General Maritime, a publicly traded tanker shipping company, is finding out that when you play with the big boys, you sometimes get hurt, according to Dealbook. The company recently received a $200 million loan from Oaktree Capital Management, one of the largest hedge fund managers in the world. General Maritime thought the loan would solve its financing problems, but instead it has created only more trouble. General Maritime’s story highlights the potential hazards when public companies borrow from hedge funds.
Hedge fund lending is increasingly common. Hedge funds still have large amounts of uncommitted capital that they are looking to put to work. Some companies, especially middle-market ones, are finding fewer avenues for loans. Hedge funds are filling this void.
Hedge fund lending is unlike traditional bank lending. Hedge funds are sophisticated entities prone to using creative lending structures, and they are not afraid of taking risk. Hedge funds are willing to lend when other aren’t — a valuable service, to be sure. But hedge funds expect higher returns. The desire to take risk and earn higher returns has led to complaints that hedge funds take advantage of companies and charge exorbitant interest rates. Hedge funds may also create complex financial structures, which may turn out to haunt the borrower.
This all happened in the case of General Maritime. First, Oaktree dictated hard terms. The loan terms look very much like those only a company on the verge of bankruptcy, and therefore with few negotiating options, would agree to. Oaktree is getting a right to 19.9 percent of the company. The interest rate that Oaktree is charging fluctuates, but in June it was at 12 percent a year….
Find out the rest at
http://dealbook.nytimes.com/2011/08/09/hazards-of-borrowing-money-from-hedge-funds/?ref=business
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