Citadel first Hedge Fund to sell Bonds ($2 billion)

Discussion in 'Wall St. News' started by JayS, Nov 28, 2006.

  1. JayS


    Citadel Hedge Fund May Issue $2 Billion in Bonds (Update9)

    By Mark Pittman

    Nov. 28 (Bloomberg) -- Citadel Investment Group LLC, the financial firm controlled by Kenneth Griffin, plans to be the first hedge fund to sell bonds as part of an effort to raise as much as $2 billion.

    The fund, which has $12.8 billion of assets, will sell $500 million of notes next week, according to a person with knowledge of the private offering. Fitch Ratings assigned a BBB+ investment-grade rating to the notes and Standard & Poor's will rate the debt one level lower at BBB. Both are the first public debt rankings for a hedge fund.

    The plan may cut Chicago-based Citadel's reliance on financing from Wall Street investment banks, which provide leverage and trading services to hedge-fund clients through prime brokerage units. The bonds will be sold through a medium-term note program, meaning Citadel can sell the total amount of debt over time rather than in a single offering.

    ``This marks a historic point in the industry, a coming of age,'' said Daniel Koelsch, S&P's analyst for Citadel in Toronto. ``Before, a hedge fund was always tied to a prime broker.''

    Debt rated above BB+ at Fitch and S&P is considered investment grade. Similarly rated companies pay a yield of 5.8 percent, or about 1.22 percentage points above similar-maturity Treasuries, on an average maturity of 6.3 years, according data compiled by Merrill Lynch & Co.

    ``There will be very few hedge funds that will be eligible for an investment-grade rating,'' said Fitch analyst Eileen Fahey in Chicago, in an interview today. ``There will also be very few hedge funds with the wherewithal to diversify their funding as much as Citadel has.''

    Amaranth Trades

    Bryan Locke, a spokesman for Citadel, declined to comment. Citadel and JPMorgan Chase & Co. in September took over energy trades from Amaranth Advisors LLC, the Greenwich, Connecticut- based hedge-fund manager that collapsed after losing $6.6 billion on bets on natural-gas prices.

    Hedge funds are unregistered pools of capital from wealthy individuals and institutions that allow managers to participate significantly in the gain or loss of the money invested. Citadel, founded in 1990, keeps 20 percent of all trading profits and charges all expenses to investors.

    Citadel returned 20 percent this year through Oct. 31, helped by gains on convertible bonds and statistical arbitrage, a strategy aimed at profiting from the idea that prices of various securities will tend to hold to a historic relationship.

    Medium-term notes are unsecured, continuously offered obligations with maturities ranging from nine months to 40 years. Each medium-term note issue is drawn down from the program level, which in Citadel's case is $2 billion, according to Fitch. The program is used by the world's biggest financial institutions, including Citigroup Inc. and Bank of America Corp.

    Guaranteed by Funds

    The notes can be issued for any maturity. The debt is guaranteed by Citadel's two biggest hedge funds: Citadel Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC. The funds would have to back the debt should either fund rating lose its investment-grade rating.

    Fitch, which raised Citadel's credit rating Oct. 30, said it based its rating on better diversification and increased duration of funding of financing sources, according to a news release from the New York-based ratings company.

    ``Their design is to reduce their reliance on Wall Street firms for funding, which would eventually provide them with a competitive advantage because they won't be forced into liquidation during periods of stress,'' Fahey said.

    Management Effort

    Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., which are managing the transaction, will begin presenting details to investors in the next week, Fitch said.

    ``This is a significant management effort for them to go out on a roadshow,'' Fahey said. ``They're not open to public disclosure, but they are providing more disclosure than other hedge funds.''

    Citadel's gain through October compared with a 14 percent advance including dividends by the Standard & Poor's 500 Index, a commonly used benchmark for the U.S. stock market.

    Citadel trades assets including stocks, oil and bonds. Griffin opened the firm with $2.6 million, three years after he began trading convertible bonds out of his dorm room at Harvard University.

    Anand Parekh, the firm's head of global equities, left the firm last week after posting below-average returns, two investors said.

    To contact the reporter on this story: Mark Pittman in New York at .

    Last Updated: November 28, 2006 17:04 EST
  2. Mvic


    How do you buy notes from these guys when you have no idea what is backing them? Will be interesting to see how the market prices them. Looks like an LTCM in the making, a reversion to the mean fund that has found a way to increase leverage.
  3. Huh? What happens to Citadel's debt rating during one of these stressful periods? Any macro event could impact Cit's debt rating, w/o the fund necessarily taking a trading-hit. Terrible idea.
  4. actually you couldn't be more wrong. their balance sheet will drive the credit rating, which is directly reflective of their trading/operating results.
  5. Citadel isn't in the business of reporting. Rating agencies shoot first and ask questions later. How did Amaranth's balance sheet look before those natgas switches blew-up? Selling debt = selling a CDS against your firm. Incredibly stupid. Not something a trading partnership should pursue. As mvic stated, reminiscent of LTCMs partnership warrant; but in this case, it will be Citadel's bondholders and fund investors holding the bag.
  6. one of the cardianl rules of trading:

    Don't trade what you don't have.

    It's crazy. I think it's cool though. Not my investment. Interested in seeing how much it costs.
  7. WinDiff


    Griffin is a very courageous man and IMO all he is trying to do here is ride out the final e'gy downslide! I would be looking at him raising at least 3 to 4Bil if he is to stay alive in the near future. Sharks are circling already Mr. Griffin so cut the shit (I know you are saying your can't), and walk away. Do it for your kids!!!
  8. Don't read too much into it, it's just more paper pushing.
  9. If the system is willing to give massive home loans with no documentation to anyone with a pulse, this should come as no surprise.
  10. You guys are displaying your financial ignorance publicly when you make comments like these. King Solomon once said, "even a fool who remains silent appears wise."

    ...consider that before you respond next time!

    In direct response to this ridiculous post, the quest for an investment grade rating has been underway for quite a while now. It's not an overnight process and is not the response to a present vulnerability.

    This is a hedge for Citadel and a hedge that Niederhoffer, LTCM, and Amaranth could've all used to avert their margin calls. The reality of a squeeze is that it is a short-term event, an event that is perpetuated by the "smart-money" to drive their opposition into a forced liquidation so that they can "bail them out" at their own gain.

    Ken is sharp and than some. Don't kid yourself and question this man's business savvy. Ken understands risk and is protecting himself and his investors from predatory forces that will come for him if the opportunity were to present itself.

    As a final note and response to your obvious ignorance, this fund is anything but a reversion to the mean strategy. You obviously have no understanding of Citadel and its operation.

    Goodluck, I can't wait for your donation to the market. If Ken hasn't already spent it on a piece of art I hope I get the opportunity to.


    #10     Nov 28, 2006