WEST PALM BEACH, FL (www.hedgeco.net) – Hedge funds continue to play an increasing part in the buy-out markets according to new reports. Such entry resulted from lenders eager to pass on second-liendebt to private equity companies. Part of the incentive for borrowers to assume second-lien debt comes from its relatively cheaper cost compared to outright bank loans. Second hand debt instrumentsgenerally cost about 5-10 percent cheaper per year than first-hand loans which carry coupon rates of anywhere from about 10-15 percent.
Second hand markets have grown from about $3 billion two years ago to near $12 billion at the end of 2004. Experts believe such trend may continue in light of the numerous deals still pending. Steve Ellis, a partner in the law firm Proskauer Rose LLP, said �There are a lot of new entrants in the market – banks, BDCS – business development companies and mezzanine funds are all going there – but hedge funds are doing most of the pushing,” he explained.
Afroz Qadeer, principal of fund-of-hedge-funds manager Tapestry Asset Management LLC in Princeton, N.J. believes that hedge funds are undercutting the market when they are offering to refinance second-hand debt free of the regular fee which banks and other financiers charge; such fee could range from 4-6 percent. With growing assets and capital in excess of $1 trillion, hedge funds in need to boost declining returns are entering the second-tire debt market in greater numbers.
Qadeer also explained that such development is very good for those seeking capital, he added, “It’s great for the borrowers – not only do they get the financing at a cheaper rate but hedge funds are able to get the package together within a week or 10 days rather than the several months it often takes investment banks.” He estimated that the second-tier debt business may provide between 14% and 20% a year to hedge fund managers participating in such business.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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