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This hedge fund is more like a stork than a vulture

Date: Monday, November 9, 2009
Author: Andrew Willis, Globe and Mail

I had a set-to with my editor when I tried to use the word "vulture" to describe the latest $1-billion fund raised by Newton Glassman's team at Toronto-based Catalyst Capital Group.

Call it a distressed-debt fund, if you please, insisted my boss. I tried to make the case for our feathered friend, arguing that funds such as Catalyst feast on corporate carcasses, stripping away assets and leaving little when they depart.

My editor was adamant - The Globe and Mail should remain vulture-free. This discussion was still in the air when a fund manager friend fired over the latest academic work on the role a distressed-debt fund plays in capital markets.

It showed that my boss was dead right: A newly released study of 474 corporate restructurings by professors at the business schools of the University of British Columbia, Columbia and Queen's showed that when hedge funds such as Catalyst are in the mix, companies tend to emerge from their financial woes in far better shape than would otherwise be expected. Rather than being liquidated, U.S. companies that attract distressed-debt funds tend to emerge from Chapter 11 filings with a new lease on life.

That academic work is supported by Catalyst's impressive, but relatively unknown, track record. Mr. Glassman was trained as a lawyer at the University of Toronto, and then cut his teeth in restructurings with uber-aggressive U.S. private equity fund Cerberus Capital. He departed in 2002 to launch his own shop, Catalyst, with a research-intensive, hands-on approach to investing.

There is a subtle difference between Catalyst and most of its rivals in this sector. The bulk of vulture - sorry, distressed-debt funds - are set up by former junk - sorry again - I mean high-yield bond traders and analysts. This crowd brings a short-term investment mentality to a sector that features a relatively liquid secondary market. Many of these funds look to buy debt off banks and other risk-adverse lenders for pennies on the dollar as a creditor filing looms, then sell for dimes on the dollar once the terms of a restructuring are set.

Catalyst, from the start, was willing to invest the time and energy needed to survive the often bruising world of restructuring, where creditors squabble for their slices of an ever-diminishing pie.

That approach earned Mr. Glassman and his colleagues a reputation for being tough, even nasty, negotiators. But it also made Catalyst's first two funds among the most successful in North America in their sector, posting top-ranked performance, according to independent services such as Preqin.

Catalysts' first $180-million fund from 2002 posted 70 per cent annual returns, and a more recent $600-million fund that's still making investments boasts 30 per cent performance. Some of the low-profile fund's high-profile successes include Quebecor World, Stelco and Hollinger.

The new fund, raised with help from Credit Suisse, did its first close last month, with $1-billion expected when all commitments are in.

Catalyst is coming of age as one of the largest potential players in Canadian restructurings at a time when the recession has littered the landscape with financially crippled companies. This vulture - oops, slipped again - I mean this distressed-debt specialist will find much to feed on.