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Highland Capital CDO Fund Is Insolvent, Wiping Out Investors
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By Miles Weiss
Feb. 20 (Bloomberg) -- Highland Capital Management LP, the investment firm founded by James Dondero and Mark Okada, said one of its hedge funds was wiped out by losses on high-risk debt securities, at least its third fund since October to close.
The managers and directors of Highland CDO Opportunity Fund LP, comprised of a U.S. partnership and an offshore affiliate, determined that “it is in the best interests” of the fund to wind down, according to a Feb. 4 letter to investors. Remaining assets will be distributed to creditors, leaving nothing for shareholders.
Highland Capital, based in Dallas, said in October it would shutter its flagship Crusader Fund, which had declined about 30 percent during the year, and its Credit Strategies fund. That month, Barclays Capital Inc. seized $642 million of leveraged loans from the firm, which oversees $33 billion.
As recently as October 2007, Barron’s magazine ranked Highland CDO Opportunity third among the top 50 hedge funds, with an average annual return of 44.12 percent during the three-year period ended that June. Its fortunes reversed last year, as the securities it invests in, known as collateralized debt obligations, plunged in value amid the credit crunch and downgrades by ratings firms.
The fund became insolvent after assets values were eroded by “the unprecedented market volatility and disruption to the financial system, and the market for structured products assets in particular,” Highland Capital said in the letter, a copy of which was provided by an investor to Bloomberg News. Assets were valued at $361.6 million, according to a June 2008 regulatory filing.
CDO Meltdown
Highland Capital, founded in 1993, was the fund’s largest shareholder, said a spokeswoman. The firm hadn’t marketed the fund extensively to investors, she said.
CDOs are securities backed by a pool of debt obligations, usually between 50 and 100, that can range from bank loans used to finance buyouts to high-yield bonds, commercial real estate loans and mortgage-backed securities. CDOs entitle holders to a share in the stream of payments generated by the underlying loans, with the most senior securities getting first dibs.
Highland Capital was one of the largest sponsors of CDOs in the U.S., having formed 30 such vehicles since 1996, according to documents filed in May 2007 for an initial public offering tied to its CDO business. The firm issued $3.2 billion of CDO securities in 2005 and $8.5 billion in 2006, the filing said. The IPO was later withdrawn.
The opportunity fund’s liabilities exceeded the value of its assets “to such a degree” that there won’t be anything left to satisfy unpaid redemptions to shareholders or make distributions to current investors, according to the Feb. 4 letter.
“We are extremely disappointed in the funds’ performance and this outcome, but believe there is no viable path to any recovery for investors,” Highland said in the letter.
To contact the reporter on this story: Miles Weiss in Washington at [email protected]
Last Updated: February 20, 2009 14:35 EST
Email | Print | A A A
By Miles Weiss
Feb. 20 (Bloomberg) -- Highland Capital Management LP, the investment firm founded by James Dondero and Mark Okada, said one of its hedge funds was wiped out by losses on high-risk debt securities, at least its third fund since October to close.
The managers and directors of Highland CDO Opportunity Fund LP, comprised of a U.S. partnership and an offshore affiliate, determined that “it is in the best interests” of the fund to wind down, according to a Feb. 4 letter to investors. Remaining assets will be distributed to creditors, leaving nothing for shareholders.
Highland Capital, based in Dallas, said in October it would shutter its flagship Crusader Fund, which had declined about 30 percent during the year, and its Credit Strategies fund. That month, Barclays Capital Inc. seized $642 million of leveraged loans from the firm, which oversees $33 billion.
As recently as October 2007, Barron’s magazine ranked Highland CDO Opportunity third among the top 50 hedge funds, with an average annual return of 44.12 percent during the three-year period ended that June. Its fortunes reversed last year, as the securities it invests in, known as collateralized debt obligations, plunged in value amid the credit crunch and downgrades by ratings firms.
The fund became insolvent after assets values were eroded by “the unprecedented market volatility and disruption to the financial system, and the market for structured products assets in particular,” Highland Capital said in the letter, a copy of which was provided by an investor to Bloomberg News. Assets were valued at $361.6 million, according to a June 2008 regulatory filing.
CDO Meltdown
Highland Capital, founded in 1993, was the fund’s largest shareholder, said a spokeswoman. The firm hadn’t marketed the fund extensively to investors, she said.
CDOs are securities backed by a pool of debt obligations, usually between 50 and 100, that can range from bank loans used to finance buyouts to high-yield bonds, commercial real estate loans and mortgage-backed securities. CDOs entitle holders to a share in the stream of payments generated by the underlying loans, with the most senior securities getting first dibs.
Highland Capital was one of the largest sponsors of CDOs in the U.S., having formed 30 such vehicles since 1996, according to documents filed in May 2007 for an initial public offering tied to its CDO business. The firm issued $3.2 billion of CDO securities in 2005 and $8.5 billion in 2006, the filing said. The IPO was later withdrawn.
The opportunity fund’s liabilities exceeded the value of its assets “to such a degree” that there won’t be anything left to satisfy unpaid redemptions to shareholders or make distributions to current investors, according to the Feb. 4 letter.
“We are extremely disappointed in the funds’ performance and this outcome, but believe there is no viable path to any recovery for investors,” Highland said in the letter.
To contact the reporter on this story: Miles Weiss in Washington at [email protected]
Last Updated: February 20, 2009 14:35 EST
