Citadel Has Billions In Credit, Tries To Reassure Investors
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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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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