New York hedge fund firm Avenue Capital Group is joining forces with a Canadian insurance holding company to prop up North America’s biggest producer of pulp and paper. The manufacturer, Montreal-based AbitibiBowater, listed debts exceeding $6 billion when it filed for bankruptcy protection in April. Avenue and Toronto-based insurer Fairfax Financial Holdings agreed to a $206 million debtor-in-possession loan that may grow to $600 million, according to court documents.
Avenue and Fairfax stepped forward after aid from Norwalk, Connecticut–based GE Capital and others fell through. DIP loans are an attractive business for distressed-debt specialists like Avenue, the $16 billion hedge fund firm co-founded by Marc Lasry (see “Talking Points”). Besides being first in line for repayment when a debtor emerges from bankruptcy, investors can earn generous fees and exert influence over the restructuring process. Avenue and $25.7 billion Fairfax have other interests in AbitibiBowater. Avenue is said to be a major bondholder; Fairfax recently wrote down 90 percent of a $350 million stake in the company’s convertible bonds.
Rahul Gandhi, a paper and forest products analyst with credit research firm CreditSights, based in New York and London, says it’s too early to tell how Avenue and Fairfax will fare: “If they’re going to recover any of their investment, they need to take a leading position in terms of ownership and going into bankruptcy.”
Fairfax hasn’t always been so cozy with hedge funds. In 2006 it filed a $6 billion lawsuit against a host of high-profile shops, including Stamford, Connecticut–based SAC Capital Advisors and New York–based ThirdPoint Partners. In the suit, which is still in court, Fairfax accuses the defendants of scheming to manipulate its stock price.
Andrew Goldman, a New York–based partner in the corporate and transactional department of law firm WilmerHale, says DIP loan defaults are rare. Even if AbitibiBowater does go bust, a fire sale of its assets might ensue. Goldman says the distressed-debt hedge fund firms he talks with have many new investments competing for attention — a sea change from two years ago. “The rub is to figure out which of them are born of good businesses but in a bad credit market,” he notes. “Bankruptcy helps a bad balance sheet more often than it helps a bad business.”
