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Hedge fund Yorkville spies gap in loans market

Wed, Feb 11 2009, 16:54 GMT
http://www.afxnews.com

By Claire Milhench

LONDON, Feb 11 (Reuters) - Yorkville Advisors, a $1 billion hedge fund, said it is stepping into the lending vacuum left by banks as it provides struggling firms with loans for up to two years, typically in the $5 million to $40 million range.

More recently the value of the loans has increased as larger-cap companies seek assistance. At end-January, Yorkville loaned $147.9 million to shipping firm Ocean Freight Inc.

The move is one way for hedge funds to thrive despite the global financial and economic crisis, and mirrors similar investments by billionaire investor Warren Buffett.

"We are seeing so many opportunities, and there are so few lenders about we can be fairly choosy," said Tom Anderson, director of investor relations at Yorkville.

"To say that our pipeline is full would be an understatement -- this is a very good time for us," he told Reuters in a telephone interview on Friday.

With credit scarce and costly, and banks scaling back lending commitments, many companies have been forced to seek alternative sources of finance.

Anderson described the New Jersey-based Yorkville as a bank wrapped in a fund structure. He said it had traditionally done smaller private placements, helping companies with a market capitalisation of less than $250 million.

Now Yorkville is being approached by companies with market caps of between $2 billion and $4 billion, so the deal size is increasing.

The $147.9 million loan to Ocean Freight will be used to repay debt, the balance intended primarily for capex, working capital and, potentially, vessel acquisitions.

Anderson described this investment as "drip financing" through a Stand-by Equity Distribution Agreement (SEDA). This allows the company to do a series of mini-secondary placements through Yorkville.

Usually, Yorkville lends to companies by way of convertible debentures, and exits primarily by converting the debt to equity and selling it into the market.

If the company cannot repay Yorkville in cash, it can repay in shares, giving it a way to stave off default.

SECURE STRUCTURE

"This is a fairly secure type of structure -- if you put it together properly you can almost guarantee your economics," said Anderson. Last year, the fund returned 3.3 percent, but the average coupon is just over 10 percent, and Anderson expects this to rise.

"Berkshire Hathaway has made it much easier for us. With Warren Buffett charging Swiss Re 12 percent, we can source transactions with 15 to 16 percent coupons," he said.

"So next year we could have an average coupon of 13 percent."

Yorkville has 23 ex-bankers in-house to assess opportunities, including specialists in alternative energy, oil and gas, technology, and pharmaceuticals.

Anderson recognises default rates are rocketing, but said Yorkville only invests in companies with suitable collateral and where a liquid public market is likely to provide an exit.

He said Yorkville also preferred to receive a proportion of the principal and interest due on its loans every month, meaning Yorkville would not be left empty-handed if a company went bust before the loan came due.

(Editing by Andrew Macdonald) Keywords: YORKVILLE/

(claire.milhench@thomsonreuters.com; +44 (0)20 7542 3571; Reuters Messaging claire.milhench.thomsonreuters.com@reuters.net)

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