By Matt Wirz
The oil slump is drawing interest from some of the savviest
bargain hunters on Wall Street.
Veteran hedge-fund manager Wilbur Ross, Blackstone Group LP's
GSO Capital Partners and Apollo Global Management LLC are among
those raising funds to buy the battered stocks, bonds and loans of
energy firms following a 54% decline in New York crude prices since
June.
More traditional investors like Western Asset Management Co. and
Seix Investment Advisors LLC also have started funds to help large
clients such as endowments and pension funds to place bets on the
ailing energy industry.
Oil's plunge to six-year lows has spurred an exodus from the
securities of companies that explore for, produce, transport and
refine oil and gas. The carnage is creating an opening for
distressed investors, who snap up cheap stocks and bonds of
troubled companies, seeking to profit when prices rebound or to use
the investments to take the companies over in bankruptcy.
Mr. Ross has used the strategy to build businesses in the steel,
automotive and textile industries and is now starting an
energy-focused fund, a person familiar with the matter said.
Fueling the fundraising rush: Bargain investments have been hard
to find in recent years, as low interest rates and a U.S. economic
rebound have helped pump up many major stock indexes and bond
prices to records. "We sold our last material private investment 18
months ago and we've been waiting for an opportunity ever since,"
said Clint Carlson, whose Carlson Capital LP hedge fund manages $9
billion in Dallas.
The oil-price plunge has hammered revenues for energy producers
and the companies that work with them, as well as investor
sentiment.
A quarter of bond investors polled by Bank of America last month
held fewer energy bonds than the benchmark index they track, the
largest proportion since the survey began in 2005.
Since June 30, 91 energy companies in the S&P Composite 1500
index with market capitalizations exceeding $100 million have lost
more than half their stock-market value, said Howard Silverblatt,
an analyst for S&P Dow Jones Indices.
In the junk-bond market, there were 111 energy-company bonds
that traded for less than 80 cents on the dollar in February,
compared with six in July, according to data provider MarketAxess.
Bonds typically trade close to 100 cents on the dollar--the face
amount the company must pay at maturity--and prices below 80 cents
reflect risk that the borrower may default. Bonds now trading below
that threshold have a face value of $57 billion and market value of
about $34 billion.
Investors are pursuing diverging strategies in the wake of the
slump. Bearish fund managers are using a technique called short
selling to profit from the drop in stock and bond prices. Some
funds have started purchasing securities of higher-quality
companies they believe have been unfairly beaten down and will
survive the downturn.
Others are waiting for prices to fall further before buying
bonds of firms that are likely to default, aiming to swap the debt
for ownership stakes in a strategy called "loan-to-own."
GSO is targeting between $500 million and $1 billion for its new
fund focused on debt of distressed energy companies, and Seix is
aiming for about $500 million for a comparable fund, people
familiar with the matter said.
Ironically, the greatest worry for some fund managers is that
too many other investors will jump on the energy trade, pushing
prices back up before they can exploit the oil-related selloff.
"The sector traded down very quickly" and could bounce sharply,
said Michael Buchanan, the head of global credit at Western Asset
Management. "That's why we're looking to move quickly."
Western Asset, which manages about $134 billion of bond and loan
investments, has launched a fund to buy debt of energy companies
rated below investment grade in the next three to six months, he
said.
Some investors, like Mr. Carlson and Halcyon Asset Management,
are focusing on energy stocks for now because equity valuations of
stronger companies have been hit harder than their bond prices. Jim
McGinness, manager of Halcyon's energy fund, said he saw a bargain
in shares of Devon Energy Corp., for example, which fell 32% from
July to January. The company's bonds declined 6% over the same
period.
Halcyon expects to build up its roughly $100 million energy fund
to about $500 million by the end of 2015, as the firm's European
clients have started clamoring to invest in the energy industry, a
person familiar with the matter said.
Five years ago, Mr. Carlson's fund made a 39% return on a $1
billion bet on distressed mortgage bonds. Now, the firm is
launching three funds to bet on the securities of energy companies
hit by falling oil prices.
One of the funds, which can buy energy-company securities or bet
against them, has started investing, but Mr. Carlson is waiting to
ramp up the other two, which will buy stocks and bonds for the long
term, because he expects most prices to fall further. The firm has
12 analysts and fund managers covering energy and power companies
who are working full-bore assessing new investments, he said.
"The last time we made a big investment was in 2009 in
[mortgage-backed] bonds," said Mr. Carlson. "This is the next
opportunity."
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