Citadel Has Billions In Credit, Tries To Reassure Investors
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Citadel Investment Group LLC held a conference call on Friday to address investor concerns for holders of $500 million in Citadel debt. As many as 1,000 other callers jammed a listen-only line for the call.
Recently, the Federal Reserve questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel and Sankaty Advisors, the credit-investment affiliate of Bain Capital. The Fed is trying to be proactive and learn if there any systemic problems in this unregulated sector.
Citadel said it has $8 billion in untapped bank credit, 30% of its assets are in cash and has had only "modest'' client redemptions.
Citadel said it had no material losses from trading partners as its main Wellington and Kensington funds fell about 35% this year. Citadel's COO said year-end redemptions will be a "few percent'' of assets.
Citadel said most of the funds' declines happened in the 4 weeks after Lehman Brothers (NYSE: LEH) went bankrupt. Kensington and Wellington lost money holding high-yield bonds, convertible bonds, bank loans, and investment-grade bonds, which were hedged with credit default swaps that protect the buyer in the event of a default.
Citadel was betting that the gap between the default swaps and the bonds would narrow. Instead, they widened as lenders left the market and investors bet that more companies would default.
Mr. Griffin did note that Citadel has more than 30% of the $13 billion in the Wellington and Kensington funds in cash and U.S. Treasuries, in addition to the available credit lines from banks. The funds' leverage is less than three times net assets.
In regards to borrowing, Griffin said banks and hedge funds will be forever changed because the cost of borrowing has become much more expensive. For example, Ken said Citadel will keep trading equities, while other areas such as collateralized reinsurance will no longer make sense.
Citadel's founder, Ken Griffin, has posted the biggest losses of his career this year, since founding Citadel in 1990. Griffin said, "We will embrace the changes that are part of that evolution and we will prosper in the new era of finance.''
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leverage
How can you have 30% in cash when you are leveraged almost 3 to 1? I think its time to tap out Ken.
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Cash vs. Leverage on Oct 28, 2008 11:28 AMIt's just like you as an individual could have $3000 in cash in your bank account at the same time that you have $10000 on your credit card. That $10,000 would be invested of course in assets that are fluctuating in value. But you can use your $3000 in cash to meet day-to-day expenses (like investor redemptions or margin calls/debt repayments) while you wait for your investments to increase in value.