LOS ANGELES — Two Los Angeles-based companies, Kayne Anderson Capital Advisors and Saybrook Capital, have formed a partnership establishing an opportunity fund that will invest in distressed and defaulted municipal bonds.
The firms plan to target distressed municipal bonds where they can gain control of the underlying asset and drive the work-out process, said Bob Sinnott, chief executive officer and chief investment officer of Kayne Anderson.
The initial focus will be on development-related bonds involving special tax arrangements like California’s so-called Mello-Roos districts and Florida’s community development districts, where special property taxes are assessed to make payments on bonds issued to pay for infrastructure projects serving housing developments, said Jeff Wilson, co-portfolio manager for Saybrook’s Municipal Opportunity Funds. They are also looking at airline-related paper and debt for smaller acute hospitals in several states, he said.
Wilson said he and Jon Schotz, a Saybrook co-managing partner, will manage the fund that will operate under the Kayne brand.
“We believe the distressed municipal market is highly inefficient and with mounting fiscal pressures, we think this area presents an opportunity to extend our approach of niche investing in areas that require highly specific expertise and access to capital,” Sinnott said. “We like to enter markets in anticipation of, or during, market dislocations.”
Kayne, an 18-year-old alternative investment firm with eight offices across the country, managed $17.8 billion in investments as of Oct. 31, principally through private investment partnerships and closed-end funds, according to its website. Kayne focuses on niche investing in midstream energy infrastructure, upstream oil and gas companies, growth equity, real estate, and middle market credit. It is entirely owned by its investment professionals and management.
“We have known Jon Schotz and Jeff Wilson for years and we like and respect what they have accomplished,” Sinnott said. “When we add a new strategy, we always look for a leading, if not the leading, team in that space, and we think we have found them.”
The 22-year-old Saybrook Capital began heavily targeting distressed municipal bonds in 2000 when it launched Saybrook’s Municipal Opportunity Funds. Since then, those funds have invested $420 million in capital in 36 separate investments for its clients, who are mainly high-net worth individuals and family companies. Saybrook represented investors impacted when Orange County filed bankruptcy in 1994. Schotz and Wilson’s team at Saybrook will continue to manage those funds separately from the fund being created with Kayne.
“The new platform we have created with Kayne Anderson will give us access to increased distribution and synergies with Kayne’s other credit strategies,” Schotz said.
Saybrook targets a small subset of the municipal market with high-yield or non-rated originations, Wilson said.
“When those deals go into default or experience stress there aren’t a lot of buyers for that paper,” he said.
Within the month, the team plans to craft the documentation to go out to investors.
They don’t know at this point how large the fund will be, but Wilson said there are a significant number of distressed deals in the system.
“There are a pretty significant number of these deals annually that are associated with these one-off development districts,” Wilson said. “We have seen 95 discrete new instances of default – ranging from $5 million to in excess of $100 million.”