Avenue Capital Group LLC, the distressed-debt firm that’s among a group of creditors winning big from the bankruptcy of Energy Future Holdings Corp., is gathering capital for its first fund dedicated to troubled energy companies.
Avenue Energy Opportunity Fund, led by Matthew Kimble, will mostly invest in corporate, distressed-debt securities and other special situations of North American energy and utility companies, according to two people with knowledge of the matter. The New York-based firm hasn’t set a target on the fund yet, said the people, who asked not to be identified because the information is private.
Avenue Capital, co-founded by billionaire Marc Lasry and his sister Sonia Gardner, is seeking money for its debut energy fund after a smart bet on the debt of the bankrupt power producer formerly known as TXU Corp. Avenue Capital was among a group of unsecured bondholders poised to walk away with the most profitable asset of Energy Future after the value of the debt soared following a pre-arranged bankruptcy plan.
Avenue Capital’s new strategy seeks take advantage of more than $100 billion of distressed energy opportunities in the market as credit quality has been deteriorating amid a surge of issuance, according to one of the people. The amount of high-yield debt issued by exploration and production companies has grown ninefold over the past decade, as the total market has doubled in size, according to data from Barclays Plc.
Lyndsey Estin, a spokeswoman at Kekst & Co., declined to comment on behalf of Avenue.
Lasry and Gardner co-founded Avenue Capital in 1995. The firm, which invests in the troubled debt and equity of companies in the U.S., Asia and Europe, managed about $14 billion in assets at the end of May. Kimble, who has been with Avenue Capital since 2003, helps lead the firm’s U.S. strategy, which has about $5.2 billion invested in distressed debt and undervalued securities of companies.
Avenue Capital’s new fund will primarily invest in senior-secured debt or other securities that get priority in the event of a default, said the people familiar with the matter. For about 17 years, Avenue Capital has invested and recycled $7.3 billion in energy and utility businesses through its other offerings.
In the Energy Future transaction, the value of $1.6 billion of notes held by unsecured bondholders and issued by the regulated unit of the Dallas-based company that sought Chapter 11 protection on April 29 jumped by about $260 million to almost within 1 percentage point of face value after the bankruptcy plan was filed. The bonds have risen more than $480 million since they started climbing at the beginning of April.
Energy Future was taken private for a record $48 billion at the height of the buyout boom in 2007 by KKR & Co., TPG Capital and Goldman Sachs Capital Partners. The investment was a bet that natural gas prices would rise. Instead, they plummeted amid the shale revolution that increased natural gas production.
Over the past several years, private-equity firms such as Blackstone Group LP, Apollo Global Management LLC and KKR have cumulatively gathered billions of dollars to take advantage of an expansion in the energy industry fueled by the shale-drilling boom. There has been a surge in junk-rated borrowing to fund the shale revolution as the Federal Reserve has held interest rates near zero for more than five years.
Lasry, a major financial-industry fundraiser for President Barack Obama, had been the leading candidate to become U.S. ambassador to France. Obama this month selected campaign fundraiser Jane Hartley. Lasry said in an April 2013 Bloomberg Television interview that leaving Avenue Capital for government service “just isn’t feasible.”
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