Credit Crunch Rocks Bain, as Funds Fall Up to 50%

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Some high-profile Bain Capital credit-investment funds are choking on losses of as much as 50%, said people familiar with the matter, the latest revelation in a day of shake-ups across the hedge-fund business.

The private-equity firm's credit affiliate, Sankaty Advisors LLC, has lost between 40% and 50% across two funds that bought up highly secured corporate loans, these people said. The two vehicles had roughly $4 billion in assets just a few weeks ago, and used a relatively low amount of borrowed money to fund their investments.

Steep losses have also hit London hedge fund Centaurus Capital LP, which Wednesday offered its investors a chance to cut their fees. And, at Tudor Investment Corp., one of the oldest and best-regarded hedge funds, fund manager James Pallotta finalized a plan to run his own firm separate from longtime colleague Paul Tudor Jones.

The developments at Bain, meanwhile, are a blow to a group of top-tier institutions that long have been investors with the Boston-based firm. Harvard University, the Massachusetts Institute of Technology and the University of Notre Dame all have some money invested in Bain's loss-making credit funds. Two of the problem funds include Sankaty's Special Situations and Prospect Harbor.

As market conditions have deteriorated, Sankaty has had to seek new, but more expensive, financing for some of its key borrowing facilities. It recently obtained longer-dated terms to stave off margin calls, which typically kick in if asset values fall below a certain price. The funds have not seen significant redemptions, according to a spokesman.

The market for leveraged loans -- senior loans issued by banks largely to fund buyout deals -- has plummeted in the last month. A Standard & Poor's index of leveraged loans now trades at 70 cents on the dollar, down from 88 cents one month ago. Until last summer, these senior loans rarely traded below par, or 100 cents on the dollar. In recent weeks numerous "bid lists" have flooded the market, creating overwhelming supply and further damping prices.

Money managers such as Bain, Blackstone Group LP and Carlyle Group have piled into this business in recent months, hoping to scoop up low-priced credits of high-quality companies. In many ways, these credit investments were supposed to fill a hole created by the greatly diminished market for private-equity buyouts. Sankaty's Special Situations fund, for instance, was raised in August 2007.

To fund these new transactions, loan investors typically borrowed some money to amplify returns. Many used facilities called total return swaps, known on Wall Street as TRS. Under these facilities, if the value of a loan declines to a certain price, the bank can secure more collateral or unwind the contract.

The Sankaty funds averaged about a dollar of leverage, or borrowed money, for each dollar of capital that belonged to investors. That level of borrowing was relatively low compared with many other investors, but it shows how even seemingly low-risk bets have suffered as the credit markets have virtually frozen.