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Airlie Fund Liquidates Loans as Returns Drop

Reuters
Wednesday, 12 Sep 2007 | 1:20 PM ET

Airlie Group, a hedge fund manager specializing in structuring debt securities, is liquidating two bank loan portfolios after performance slumped in August, according to a letter the firm sent to investors.

The Airlie Opportunity Master Fund had an estimated net loss of about 11.25 percent in August, according to the letter obtained by Reuters.

Airlie is one of a group of hedge funds that buys bank loans from investment banks and structures them into bonds called collateralized loan obligations (CLOs), which are then sold to investors.

"The CLO market is for all intents and purposes closed for new issues," said a senior Airlie official, who declined to be named. "We're trying to maintain value in the fund. We are trying to navigate through this difficult time."

Greenwich, Connecticut-based Airlie, which has $600 million f assets under management, is not liquidating the entire portfolio, the official said.

"If the CLO market revives, hopefully by the end of the year, then we would want to go back and re-enter the marketplace," said the official, who added they are seeing prices of 95 cents on the dollar for the loans.

The CLO market has been hurt by widening problems in the credit markets, forcing hedge funds like Airlie to drop plans for the issues.

"Because of the state of the CLO market, we determined it prudent to liquidate both warehouse facilities," including a pool of U.S. dollar loans and the second pool of Euro loans, said the letter to investors sent Tuesday. Portfolios of bank loans for CLO issues are referred to as warehouses.

Airlie said it had been accumulating bank loans to sell two debt issues this year after successfully selling two CLOs in 2006.

But in the letter, it said its distributing banks, JPMorgan Chase & Coand Royal Bank of Scotland Group, told Airlie recently that conditions in the CLO market made the issues too difficult to complete.

Banks typically lend money to hedge funds to buy bank loans for CLOs. If the market for CLOs dries up, banks often seize the underlying assets.

"It is their belief market conditions were such that it is unlikely that these transactions could be completed prior to year end," according to the letter signed by Brendan Driscoll, Airlie's chief financial officer.

In recent months, many investment banks have stepped up efforts to auction off bank loans after hedge funds that specialized in creating CLOs stopped buying them in response to an investor drought.

Managers of CLOs can be large global, institutional investors or as small as one person operations. Hedge funds, which buy and sell securities, have been reliable and voracious buyers of CLOs and a broader class of securities known as collateralized debt obligations, or CDOs.

Total CDO sales grew to more than $300 billion in the United States last year, a record, doubling in size in less than two years, according to Thomson Financial.

Canceled deals or a lack of buyers are noteworthy because that could puncture investor confidence and push default rates higher.

Moody's Investors Service said Tuesday it expects the U.S. speculative-grade default rate to more than double to 4 percent over the next year.