Leverage Liquidity Drying Up For Hedge Funds

Date: Wednesday, July 11, 2007
Author: Hedge Fund Daily

First came reports that investment banks were demanding higher margin requirement from hedge funds that invest in mortgage-backed bonds. Now, it appears the banks are pulling the plug on lending for such loans altogether. “We’re seeing a withdrawal of liquidity by prime brokers, mainly the big investment banks lending to hedge funds, and by lenders to parties willing to buy leverage loans,” Robin Doumar of London-based Park Square Capital, a hedge fund that specializes on mezzanine finance and distressed situations, told Reuters. According to the news service, a number of companies have shelved plans for junk bond sales in the wake of Bear Stearns subprime troubles, as U.S. investors are running scared away from them. “Europe is trailing the U.S. in recognition of what’s going on,” said Doumar. “There are going to be a lot of stuck deals. People need to wake up and smell the coffee.” Hedge funds aren’t the only ones that are going to experience a liquidity drought; the folks putting together syndicated debt packages behind private equity deals in Europe--where debt levels are more than seven times earnings before interest, taxes and the like, compared with five times in the U.S.--also may have a rocky road ahead. Predicts Lynn Heistand, a partner with the law firm Skadden, Arps, Meagher & Flom, head of the firm’s restructuring practice, in a Reuters interview, “We’ll see a reduction in debt levels in Europe about one year later than in the U.S.”