In its first foray into U.S. money management, the Chicago-based subsidiary of Prudential Corp. PLC, the U.K.'s biggest insurer, is raising $300 million in a distressed securities fund.
The firm, PPM America, so far has raised more than $150 million for the Special Investments Fund. Of the total, $25 million is from its parent, London-based life insurer Prudential Corp.; $75 million is from Pru's U.S. subsidiary, Jackson National Life Insurance Co., Lansing, Mich.; and $50 million is from two other U.S. insurance companies.
The fund hopes to attract another $150 million - $100 million in equity and $50 million in debt - before year end, by targeting pension funds. Officials just began talking to funds and consulting firms in the past three weeks.
PPM's strategy is precisely the aggressive activist approach recently abandoned by Fidelity Investments for a high-yield bond fund using distressed securities. Nevertheless, Levoyd Robinson, a PPM managing director, said such an approach "is really the best way to improve value. You have to be active in the restructuring process otherwise you're letting someone else decide your fate."
PPM might have an uphill struggle. F. John Stark III, the fund's senior managing director, has grabbed many headlines for leading bondholder revolts against corporations that threaten to erode bond values - for instance, by taking on substantial debt or spinning off operations. Yet now it's marketing a fund to, among others, pension funds of corporations that might someday be on the fund's hit list.
When the fund began operations June 21, it received about $100 million in equity from PPM affiliates, $2 million from PPM, the general partner, and $2 million from its portfolio managers and an insurance company investor. It also issued $50 million of 9.12% senior secured notes, rated Baa2 by Moody's Investors Service and BBB by Duff & Phelps Credit Rating Co.. The bonds were purchased by the Teachers Insurance and Annuity Association and Transamerica Corp.
The fund is seeking an additional $96 million in equity from outside investors. It then plans to issue an additional $50 million of rated senior secured notes to provide it with total capital of $300 million.
PPM hired three young investment managers to spearhead the effort. Mr. Robinson, who joined PPM in May, hails from First Chicago Capital Corp., where he oversaw the firm's $250 million distressed portfolio. Brian Schinderle joined the firm in August from Sanwa Business Credit Corp.'s special situations group, where he managed a $75 million distressed fund. Brad Scher also joined the firm in August; he had been director of distressed loans for TIAA.
PPM got its start in 1990, primarily to help unwind a $674 million troubled loan portfolio for Jackson National. Today, the portfolio totals $100 million and PPM earned an annualized 33% through Dec. 31 on the portfolio of the underlying securities. Prudential is the largest institutional property owner in the United Kingdom, yet PPM is little known in the United States.
The firm did earn recognition in institutional bond circles some years ago for its involvement in creditor and bondholder committees, especially that of Marriott Corp. It has served on 37 bondholder committees since 1991, with Mr. Stark serving as chairman or co-chairman in 16 of those panels. Among the companies: Bally's Grand Inc., Six Flags Entertainment Corp., Orion Pictures Corp., National Gypsum Co., Insilco Corp., Phar-Mor Inc. and Carolina Steel Corp.
PPM is based in Chicago but just opened a New York office. PPM runs $28 billion, of which $24 billion is for Jackson National Life.
Mr. Stark, a lawyer who has been vocal in a number of corporate restructurings and loan workouts for the firm, is heading PPM's special investments group. Under Mr. Stark's leadership, PPM led a bondholder lawsuit against Marriott in 1993 and 1994 over the company's spinoff of its real estate business from its more profitable lodging operations. While bondholders lost the case, PPM's efforts focused media attention on bondholder rights.
PPM intends to take an active role in restructurings and provide debtor-in-possession financing to portfolio companies. The firm has generated more than $250 million in DIP loans on behalf of Jackson National since 1992. DIP loans are granted with court approval in Chapter 11 workouts and typically enjoy senior status over other creditor claims while earning higher rates of return than pre-bankruptcy credits.
PPM officials say most banks sponsoring distressed funds have not been aggressive DIP lenders. PPM's fund intends to take controlling positions in workouts, something banks often cannot do because of regulatory restraints and a more conservative corporate culture.
The fund has a seven- to nine-year time horizon, similar to buy-out or venture capital funds. Its exit strategy on investments will entail sales of securities in the secondary market, debt for equity swaps, recapitalizations and perhaps even public offerings of restructured securities.
PPM America Special Investment Fund already deployed some of its capital with investments in distressed U.S. corporate securities such as financial liabilities, trade claims and bank debt.
Its goal is to return at least 25% per year, before deduction of fees.