Direct Lending Fund Suspends Withdrawals After Big Loan Goes Bad

(Bloomberg) -- Direct Lending Investments, which had $758 million in assets in November, said it suspended withdrawals and redemptions from its funds after a borrower defaulted on a loan that accounts for about a quarter of its capital.

The borrower, a company that buys accounts receivables from telecommunication companies, owes $191.3 million, Direct Lending said in a Feb. 11 letter to investors seen by Bloomberg. The borrower is owed $160 million from other firms, but "a substantial portion" of that might not be recoverable, the letter said.

Direct Lending, based in Glendale, California, said it hired a law firm to investigate and that its lawyers presented the matter to federal prosecutors. A spokesman for the U.S. attorney in the district declined to comment.

“We think that this is very likely the result of misconduct, but we haven’t determined by whom," Brendan Ross, the chief executive of Direct Lending, said in a interview. “We deeply regret this situation."

The borrower that defaulted, VOIP Guardian Partners I, has been in the business of advancing money to smaller telecoms against their accounts receivables, the letter said. VOIP then gets repaid from money the telecoms are owed by larger telecoms.

Lending Boom

Rodney Omanoff, one of VOIP’s founders, said in an interview that some telecoms that were long-time clients stopped paying their bills and that his company had done nothing wrong. He said its financial statements were “immaculate” and that Direct Lending signed off on each purchase of receivables.

“We worked directly with Direct Lending on a day-by-day basis for years,” said Omanoff, a former comedy talent agent and real estate investor. “We’re examining the matter together.”

Founded in 2012, Direct Lending has been part of a boom in alternative asset managers that make loans to mid-size companies, filling a gap left by banks after the financial crisis. Direct Lending reported gains every month through at least November 2016, according to another investor letter seen by Bloomberg. Ross declined to provide more recent numbers.

Its assets increased about 10-fold between 2014 and 2016, Ross said on a podcast hosted by Lend Academy in 2016. Ross initially focused on small business loans and then branched out into making larger loans to companies in the business of lending themselves.

Following the default, Direct Lending won’t collect performance fees, the February letter said. The firm expects its suspension of withdrawals and redemptions will last for an extended period, partly to avoid using liquid assets to redeem some investors ahead of others. The funds also stopped taking new investments.

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