Falcone’s Harbinger Capital Turns to Dell’s MSD for Loan

Harbinger Group's Philip Falcone
Philip Falcone, chairman and chief executive officer of Harbinger Group Inc. Photographer: Jacob Kepler/Bloomberg

Philip Falcone’s hedge fund, having taken out a loan earlier this year at an effective annual interest rate of 24 percent, has found a new source of financing: the money-management arm of billionaire Michael Dell.

Harbinger Capital Partners Master Fund I Ltd. entered into a note purchase agreement on June 14 with a credit fund run by MSDC Management LP, according to a June 18 regulatory filing. MSDC Management is an investment adviser backed by MSD Capital LP, the private investment firm for Dell and his family.

Under the financing agreement, the MSD credit fund can swap as much as $50 million of loans extended to Falcone’s Harbinger Capital for part of its stake in Harbinger Group Inc., his publicly traded investment vehicle. Harbinger Group has served as a source of capital for Falcone, raising about $400 million last year through the sale of convertible preferred stock to investors such as Fortress Investment Group LLC, George Soros’s Quantum Partners LP, and James Litinsky’s JHL Capital Group LLC, according to federal filings.

Lewis Phelps, a spokesman for Harbinger Capital, and Todd Fogarty, a spokesman for MSD Capital, declined to comment, while Falcone didn’t return a telephone call and an e-mail. Harbinger Capital and MSD Capital are both based in New York.

The terms of the loan, such as the total amount of money Harbinger Capital can borrow and the interest rate it will pay, weren’t disclosed in its filing with the U.S. Securities and Exchange Commission.

Jefferies Loan

It replaces a loan, originally for $190 million, that Harbinger Capital received Jan. 31 from Jefferies Group Inc., according to the SEC filing and New York state corporate records. Harbinger Capital had already paid down about $82 million of the Jefferies loan, which was scheduled to mature in October and carried an annualized interest rate of 24 percent, more than four times the rate paid by corporate borrowers with non-investment-grade credit ratings as of January.

At the end of January, Harbinger Capital Partners had invested about $3 billion, equaling about 60 percent of its assets, in LightSquared Inc., a Reston, Virginia-based firm that planned to build out a network offering high-speed data service to as many as 260 million people. In February, the National Telecommunications and Information Administration recommended that the Federal Communications Commission withdraw the license for the company’s network, after finding that its signals would interfere with global-positioning systems.

LightSquared filed for bankruptcy protection three months later.

MSD Capital

MSD Capital was formed in 1998 to exclusively manage the capital of Michael Dell, the founder of computer maker Dell Inc., and his family. In July 2009, the principals of MSD Capital, including Glenn Fuhrman and John Phelan, formed MSDC Management LP as an investment adviser that would run private funds backed by outside capital as well as by Michael Dell.

At the end of last year, MSDC had gross assets of $4.44 billion, according to documents filed with the SEC on April 30. This included about $1.78 billion in MSD Credit Opportunity Fund LP; about $1 billion in MSD Energy Partners LP, established to invest in oil and gas companies as well as alternative energy providers, utilities, and drilling firms; and $886.8 million in the MSD European Opportunity Fund LP.

‘Value Opportunities’

The credit opportunity fund, according to the SEC registration, invests in “distressed, stressed, special situation and event-driven value opportunities,” by acquiring bank loans, bonds, trade claims, hybrid securities and equities. It focuses on companies that are undergoing bankruptcy, restructuring or reorganization as well as securities selling below intrinsic value because of a lack of access to capital in financial markets.

In a letter dated June 15, Harbinger Capital laid out the terms of an exchange option in which MSD HMF Investments LLC, an affiliate of MSD Credit, could swap loan advances for Harbinger Group shares held by Falcone’s hedge fund. As of June, Falcone and his affiliates, including Harbinger Capital, held a 69 percent stake in Harbinger Group comprised of 129.86 million common shares.

Under the agreement, MSD HMF can buy the Harbinger Group shares at $6.50 each until June 2013, with the price moving to $7 during the following year of the loan. The maximum amount of advances that MSD HMF can exchange for shares is $50 million, which would equal a 5 percent stake in the holding company. It can also exchange advances to Harbinger Capital for other securities the hedge fund owns.

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