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Hedge funds are raking in cash

Monday, September 17 12:00:02

Hedge funds that bought into depressed corporate loans during the worst of the euro zone crisis are now being rewarded for their faith in a recovery, with returns of sometimes more than 30 percent.

Companies such as German forklift truck maker Kion and privately-held U.S. firm ServiceMaster are taking advantage of a booming high-yield bond market to refinance their loans and pay out investors, including hedge funds.

Strong demand for high-yield bonds - debt rated below investment grade but with bigger returns - has squeezed borrowing costs for some to a record low and companies have issued almost $250 billion of such bonds this year, with volumes last week hitting an all-time weekly high of $20.84 billion across 27 deals.

"In this environment of zero to low growth and low rates, this is one of the few strategies where you can earn real returns based on real underlying economics rather than just taking a directional bet on say, the euro...," Robert Marquardt, founder of hedge fund investor Signet Management, said.

The strategy, which continues to be attractive, highlights how credit-focused funds - among the best performers in 2012 - are finding ways to wring profits from companies re-ordering their finances, especially as a bank pullback forces firms to look for alternative funding sources.

Earlier this year many funds made big gains from capital-starved banks buying back their own debt in so-called liability management exercises.

Among firms to have attracted hedge fund attention are Swiss chemical maker Ineos, German manufacturer Schaeffler, and Dako, a Danish cancer diagnostics tool maker, which have all refinanced this year, several managers active in the strategy told Reuters.

One, asking not to be named, said he had picked up Dako's loans at close to 89 cents at the start of the year, before the debt was taken out at par just a few months later.

"We've done very well out of this ... We like the volatility," he said.

Funds are also eyeing German forklift truck maker Kion. Its loans traded below 70 cents last October, according to Thomson Reuters LPC data, before the private-equity owned company refinanced some of its outstanding debts.

Hedge funds are hopeful that a recent stake sale to Shandong Heavy Industry will allow the firm to further re-finance at par, handing them more profits.

Elsewhere, funds have traded U.S. firms such as ServiceMaster, a provider of services including pest control, which issued a high-yield bond last month to repay a loan, as well as housebuilder Beazer Homes and payment processor First Data Corp.

The European high-yield market has seen a surge in supply in September, while in the United States, a much bigger market, demand has pushed the average yield-to-worst - the lowest possible yield on a bond which the issuer can repurchase before maturity - on the Barclays U.S. high-yield index to its lowest ever level.

"We are seeing the emergence of a very strong high yield bond market in Europe. It still has a way to go to get to the breadth and depth of the U.S. high yield market, but it is developing fast," Simon Davies, Head of Event Driven and High Yield at hedge fund Cheyne Capital, said. (C ) Reuters