Ciena Still Entwined with Long Term Capital via Derivatives?
(anybody know if Long Term has cleared their position of Ciena yet?)
October 7, 1998
Long-Term Capital Went
Beyond Traditional Positions
By MITCHELL PACELLE
Staff Reporter of THE WALL STREET JOURNAL
Investments by Long-Term Capital Management LP appear to have
ranged far beyond traditional bets on the movements of bonds and
takeover stocks, judging by recent Securities and Exchange Commission
filings on the ailing hedge fund's stockholdings.
As of June 30, the fund owned $539.2 million worth of stock in 76
companies, including stakes in companies slated for takeovers like Waste
Management Inc., Teleport Communications Group, and 360
Communications Co., all purchased earlier this year. Such investments,
called risk arbitrage, involve the simultaneous purchase of stock in a
company being acquired and sale of stock in its proposed acquirer.
But Long-Term Capital's stock holdings also indicate that the Greenwich,
Conn., hedge fund was involved in bets on the relative values of certain
companies' stock, convertible stock, warrants, options and even the
relative values of the voting and nonvoting shares. The hedge fund's
nontakeover-related stock holdings included stakes in Dell Computer
Corp., Bear Stearns Cos., and Revlon Inc.
"No investors that I know of got in to the fund expecting them to go
beyond bond arbitrage," said Charles Gradante, managing principal of
New York-based Hennessee Hedge Fund Advisory Group. "As it turns
out, they were doing convertible arbitrage, risk arbitrage and options
arbitrage."
Separately, Credit Lyonnais SA Tuesday acknowledged that it made
personal loans totaling $34 million to three Long-Term Capital partners.
The bank says the loans are guaranteed and it has no other loans
outstanding of this type. Credit Lyonnais wasn't among the Wall Street
securities firms and commercial banks that put up cash for the rescue of
Long-Term Capital.
The latest SEC filings appear to significantly under-represent the amount of
capital that Long-Term Capital put at risk in the takeover arena. "This is
not a big risk-arb portfolio," said one risk-arbitrage investor. "These aren't
the big deals that are around. Why would they waste their time?"
The explanation lies in derivatives, whose values are derived from an
underlying security or other assets, which can be a low-cost way to make
leveraged bets. Long-Term Capital took positions in many takeover
stocks by purchasing derivatives, according to someone familiar with the
fund's investments. The derivatives positions don't show up in the SEC
filings.
Some of those derivatives, purchased from financial institutions, entitled the
hedge fund to collect the price increase of the takeover stocks without
actually having to buy the stock, he said. And by using derivatives, the firm
wasn't bound by limitations on borrowing more than 50% of the value of a
purchased stock.
Using such leverage enables an investor to squeeze higher profits out of
takeover arbitrage deals that may be shunned by some investors as not
profitable enough, explained one such investor. "Safe" takeover deals --
those thought to have a high likelihood of being completed -- are shunned
by some investors as not profitable enough.
"Some guys are taking safe deals and levering them up to get higher rates
of return," this investor said. "The problem comes if you don't just do it on
safe deals."
The June 30 SEC filings, for example, don't reveal what traders
say was a large position held by Long-Term Capital in Ciena Corp., a
telecommunications-equipment maker that was to have been acquired by
Tellabs Inc. The hedge fund took a big hit when those shares dropped
from more than $90 apiece to $13 when the deal was scrapped.
The near-collapse of Long-Term Capital earlier this month, which led to a
$3.6 billion capital infusion by a consortium of banks, has required the
hedge fund to sell off some of its more liquid assets, leading to a dramatic
reduction of its stock holdings, according to someone knowledgeable
about the sales.
Traders suspect the sales have been partly to blame for a recent downturn
in the prices of some of the stocks held by takeover stock traders, such as
American Bankers Insurance Group Inc., slated to by acquired by
Cendant Corp. Questions remain about that deal because of the sharp
drop in the price of Cendant's own shares.
As of June 30, Long-Term Capital's largest reported stock holdings were
a $95 million stake in Waste Management, $41 million in Dell, $40 million
in Teleport Communications, another $40 million in 360 Communications
and $25 million in Beneficial Corp., according to Carson Group, a New
York research group that tracks SEC filings. It also held stakes in
Microsoft Corp., Berkshire Hathaway Inc., General Electric Co. and
Washington Post Co.
The fund's stake in Revlon, worth $12 million on June 30, was related to a
bet it made on the relative value of the cosmetic company's stock and
bonds, according to someone familiar with the positions. Its position in
Dell was related to a bet on a perceived price discrepancy between stock
and options in the computer maker, the same person added. |
