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Cargill Unit Raises $373 Million to Buy Banks’ Orphaned Assets

Cargill Inc., the nation’s largest closely held company, raised $373 million through its CarVal Investors unit to buy debt assets that banks divest in the face of new regulations.

CVI Credit Value Fund LP plans to acquire home loans, consumer debt and mortgage-backed securities, according to Timothy Clark, a senior partner at Minnetonka, Minnesota-based CarVal. It also may buy liquidation claims held by banks, brokerages and other creditors in the bankruptcy proceedings of companies such as Lehman Brothers Holdings Inc. and Nortel Networks Corp.

Formed in 1987 to complement Minneapolis-based Cargill’s proprietary financial trading, CarVal became a big acquirer of assets from failed savings and loans auctioned off by the Resolution Trust Corp. in the early 1990s, according to Clark. The firm, one of at least six in the U.S. to start credit- related funds since June, sees a fresh opportunity as banks and other financial institutions work out their “debt hangover” from soured loans and distressed securities, he said.

“The asset purge is beginning from major financial institutions and we are focused on the resulting orphaned assets,” Clark said in an e-mail. “Consumer assets are starting to be priced attractively,” he said, referring to credit-card receivables and retail auto loans.

In the wake of the 2008 financial crisis, the 27-nation Basel Committee on Banking Supervision adopted international standards in September that will more than double the ratio of capital banks must hold in relation to the amount of risk on their balance sheets. The Dodd-Frank U.S. financial overhaul, signed into law in July, limits proprietary trading by banks as well as their investments in private-equity and hedge funds.

Fund’s Targets

CarVal will acquire assets banks might divest to increase capital and meet requirements under the new rules, Clark said.

Banks have been stuck holding assets from business lines they’re exiting, such as trading for their own accounts, Clark said. CarVal’s fund is looking to buy these leftovers, which are often hard to sell to other financial institutions because the assets are illiquid, requiring lots of capital to be set aside.

“There are non-strategic businesses in banks and corporations that are being disbanded or rationalized or put up for sale,” Clark said, citing a portfolio of aircraft leases that CarVal recently purchased.

Fortress Investment Group LLC, which oversaw about $41.7 billion of private equity, hedge-fund and fixed-income investments as of June 30, said in its second-quarter earnings release that the firm had $2.6 billion in commitments for a second credit-opportunities fund and related accounts. Ken Griffin’s Chicago-based Citadel Advisors LLC reported in August regulatory filings that it had raised $225 million for a residential mortgage opportunities fund.

Pine River, Premium Point

Firms that have filed SEC notices for credit or mortgage funds in the last five months also include Minnetonka-based Pine River Capital Management LP; Premium Point Investments LLC, a New York firm run by Anilesh Ahuja, the former global head of residential mortgage-backed securities at Deutsche Bank AG; and Claros Advisors LLC, also in Manhattan.

Money managers formed dozens of credit funds from July 2007 through 2008, hoping to acquire mortgages and other types of debt from banks that were jettisoning the assets to raise cash and reduce leverage as the financial crisis worsened. Banks balked at the distressed prices being offered, as the sales would have left them with steep losses that further depleted regulatory capital.

‘Awash in Liquidity’

“Our marketplace has been awash in liquidity since the early 2000s,” said Kingsley Greenland, the CEO of DebtX, a Boston-based online marketplace that hosts auctions for mortgages and other forms of debt. “It was a pricing issue” that impeded sales, he said.

Banks became more willing to sell soured mortgages and distressed mortgage bonds earlier this year because rising profits from other sources were available to cushion potential losses, according to CarVal’s Clark. Investors have offered higher prices for mortgages and other bank assets because delinquencies have stabilized, making it easier for buyers to calculate potential returns, he said.

DebtX’s transactions during this quarter will be more than double those recorded a year earlier, with most of the volume coming from commercial banks, Greenland said. PNC Financial Services Group Inc., the Pittsburgh-based bank, said in August it was selling $2 billion of distressed mortgages and home-equity loans.

Pricing Floor

“Prices have found a floor and have risen to levels that are more appealing for banks to sell,” said Chris Hentemann, a managing partner at 400 Capital Management LLC, a New York-based firm that specializes in mortgage- and asset-backed securities. “Regulatory capital requirements are changing for the asset class, which is putting pretty significant constraints on what banks will be able to hold on their balance sheets,” said Hentemann, formerly head of global structured products at Banc of America Securities LLC.

Since its founding with a single grain-storage facility in 1865, Cargill has developed expertise in commodities trading, using futures and other instruments to manage the price risk associated with buying, selling and processing agricultural commodities, according to Lisa Clemens, a spokeswoman. That led to trading financial instruments and, in the late 1980s, distressed-credit investing. The company had almost $108 billion of revenue in its latest fiscal year.

$10 billion in Assets

CarVal, the parent’s vehicle for investing in distressed assets, now has about $10 billion under management in four categories, including loan portfolios, corporate securities, real estate and special opportunities.

Under the loan-portfolios strategy, CarVal invests in commercial borrowings, consumer receivables and residential mortgages that are either delinquent, modified or have been written off. The corporate-securities strategy focuses on bonds, bank debt, credit-default swaps and stocks tied to leveraged or financially troubled companies.

Before joining Cargill in 1992, Clark, 46, was a manager in the financial-services practice of Arthur Andersen & Co. He runs CarVal with President John Brice, who came to Cargill in 1996 after working in the private-equity and quoted asset-management division of Friends Provident, a U.K. life-insurance company.

Cargill is among the Investors in CVI Credit Value, whose fundraising was disclosed in an Oct. 15 filing with the U.S. Securities and Exchange Commission.

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