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| Patrick Halloran |
Wayzata Investment Partners, the distressed debt investment company spun off from CFSC Wayland Advisers last June, is planning to add to its $1.3 billion in assets by raising a distressed private equity-style fund this fall to target bankruptcies and distressed corporate situations, according to Patrick Halloran, ceo and managing partner. The Minn.-based company has been buoyed by a strong M&A market this year and has sold over five companies in the past year, but the market is really starting to look interesting again on the distressed side, said Halloran. "We think this fall could be the start of very interesting times. There have been a lot of bad deals that have come to market over the last 18 months. That, combined with the hot distressed money, could result in a dramatic downward price action."
Wayzata Investment Partners was founded in June 2004 and is a spin-off from CFSC Wayland Advisers, the debt-financing arm of Cargill Financial Services Corp. The Wayzata team is headed by ceo and managing partner Patrick Halloran, who owns more than 50% of the firm. He began his investment career on the high-yield distressed side at Dean Witter in Chicago in the mid-'80s and moved to Cargill in 1989, where he started up the high-yield and distressed investments desk. Halloran discusses with LMW Wayzata's focus, opportunities in the debt markets and future plans.
LMW: How did Wayzata come to life and what will be the main focus?
Wayzata is essentially a spin-off of Cargill Financial Services Corp. We have seven partners, two offices, one in Boston and one in Wayzata, Minn., with roughly $1.3 billion of assets under management and eight different investment vehicles raised over the last six or seven years. Our major focus is on finding middle-market situations where we can really control the bankruptcy, reorganize the company and end up owning a large chunk of the company when it comes out of bankruptcy.
The strategy is not going to be a lot different than what we have been doing over the last 10 years and that is what we have been focusing on, distressed corporate debt. Right now, we are looking to raise a couple of things. In the late fall we are looking to raise another distressed private equity-style fund. We are going to be investing in bankruptcies and distressed corporate situations. We are also looking at the possibility of issuing some sort of CLO, but we are still in the conceptual phase.
LMW: Why did separating from Cargill make sense and what will the effects be?
It happened because it is probably easier for us to raise capital without having a big market sponsor on top of us. I think potential investors sometimes get a little bit nervous about having a huge 800-pound gorilla owning the company and not knowing if the strategy can change at any particular point in time. Now that the company is owned by myself and my six partners it is pretty clear what we are trying to do over the next 10 to 20 years. The spin-off is not going to change our strategy much.
LMW: How much of this $1.3 billion in assets actually comes from Cargill?
As part of the spin-out we agreed to take all of the existing vehicles out of the Cargill umbrella. In 1989 we started with $25 million of capital. Throughout the early-to-mid-'90s we continued to invest in the business all with Cargill proprietary money, and then in 1998, we went out and raised external funds with third-party capital. From 1998 through April of 2004 we raised eight different investment vehicles and by the time we spun-out of Cargill, approximately 92% of the capital we managed was third-party capital and not Cargill money. Even though we have gotten a lot of third-party capital, Cargill is still our largest investor throughout the various funds.
LMW: What will be the business relationship with Cargill now?
We have a very good relationship with the people at Cargill and we think that we will probably have a better ability to work with some of the operating businesses in the future because we will not have the same conflicts that we had when we were under the Cargill umbrella. [For instance] there was a situation where we accumulated a large distressed debt position, we reorganized the company and we came out of the reorganization owning 70% of a steel company. And if we own 70% of a steel company and Cargill is one of its biggest competitors it just does not look good. Also, it was difficult to get Cargill to come in and use them as experts or as a potential management team of the company when we had such a close affiliation. So, those are the things that will be gone, gone forever, which is beneficial to us.
LMW: Can you provide specific examples of plays that Wayzata has pursued?
Last year, during the Microcell [Telecommunications] reorganization, our group was the largest holder of bank debt and the largest holder of the company's bonds. We, as a member of its steering committee, were instrumental in forcing a reorganization of the company rather than a sale. We believed the sale of the company would provide significantly less value. Today Wayzata is one of the largest equity holders in Microcell.
Also, in the 2001-2002 timeframe, Wayzata managed to acquire a significant majority of Trump Hotel Casino & Resorts' 15.5% notes that were secured by a riverboat in Indiana and a lien on PIK notes at Trump Marina Casino. The notes were also secured by liens on the common stock of Trump Plaza and Trump Taj Majal. The 15.5% bonds were ultimately redeemed at the call price of 101.6.
LMW: What kind of opportunities do you see in a more mature distressed debt market and how does Wayzata navigate a crowded market?
We are seeing right now a market that is really starting to look interesting again. We are seeing a lot of nervousness in the market. What we have done over the last year or so is sell off a lot of our existing distressed investments that we have taken through the bankruptcy process, cleaned up and used the strong market to sell. We probably sold between five and 10 companies over the last nine to 12 months, mostly going into strategic investors, middle-market private equity funds and LBO funds. The M&A environment has been very strong, which allows us to sell the companies that we've taken through the bankruptcy process.
LMW: Beyond supply and demand issues, what do you see as the main challenges of being a distressed buyer?
There is a lot of distressed money out there that has been through the ups and downs over the last 15 years. Most of our money is locked up for eight years, which is a lot different than some of these hedge funds that are playing in the distressed market. When the market is down investors pull their money out. So I think that if we are coming to a downturn in the market again the downdraft is going to be very steep and very dramatic. This is going to happen because a lot of these players are hedge funds with short lock ups on the money.
LMW: When do you expect this to happen?
We think this fall could be the start of very interesting times. There have been a lot of bad deals that have come to market over the last eighteen months. That combined with the hot distressed money could result in a dramatic downward price action.
LMW: Do you believe investment banks are too proprietary in the distressed space?
We have always avoided dealing with investment banks with proprietary trading desks. We try to team up with dealers that do not have a lot of capital, or dealers that are smaller, because the big dealers with proprietary trading desks simply take our ideas for themselves. We do too much upfront work on these distressed opportunities to share them or give them away to large proprietary trading desks.
LMW: Where does Wayzata see itself in five-to-ten years?
We are actually working on a strategic plan right now. I do not think 5 to 10 years is a realistic time frame but we are looking at going out two to three years. We are looking to expand our business and will likely double the size of our assets under management over three or four years.
LMW: How do you see the distressed market in that period of time?
I can only talk about what I've seen in the past. Over the last 15 years in this market, you would consistently see ups and downs. It is a very cyclical business. You have to know how to play the market, when things are beaten up you have to acquire your positions. When the high yield and distressed market is strong that is when you exit situations that you have taken through bankruptcy. I do not think that will change because when the market is very frothy companies can come to market with new high yield debt and leveraged loans and that will never change.