Brian Higgins has helped guide King Street Capital Management to pounce on some of the most high-profile distressed debt events of the past two decades, from Lehman Brothers Holdings to Revlon Inc. to WeWork Inc.
Now the $23 billion hedge fund’s co-founder is gearing up with his colleagues to seize on opportunities as rising interest rates and a weakening economy pinch companies laden with debt taken on when borrowing costs were much lower.
King Street, which Higgins co-founded in 1995 with fellow First Boston alum Fran Biondi, is seeking roughly $3 billion of fresh capital across various funds, according to a person familiar with the situation, who requested anonymity because the discussions are private.
The money manager joins funds including Angelo Gordon & Co. and Brookfield Asset Management in building up war chests aimed at the credit market, where worries are mounting as the tally of distressed debt — loans or bonds that are in default or at high risk of defaulting — has already surged. For dollar-denominated corporate bonds and loans in the Americas, the pile was about $274 billion as of the end of last month, from below $100 billion in early May 2022, data compiled by Bloomberg show.
As Higgins sees it, opportunities will emerge over time, as financial conditions gradually tighten for businesses and consumers that still have excess savings from the trillions of dollars of pandemic stimulus.
“This market is a slow-motion car crash,” he said. “There are opportunities in terms of new lending, a bit of a walk-don’t-run.”
The New York-based firm has bounced back from a challenging period. King Street had faced a client exodus as investors were frustrated with years of low-single-digit returns, with the fund sitting about 40% in cash. The outflow also came in the wake of Biondi’s surprise 2019 announcement that he’d retire the next year.
Its flagship fund has outpaced its peers in 2023, earning roughly 4.5% through May, according to a person familiar with the results, compared with 2.2% for the Bloomberg credit hedge fund index. That follows a 3.8% decline for the fund in 2022, the person said, compared with a drop of about 5% for the index.
King Street declined to comment on its fundraising and performance figures.
Since its inception, King Street has quietly amassed stakes in some of the best-known companies in financial distress. It was among a small group of funds that reaped billions of dollars trading in the debt of Lehman years after it collapsed. In the case of Revlon, King Street and other creditors wound up taking control of the cosmetics brand during its bankruptcy process. And with WeWork, bondholders including King Street struck a deal to provide new money and swap into new debt and equity of the troubled co-working company.
The firm has also waded into real estate lending and collateralized loan obligations, and introduced a strategy in 2020 to capitalize on lending opportunities and markdowns of high-quality companies being hit by the pandemic.
Against a backdrop of rising interest rates, King Street has been ramping up rescue financing and other liability-management transactions to private equity-owned companies that are struggling to service their debt.
The case of Envision Healthcare Corp. showed the risk of such financing. The medical staffing company filed for bankruptcy in May even after receiving more than $1 billion in cash last year from King Street and other investors, in a deal that involved moving Envision’s most promising asset out of reach of some creditors.
Meanwhile, as defaults climb and the wall of debt maturities closes in, King Street is eyeing funding opportunities in commercial real estate, ranging from condo developments in New York to a hotel in Venice, according to people familiar with the matter.
The money manager tends to get involved when it can write big checks and drive negotiations. It’s also getting into some under-the-radar situations.
In May, King Street and Centerbridge Partners led a roughly $328 million financing deal to U.S. Renal Care to help fund the dialysis provider’s growth, according to people with knowledge of the situation. U.S. Renal has been grappling with cash-flow pressures during the pandemic. U.S. Renal and Centerbridge didn’t respond to requests for comment.
“Some of our favorite recent investments have been in the healthcare space, where we think there’s high-quality companies that need capital today because their margins are getting hit, but we think over time they’ll recover and be solvent,” said Paul Goldschmid, a partner and co-portfolio manager at King Street.
King Street has gotten more aggressive in its trading the past couple years, and elevated Goldschmid and David Walch as co-portfolio managers with Higgins. The firm held 8% cash in reserve, Bloomberg reported in May, compared to as much as 18% last year. The shift potentially sets it up to boost returns should markets evolve as it foresees.
“Treading water last year was good given the challenging market, and I hope that puts them into a position to take advantage of what should be a pretty attractive environment for what they do,” said Damien Bisserier, managing partner at Evoke Advisors, whose clients have invested in King Street since 2015.
--With assistance from Hema Parmar and Jeremy Hill.
This article was provided by Bloomberg News.