John Paulson Buys Distressed Debt; Carl Icahn Buys Tropicana Casino ~ market folly

Monday, June 15, 2009

John Paulson Buys Distressed Debt; Carl Icahn Buys Tropicana Casino

We recently learned of two major hedge fund transactions that we thought were worth highlighting here on the blog. Firstly, John Paulson is at it yet again. The prominent hedge fund manager has been in the media a lot recently given all the portfolio moves he has made. His latest move includes purchasing distressed mortgage securities.

Paulson & Co

This isn't necessarily new news from the Paulson camp, as he had mentioned before that he had been covering some of his mortgage related short positions and was getting constructive on the sector. He thinks that there is now possibly some value in the type of assets he was previously short. The major distinction though is that he was short sub-prime securitizations previously, but now is getting long jumbo and prime securitizations, which are typically of better quality. So, it appears he is getting constructive on a sector that he made so much money on the short side the last few years.

Sandra Lee, senior vice president at Paulson & Co said that, "We've been adding pretty steadily to our long distressed positions." Additionally, she said that they are buying debt of various financial institutions that received government help. This news comes after the fact that we saw Paulson start a real estate recovery fund. Additionally, Paulson gave his investor stamp of approval and bought $100 million worth of CB Richard Ellis shares. With his latest batch of moves, it seems that while Paulson is cautious on the economy near term, he definitely is starting to see some value in the real estate sector. His diversification within the asset types related to housing is very notable and we'll continue to track his movements. To see what else Paulson holds, you can check out the rest of Paulson & Co's portfolio here.

Carl Icahn

Meanwhile, notorious rabblerouser and activist campaigner Carl Icahn sees value in another sector: gaming. His Icahn Group has purchased the Tropicana Resort in Atlantic City for nearly 80% off. They landed the property by making their $200 million debt-swap offer which was accepted by a bankruptcy court judge. This marks the end of a long timeline as the casino/hotel has been on the market for a year and a half.

So far, Icahn doesn't have any plans for the casino so we'll have to see what he has in store. Along with Icahn in the purchase are partners in the creditor group Black Diamond Capital Management and Schultze Asset Management. Their discounted purchase has made them the proud owners of a $1.4 billion mortgage on the casino resort. However, Icahn is familiar with scooping up discounted casinos in bankruptcy courts, as he had previously bought the Sands in 2000 for $65 million which he later sold for $270 million. We'll see if he has the same golden touch this time around. Icahn isn't alone in spotting value in casinos, as we've seen a few other hedge funds here and there start to pick up debt and shares of various casinos. While we haven't had a whole lot to cover in terms of Icahn's recent portfolio activity, we have in the past noted his large Biogen Idec (BIIB) position.

Both Icahn and Paulson are interesting investors to follow, given their prowess in different areas. Icahn is notable due to his activist investing style where he seeks change at public companies. On the other hand, Paulson is well-known for his ability to spot trends and his familiarity with the housing sector, after profiting handsomely from the crisis the past few years. For recent performance, Paulson & Co's flagship fund is up 8.75% for the year, while Carl Icahn's fund is faring slightly better, up 7.3% for May and up 16% for 2009 as noted in our May hedge fund performance numbers post.

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