As a junk bond trader at Credit Suisse Group AG, Hamza Lemssouguer reeled in huge profits spotting stress in credit markets.
(Bloomberg) — As a junk bond trader at Credit Suisse Group AG, Hamza Lemssouguer reeled in huge profits spotting stress in credit markets.
Now on the buyside, he’s still looking for stress, and seeing it everywhere. That’s providing the 33-year old owner of hedge fund Arini with his latest trade: lending to borrowers in need of quick cash they can’t get from public markets.
“Maybe this market is something we have never seen before,” Lemssouguer said in an interview at his office in London’s Mayfair district. “There is a lot of stress and distress and a maturity wall.”
In the next 12 months, US and European companies face maturities on about $820 billion of debt, about 7% of what’s outstanding, according to data compiled by Bloomberg. After 2025, the wall and refinancing burden gets higher, exacting the heaviest toll on the most vulnerable companies.
On a recent October morning, Lemssouguer wore a faded Mickey Mouse T-shirt with a slogan fitting for someone who deals with stressed borrowers — “It’s all going to be okay” — and identified the potential pressure points.
Lemssouguer says the need for fast cash will become more acute as banks and businesses prepare for an economic downturn. He estimates companies that were paying 2% to 4% on their debt will see those costs rise to 8% to 10%.
While private credit sets its sights on financing ever larger leveraged buyouts, he expects even performing businesses will face funding shortages in order to hire, spend, invest or make acquisitions.
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“There is a gap in the market as a lot of private credit transactions focus on the big buyouts,” he said.
The credit opportunities strategy will parcel out capital in slugs of about €30 million ($31.6 million) to €200 million, according to a person familiar with the strategy.
Rates on individual loans are likely to vary widely, but the fund is targeting overall returns of about 15%, compared with about 6% on publicly-traded European high-yield credit, the person said.
Arini will tap existing investors before offering it broadly next year. Investors’ capital will be locked in for about four years.
Distressed debt managers sometimes seek profits from loan-to-own strategies, scooping up deeply discounted bonds or loans and converting them into equity stakes — with potentially huge upside — through court-administered restructurings.
That’s not Lemssouguer’s aim here, according to the person. Instead, he will ride out stress and hope to pick winners in the already crowded field for private lending.
Lemssouguer and Arini declined to comment on the new strategy or performance of existing ones.
Lemssouguer started his credit-focused hedge fund last year, naming it Arini after the parrots he breeds in his spare time. Four senior analysts from Credit Suisse joined him. In all, 40 people work at the firm, including 20 on the investment team.
The hedge fund was up 5.7% in September, bringing returns for the first nine months of the year to around 27.8%, according to the person familiar. A rough comparison of peers in the Eurekahedge’s Structured Credit Hedge Fund Index shows a gain of about 6% this year.
The credit opportunities strategy will be Arini’s fourth. In addition to making private loans to leveraged companies, it can buy securities from the secondary market that trade infrequently.
The Master Fund started in January 2022 targets mostly single-name corporate bonds, loans and credit-default swaps as well as some liquid structured credit. In May the firm launched a structured credit fund that buys less-liquid securities. Together they now have $3.1 billion of assets, according to the person familiar.
Arini is also collecting leveraged loans to bundle into its first collateralized loan obligation.
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As central banks signal that rates might need to stay higher for longer than investors had expected to curb inflation, the strain could fracture companies, consumers and ultimately the economy, Lemssouguer warns. He’s betting on being there to pick up the pieces.
“It is very hard for me to see a world without a significant slow down over the next few years,” he said. “The cost of funding has gone up, cash flows will be impacted, consumer spending affected and the trickle-down effect that will take place will be unavoidable.”
–With assistance from Tasos Vossos.
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