3i fund snaps up utility bonds from hedge funds

Michael Queen, a 3i managing partner is shown in this undated handout photo.

LONDON (Reuters) - 3i Infrastructure said on Monday it has taken advantage of forced selling by hedge funds to snap up 86 million pounds of utility bonds at a steep discount.

The purchases, which 3i Infrastructure said offered higher-than-equity returns at lower risk, highlight the bargains on offer to less-leveraged investors after a steep rise in credit spreads driven by risk aversion and forced selling.

3i Infrastructure, 43 percent owned by private equity group 3i Group Plc (III.L), also said it was keen to take part in any purchase of Gatwick, the country's second-biggest airport.

Michael Queen, a 3i managing partner, said the fund exploited an "anomaly in the market" -- buying debt at an average 84 cents on the dollar, for a yield to maturity of 14 percent.

"Hedge funds are receiving redemption notices and having to liquidate their portfolios," he told a conference call. "Because capital is scarce at the moment, the prices at which they're having to liquidate these portfolios are clearly at a discount to fair value."

3i Infrastructure bought debt issued by Ireland's Viridian, Thames Water and National Grid Wireless of Britain, and Telediffusion de France, and has bought more since September 30.

"I believe this a window of opportunity that will probably exist for another 3 to 6 months," Queen said. "I certainly wouldn't expect to see more than 200 million pounds of our portfolio invested in this sort of asset."

Earlier 3i Infrastructure said it had made a total return of 50.3 million pounds in the six months to September 30, and the outlook for infastructure investment was positive.

Queen said given the size of Gatwick, which is being sold by British airports operator BAA, bids were likely to come from consortiums of investors.

"Clearly as a UK-based infrastructure fund, this is going to be something we're looking at extremely carefully and extremely seriously," he said. "Our position at the moment is that if there is a deal to be done on Gatwick, we would like to be part of it."