Hedge fund Citadel to sell up to $2 bln of notes
Tuesday, November 28, 2006 4:32:15 PM (GMT-06:00)
Provided by: Reuters News
(Adds hedge fund background, comment on possible goal)
By Dena Aubin
NEW YORK, Nov 28 (Reuters) - Citadel Investment Group, one of the world's largest hedge fund managers, plans to sell up to $2 billion of notes next week in what is believed to be the first public debt sale by a hedge fund, according to offering documents.
The notes, aimed at giving the $12.7 billion Chicago-based hedge fund group a more stable source of capital, could pave the way for more debt offerings from the $1.2 trillion hedge fund industry, analysts said.
"It could set an example for more established players in the industry," said Daniel Koelsch, an analyst for Standard & Poor's in Toronto. "You might get a stable, patient layer of funding that they really need, especially on the back of markets that can dry out extremely quickly."
Hedge fund manager Amaranth Advisors LLC recently had to liquidate positions after being hit with heavy investor redemptions sparked by the fund's $6.4 billion in energy losses, causing the fund to wind down.
Citadel was founded in 1990 by Kenneth Griffin, 38, president and chief executive.
Its two main funds have posted annualized net returns of over 20 percent per year for many years, putting it in a pantheon of top-performing hedge fund groups, although some strategies, notably energy and credit trading, suffered losses in 2005, according to offering documents.
The "multi-strategy" funds use many different trading strategies across the globe, including merger arbitrage, distressed debt, credit derivatives, energy assets, reinsurance and others.
Citadel said in offering documents that the proceeds of the debt offering "will enhance the stability of the funds' capital base," since funds cannot be withdrawn by investors during redemption periods, as is typical for hedge fund investors.
Currently, 56 percent of the existing capital in its two main funds can be withdrawn at the end of any quarter, and all of the capital is potentially subject to withdrawal within three years.
The note offering prompted some speculation that Citadel may be preparing to close its funds to outside investors, a move that would be similar to that of Renaissance Technologies' highly successful Medallion Fund, which gave back $7 billion of outside investor capital in recent years.
By closing to outside investors, the fund could retain all profits for its partners, rather than paying out 80 percent of profits to investors, as is typical for hedge fund groups.
"For a lot of hedge funds, that's the ultimate goal," said a senior hedge fund analyst at a multibillion dollar hedge fund, who asked for anonymity. "If you are that good, closing to outside investors makes it that much better for you."
The notes will be issued under a "medium term note program," which allows Citadel to sell debt in one or more pieces up to $2 billion in total, with maturities of nine months or more. The first debt sale, expected next week, will be five-year senior unsecured notes, market sources said.
"It's long-term funding, which is actually a very beneficial thing for a hedge fund like Citadel," said S&P's Koelsch. "The capital they usually hold is subject to redemption provisions, so it provides a certain amount of stability for their whole funding structure."
A spokesman for Citadel did not return phone calls seeking comment.
The notes will be issued by Citadel Finance Ltd., a unit of Citadel's two main funds, Kensington Global Strategies Fund Ltd. and Wellington LLC. Goldman Sachs <GS.N> and Lehman Brothers <LEH.N> are the placement agents for the notes.
Despite a long record of double-digit returns, the funds are selling debt at what some investors believe is the top of the investment cycle.
"I certainly have a healthy amount of skepticism, just with respect to where we are in the cycle from a big picture perspective," said Robert Bishop, portfolio manager for Seneca Capital Management in San Francisco.
The $9.5 billion Kensington fund returned 20.74 percent annually in the 8-3/4 years ended Sept. 30, while the $3.26 billion Wellington fund returned 23.64 percent over that period, according to the Citadel offering documents.
S&P rates the notes "BBB," the second-lowest investment grade, while Fitch Ratings expects to rate them one notch higher at "BBB-plus."
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