11:09 AM ET

TransCanada Rises 5% on Breakup Speculation

By Johanna Bennett

U.S. activist investors are crossing the border into Canada. This time, they are reportedly targeting TransCanada (TRP ).

Citing “people close to the matter,” Reuters reports that several U.S. activist hedge funds reviewing the nearly $38 billion pipeline operator as a break-up candidate.

At $54.35, the shares jumped 5.12% during morning market action.

As Reuters reports:

Discussions about a potential campaign are still in the early stages, but some of TransCanadas largest shareholders have been contacted by hedge funds interested in shaking up one of North Americas biggest pipeline companies, the people said.

These actions have also led to discussions by the TransCanada board surrounding the companys strategic direction, the people said, asking not to be named because the matter is not public…

The identities of the hedge funds reportedly involved were not reported. But according to Reuters, Daniel Loebs Third Point. has looked at the company and the New York based firm has amassed a position over the last few months.

This is not the first time the notion of breaking up TransCanada has been floated. Last month, Barron’s weighed in bullishly on the stock. My colleague Andrew Bary wrote that the stock could climb 35% thanks to the company’s industry-leading backlog of projects in the works. He also wrote about speculation that the company could attract a U.S. activist investor who would push for a more generous dividend and a separation of the companys pipeline and power-generating assets.

A breakup has also been endorsed by Citigroup analyst Faisel Khan. He wrote in June that such a move would unlock the intrinsic value of the companys pipeline and midstream assets, which are undervalued.

Apr 10, 2014

10:55 AM ET

Who Bought Puerto Ricos Bonds? Hedge Funds, Thats Who

By Michael Aneiro

The Wall Street Journal today confirms what many muni-market watchers had suspected: that the main buyers of Puerto Ricos $3.5 billion bond sale last month were not your traditional muni investors, with nontraditional buyers (read: hedge funds) snapping up 70% of the deal. That buyer base in part explains heavy trading of the new bonds in the early days after the deal. Matt Wirz reports for the Journal today and names names:

Och-Ziff Capital Management (OZM ) LLC. Fir Tree Partners. Perry Capital LLC and Brigade Capital Management each bought more than $100 million of the bonds, according to a list of buyers of the $3.5 billion deal. The list doesnt show whether the firms continue to hold the bonds, which carried junk credit ratings, or whether they sold some or all of their purchases afterward.

John Paulsons Paulson & Co. also purchased more than $100 million of the deal. It isnt clear whether Mr. Paulson owned Puerto Rico debt before. His firm invested in a Puerto Rico hotel earlier this year…

Investors have sold $1.7 billion of the bond since Puerto Rico issued it, according to data from the Municipal Securities Rulemaking Board. It isnt clear how much of that debt was sold by hedge funds, and some of those transactions reflect trades by investors who purchased the bonds from original buyers of the debt.

Nov 12, 2013

10:56 AM ET

Muni Market Still Deciding Whether It Likes Hedge Funds

By Michael Aneiro

Theres another story out about the growing role of hedge funds in the muni market, this time in todays Wall Street Journal. This blog has written about the subject several times over the past few weeks, particularly about how hedge funds are getting more involved in Puerto Rico debt. Careful readers of todays Journal story might find parts of it sound familiar, as some of the market participant comments are sourced from the same Bloomberg muni conference I wrote about last week, but its a subject worth revisiting for muni investors as its having widespread market impact. Michael Corkery and Matt Wirz report that hedge funds are capitalizing on heightened concerns of muni defaults following Detroits bankruptcy filing and Puerto Ricos publicized woes:

Hedge funds, which invest trillions of dollars on behalf of wealthy individuals, pension plans and college endowments, are barreling into the municipal-debt market at a time when many investors fear increasing defaults. Hedge funds now hold billions of dollars worth of distressed municipal debt, up from virtually no investments five years ago, municipal-bond analysts say.

The default concerns intensified after Detroits bankruptcy filing in July, the biggest financial failure by a city in U.S. history. Detroits turmoil drove down prices throughout the municipal-bond market to levels some hedge funds found attractive, because of the potential for whopping returns if the market rebounds.

Hedge funds can be a double-edged sword for municipalities. As eager buyers of new bonds, they are a source of liquidity as individual investors get more skittish. In return, they often want higher interest rates and more financial information from municipal officials than such officials are accustomed to providing. And hedge funds arent shy about pushing for improved disclosure and financial discipline.

The story goes on to discuss the role hedge funds played in the restructuring of Jefferson County, Ala. and in providing loans to help the city of Harrisburg, Pa. avoid default. It says hedge funds have bought up large chunks of Puerto Rico bonds, which have rebounded by 8% over the past month, while others are lining up to propose short-term financing to Puerto Rico.

Oct 29, 2013

3:47 PM ET

Puerto Rico Debt Gaining Popularity As A Hedge

By Michael Aneiro

Ive written recently about how Puerto Rico debt is finding favor among hedge funds  rather than plain old buy-and-hold muni investors lately, as a way of cautioning retail investors tempted by Puerto Ricos high yields about who else is roaming that marketplace.  Today  David Kotok. chairman and chief investment officer at Cumberland Advisors. offers an in-depth look at one way hedge funds might use Puerto Rico debt to their advantage:

My colleagues Michael Comes, John Mousseau, and I took apart a hedge fund trade. We reconstructed ways in which hedge funds can buy Puerto Rico and also hedge the other side of the trade for their profit. They can take long positions in Puerto Rico debt. They offset the risk through either a short position or put option on Assured Guarantee stock. Assured Guarantee is the major bond insurer of some Puerto Rico debt. Alternatively, the hedge fund can use a credit default swap on Assured Guarantee. In either case they try to neutralize their Puerto Rico default risk by using Assured as a proxy.

The theory behind this is that Assured Guarantee would be hurt if Puerto Rico defaults. So, the hedge fund’s long position would lose from a Puerto Rico debt downgrade or default, but it would have an offsetting gain from the credit default swap position or short position on Assured Guarantee stock. The offsetting neutralized position could result in a profit to the hedge fund. In fact, my colleagues and I calculated that the hedge fund could assume a neutral duration position and thereby create about 350 basis points in an annualized tax-free yield. That yield would also be a tax-free yield to the hedge fund’s investors. So the typical hedge fund investor can derive a taxable-equivalent yield of about double the tax-free yield, or about 7% on a maturity structure that can be unwound in only a few days. That is without leverage. My colleague John Mousseau noted that some hedge funds may be able to lever this up to 20 times.

There is still counterparty risk when putting such a trade together. And the position needs continuous rebalancing, since it has three or more moving parts and constantly adjusting weights. But that is exactly what a hedge fund is supposed to do. What we want to show is that there are ways to do it. Furthermore, note that the starting point of the trade is buying Puerto Rico debt, not because you like it but because it offers a hedging opportunity in a distressed market.

Kotok says that Cumberland does not hold any Puerto Rico debt and we would not buy it today, adding that the same is true for any mutual fund with exposure to Puerto Rico.

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