions, as far as we know. The FT article says:

Like other investors, it has been hammered by the falling prices of leveraged loans. Highland’s main hedge funds, investing in distressed debt and other credits, were down 11.5 per cent to 14 per cent in January. While it is not clear how it fared in February, Highland’s recent performance contrasts with gains of 30-40 per cent in 2006 and 2007.

As a result, Highland executives, led by co-founder Mark Okada, are engaged in an intense dialogue with investors to discourage them from withdrawing their money.

...

Mr Yang said redemptions so far “haven’t been significant” and Highland is seeing inflows as well. Highland officials insist that the size of their holdings remains a source of strength, pointing out that $25bn of their loans are in closed-end funds that do not face redemption pressures.

And more on the general situation:

Highland’s fortunes underscore the rapid changes on Wall Street. At the peak of the buy-out boom, private equity firms worked to keep Highland out of deals because of its reputation for tough tactics. As the credit squeeze worsened, the same funds welcomed Highland’s cash. Now, market participants are monitoring Highland’s health because of its prominence in the leveraged loan market.

Question is how long the "storm" will last in leveraged loans. If it is, as we think, an permanent "gap down", Highland may have to ultimately book losses or shut down funds. Risk premiums on leveraged loans were simply unrealistically low, and that condition is unlikely to come back. Ever.

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.