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Solus to Restructure Flagship Fund After Liquidity Dries Up

Solus to Restructure Flagship Fund After Liquidity Dries Up

(Bloomberg) -- Solus Alternative Asset Management is restructuring its $1.8 billion flagship hedge fund Sola, according to an investor letter seen by Bloomberg, as liquidity in distressed assets dries up.

The firm is giving investors the option to move their assets to an existing long-term fund, or to exchange their current investment into a lock-up vehicle within Sola that will monetize their assets over time and then reinvest that cash into more liquid assets, the letter said. Clients have until the end of the month to decide, and investors who choose to do neither will have their interests liquidated.

“The distressed asset class has become increasingly less liquid over the past 24 months to 36 months,” the March 10 letter said. “This trend has not changed, and in fact has been exacerbated by the recent turbulence in the markets caused by Covid-19 related concerns.”

Coronavirus fears are roiling markets, pushing bonds of the lowest-rated issuers to new lows amid panic selling. At the same time, oil prices have plunged after a coalition of OPEC and allied producers disintegrated amid disagreement over how to handle the pandemic’s hit to energy demand. The drop has threatened the U.S. shale industry and spurred a broad selloff across the sector.

The fund was left with a high concentration of illiquid assets, and the pace of selling those assets has taken longer than expected, according to the letter, which was signed by Chief Investment Officer Chris Pucillo. The firm added that it received “unexpected withdrawal requests” after the end of last year following “largely untrue negative press.”

A representative for the New York-based firm declined to comment.

The decline in energy prices is likely to have hit firms such as Solus. The firm lost about 7% last year, led by losses in oil services company Hornbeck Offshore Services Inc. and natural gas transporter and processor Southcross Energy Partners LP, Bloomberg has reported.

Distressed-debt funds have struggled to find opportunities in recent years as the long-running economic expansion kept credit markets open to troubled companies and default rates relatively low.

Solus started the Long-Term Opportunities Fund in December, and currently manages about $1.3 billion in it and similar private equity-style vehicles. The long-term fund has a draw-down structure and keeps investors’ cash locked up for two years, with a potential extension of as much as one year.

That structure, more commonly used by private equity funds, has grown in popularity among distressed investors as it allows them to raise committed capital they can later call and deploy once opportunities, such as bankruptcies, finally begin to appear. It also keeps them from having to sell harder-to-trade assets at a loss if investors want to redeem along the way.

About $400 million of Sola capital already moved into the LTO fund in December, and the firm expects another $400 million will be transferred into its private-equity style vehicles following Tuesday’s announcement, according to a person with knowledge of the matter.

Clients who elect to move into a locked-up share class of Sola won’t be able to withdraw their cash before the end of 2021. At that time, Solus has an option to “side pocket” any remaining illiquid investments, according to the letter. The fund will then return to quarterly liquidity, as it will be invested in easier-to-trade assets by then.

For investors opting instead to be redeemed, the firm expects about half of the portfolio to be monetized this year and the rest in 2021, assuming normal market conditions. Those clients will receive their pro-rata portions of sale proceeds until they’re fully redeemed.

“Despite the fact that the current market environment has been challenging for distressed investors, we continue to have more opportunities in front of us than available capital,” Pucillo said in the letter. “With the successful transition of our investors into more suitable structures for our assets, we will be able to follow through on the investment thesis we started and provide investors with maximum value.”

--With assistance from Sridhar Natarajan and Eliza Ronalds-Hannon.

To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net;Melissa Karsh in New York at mkarsh@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Josh Friedman, Melissa Karsh

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