At the first Wharton Hedge Fund Conference keynote speaker Marc Lasry of Avenue Capital declared that he was still in shock over how his firm got to $22 bn in size. Lasry started his firm in 1995 after breaking off from an entity that is affiliated with the Bass family with $7 million, expecting to run a few hundred million dollars if things were to go well. At its peak in 2007, the firm exceeded all targets with $22 billion in assets under management. The wonders done by a decade of liquidity and leverage helped him grow beyond his wildest dreams.
But it’s not his firm’s unconstrained growth that sent Lasry into therapy; it is the unwinding of the leverage and lack of liquidity that puts him there. It has depressing prices of assets, and especially those of the distressed type that Lasry meddles in. One of the drawbacks of distressed is that it becomes a little more distressed every day. Last year, he was down 25% (he didn’t specify whether it that number is performance or AUM).
Lasry started buying bank debt of Sam Zell’s Tribune at 60 cents on the dollar, and has since had the opportunity to add to his position at 40. Most recently he lower his cost basis by paying 25 cents. At 25% of face value, the senior debt is valued at only $2 billion. Not bad for a company that is selling its sports team for a billion and generates $600 million of EBITDA.
Lasry sees similar opportunities in securitized leases of US Air’s airplanes. We assume he refers to Enhanced Equipment Trust Certificates, EETCs. These securities are backed by escrow amounting to 60 cents on the dollar, yet trade at only 40. Not only do you get the cash at a discount, you get the plane leases for free.
Another one of Lasry’s investments is Trump Casino. Its bonds now trade at 5 cents on the dollar, down from 60 cents a year ago. Trump has $500 million in bank debt and $1 billion in bonds. With $110+ million in EBITDA Trump should be able to pay off its bank debt. The bonds are simply an option play on the value of the equity. When Trump restructured a few years ago, he talked his bankers into giving him a large chunk of the equity in return for letting him stay around and use his name. Lasry is a tougher bargaining partner. He didn’t see the value that could be added by the guy who ran the casino into the ground in the first place. He simply refused to make any concessions. Trump will now have to go elsewhere and maybe do some real work to make money.
For the hedge fund industry, Lasry expects the shakeout to continue. Those who will survive the next year will remain in business for the long run. Funds that do not perform will in the first and second quarter of the year will be faced with further redemption requests.
Overall, Lasry believes that the government will do anything necessary to avoid getting into a Japanese situation. The most likely outcome will be the complete takeover of all liabilities of banks, which will then be free again to resume lending. Avenue currently holds around 40% in cash and stands ready to start buying assets when the time has come. Lasry expects a turnaround by the end of the year. If the government is not successful with all the cash that it is throwing at the problem within six months, then even cash holdings won’t be any good.
Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which does not hold positions in any of the securities mentioned here. He is the author of an e-book about alternative strategies as well as the forthcoming book Merger Arbitrage: How to Profit from Event-Driven Arbitrage (Wiley Finance, 2009).
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