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Sovereign Debt Appeals to Funds as Bankruptcies Slow

Hedge funds that invest in distressed assets are looking to put their money in mortgage-backed securities, sovereign debt and small companies as larger bankruptcies fade, panelists at a Golden Networking forum said.

“The kind of companies which we saw as bankruptcies in 2009 have stabilized, most of them kicked the can down the road,” said James Sprayregen, a lawyer for Kirkland & Ellis LLP, speaking today at the Distressed Investing Experts Forum 2010 in New York.

“It’s a different type of environment right now. It does take creativity,” Sprayregen said, adding that investors are getting opportunities in commercial mortgage-backed securities now.

Sprayregen advised UAL Corp., the world’s second largest airline, in its restructuring. As a managing director for Goldman Sachs Group Inc., he was co-head of the firm’s restructuring group.

Debt markets are more open this year compared with 2008, said Jonathan Krautmann, an analyst in distressed investing for Third Avenue Management LLC, speaking on a panel with Sprayregen. Still, smaller and midsize companies are having a hard time refinancing their debt at good rates, Krautmann said.

“Small companies are where the opportunity is” now that bankruptcies by large distressed companies including Chrysler LLC, General Motors Corp. and CIT Group Inc. have been completed, he said.

Steven Kargman, president of the restructuring adviser Kargman Associates, said sovereign debt has also stirred more interest following Greece’s financial travails last spring.

$1 Trillion Debt

While the default rate is expected to decline in 2010, managers of distressed funds expect new opportunities when $1 trillion in debt comes due from 2012 to 2015, according to a Sept. 9 report from the Hennessee Group LLC, which advises hedge funds. That debt will likely prove difficult to refinance, the group said.

Hedge funds that invest in distressed companies outperform most of their peers. Such funds are up 5.14 percent this year as of the end of August, while hedge funds overall are up only 1.3 percent, according to a Hennessee Group index.

The only type of hedge fund to do better was the high-yield index, up 6.57 percent. Hedge funds outperformed the S&P 500, which declined 5.9 percent during the same period, according to the index.

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