Colleges Buy Up
Risky Debt After
Bear's Debacle
By CRAIG KARMIN and SERENA NG
June 22, 2007; Page C1
With Wall Street scrambling to offload risky mortgage-backed securities, potential buyers of subprime debt are emerging -- among university endowments.
"There's an opportunity out there to buy these loans at a discount," says Lou Morrell, vice president for investments and treasurer at Wake Forest University in Winston-Salem, N.C. The university's $1.2 billion endowment is in the process of placing about $25 million with a hedge fund to invest in subprime mortgages. Because these loans could sell for steep discounts, he says, "they will be popular with a lot of endowments out there."
Late Wednesday, Merrill Lynch & Co. -- a lender to the Bear hedge funds -- auctioned off some assets it had seized from the Bear funds. The investment bank sought bids for $850 million in securities, some of which were backed by subprime mortgage bonds, but ended up selling less than half that amount, according to people familiar with the matter.
Most of the trades Merrill made were at prices of 85 to 95 cents on the dollar. A person familiar with the auction said some bids -- which didn't result in trades -- were as low as 30 cents on the dollar.
Yesterday afternoon, other lenders to the Bear funds put a further $800 million of the Bear funds' assets up for auction, according to investors who reviewed the lists of assets. Those moves prompted speculation that talks had broken down that were aimed at finding a solution short of auctioning the assets.
In another sign of growing investor unease toward riskier classes of debt, Thomson Corp.'s Thomson Learning yesterday significantly restructured a planned junk-bond offering, reducing the amount of money it planned to raise to $1.6 billion from $2.1 billion. The textbook publisher also had to drop a feature -- known as a payment-in-kind toggle provision -- on some of its bonds that would have allowed it to pay interest in the form of additional debt if it ran short of cash in the future.
Such provisions are an example of the kind of easy terms for borrowers that have gotten some investors worried about loose lending terms in the corporate debt market.
The pushback could have broader implications for some of the other large debt sales slated to take place in the coming weeks to fund other takeover deals. Many acquisitions in recent months have been dependent upon an availability of cheap corporate debt. Any significant change in investor sentiment could slow a record-breaking merger boom that has played a role in pushing up stock prices in recent months.
In contrast to other types of investors, university endowments continue to show a greater appetite for risk. They have been at the vanguard among large institutions when it comes to investing in alternative assets, such as hedge funds, private-equity firms, and real estate. The top 53 university endowments, with nearly $217 billion in assets, have invested about 18% of that money into hedge funds, according to the data provider HedgeFund Intelligence. By contrast, the average public pension fund has around 5% in hedge funds.
Because endowments can tolerate more short-term volatility and face less-frequent scrutiny than most public pension funds, they often have been willing to invest in areas often considered too risky for many other institutional investors.
Scooping up subprime mortgages at depressed prices is the latest case of buying assets on the dips. It is a strategy that has generally served investors well over the years, though most of those who bought technology companies after the tech bubble burst in 2000 got crushed, proving this approach is far from foolproof.
Bill Spitz, chief investment officer for the $3.4 billion endowment at Vanderbilt University in Nashville, Tenn., says his fund currently has a "negligible" amount of money in debt backed by subprime mortgages. But he has earmarked $50 million to invest in these securities through a new fund from Trust Company of the West.
This fund of $1.5 billion, or possibly more, will invest primarily in subprime mortgage securities. The Los Angeles-based money-management firm has put up about $150 million of its own money into the fund. The fund is expected to close to investors in July.
Mr. Spitz says he has no expertise in the mortgage market, but is placing money with TCW as part of Vanderbilt's strategy of putting as much as 5% of the fund's assets into "opportunistic" investments they hope can boost returns.
"What typically happens when there is a scare of this sort, people disgorge assets quickly and they sink to a level below their true value," says Mr. Spitz. "That creates opportunity."
"Universities have the financial structure that encourages alternative investments, and this leads to a culture with a greater tolerance and understanding of risk," says Allen Proctor, a private consultant in Columbus, Ohio, and the former chief financial officer at Harvard University. "Investing in subprime loans is in character with that."
In previous years, he says, endowments turned to high-yield "junk" bonds and oil- or gas-well leases. Mr. Spitz says that his endowment profited from an investment in junk bonds during a selloff in 2002. Vanderbilt has also bet on the movements of the stock market in 2005 -- known as betting on volatility -- through the derivatives market.
Even so, not all endowments are eager to own bonds backed by subprime mortgages. At the University of Richmond in Virginia, where HedgeFund Intelligence estimates that nearly half of its $1.6 billion endowment is invested in hedge funds, chief investment officer Srini Pularvarti says the fund will be avoiding subprime. "We don't think its something we want to play," he says.
Separately, Rep. Barney Frank, chairman of the House Financial Services Committee, renewed calls for legislation that would make Wall Street brokerage firms more responsible for the quality of the loans that the firms buy, repackage and then sell to investors.
Mr. Frank argued that if the brokerage firms refused to buy these high-risk loans in the secondary market, lenders would have a harder time selling them in the first place. |
发表于 2007-6-22 17:12:42
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