NEW YORK/BOSTON (Reuters) - Money manager Philip Falcone is effectively mortgaging a significant chunk of his multibillion-dollar hedge funds’ assets in an effort to raise financing for an ambitious plan to construct a high-speed wireless network.
Investment bank UBS UBSN.VX, which is trying to line up investors willing to loan up to $400 million (252 million pounds) to Falcone’s satellite-based wireless venture, recently filed a financing document that reveals Falcone’s flagship Harbinger Capital Partners fund is pledging billions of dollars in stock, bonds, corporate loans and other assets as collateral for the deal.
The financing statement, filed with the New York Department of State on July 30, reveals that among the hedge fund’s many assets Falcone is posting as collateral is much of Harbinger’s 26 percent equity stake in Ferrous Resources Ltd, an Isle of Man-based iron ore company that recently scuttled plans for a $400 million initial public offering.
Other assets Falcone is posting include more than 12 million shares of Spectrum Brands Holdings (SPB.N), 86 million shares of African Medical Investments AMEI.L, and much of the hedge fund’s equity interest in Harbinger Global Wireless, the wireless network Falcone is seeking to build.
Falcone has been one of the hedge fund industry’s most closely watched managers since a savvy bet in 2007 on the collapse of the U.S. housing market, coupled with a bullish wager on mining companies, led to huge returns for his Harbinger funds and turned him into a billionaire.
For the past several years, the 47-year-old former college hockey star has been trying to come up with a game plan for scoring a profit by providing wireless broadband access to rural areas of the United States with limited Internet and cell phone service. The loan is seen as critical to getting that effort off the ground.
A Harbinger spokesman said the financing statement filed by UBS is a routine matter that is commonly used in the hedge fund industry to raise money for general corporate purposes. A UBS spokesman declined to comment.
But to some degree, the need for a prominent hedge fund manager like Falcone, a former head of high-yield trading at Barclays Capital, to post billions of dollars in collateral is one more indication of the risk-averse climate that continues to prevail on much of Wall Street, experts said.
“Everyone is being treated the same by banks, both big and small funds,” said Jonathan Kanterman, a managing director with Stillwater Capital, which invests in other hedge funds but not Harbinger. “Several years ago, he would have been able to get $400 million without posting any collateral. Now, having to pledge specific assets is just indicative of today’s credit environment.”
Also, pledging hedge fund assets as collateral for a loan to finance a wireless network that could take years to build and produce a profit may raise some eyebrows among Falcone’s hedge fund investors.
If the wireless venture falters, the lenders lined up by UBS could use the collateral posted by Harbinger to pay off whatever debts are owed on the loan.
The high-stakes gambit by Falcone also comes at a time when Harbinger is underperforming. The offshore version of his flagship hedge fund had lost 10.7 percent for year through the middle of July, ranking the New York-based fund manager as one of the industry’s 20 worst performers, according to HSBC Private Bank.
Additionally, a separate $2 billion pool of hard-to-sell assets has lost some 14 percent of its value this year.
Harbinger’s poor performance in 2010 is starting to look like a repeat of 2008, when the fund ended the year down 22 percent. That, of course, would be a major disappointment for Harbinger investors, who thought Falcone had righted the ship when his funds registered a 46 percent gain in 2009.
News that Falcone had retained UBS to raise money for his wireless dream was first reported by The Wall Street Journal in July. The extent of the collateral posted by Harbinger became public only when UBS filed the financing statement.
Building a high-speed wireless network has been Falcone’s dream for nearly four years. His strategy took a big step forward in March when Harbinger closed on its $262.5 million acquisition of SkyTerra Communications, a mobile satellite communications company.
A key component of the wireless strategy is a related venture called LightSquared, which is led by Sanjiv Ahuja, SkyTerra’s chairman and chief executive officer. LightSquared, formed this year, has a goal of providing wireless broadband access to “at least 92 percent of the people in the U.S.” by 2015, according to the company’s website.
LightSquared’s website also notes that Harbinger and its affiliates have contributed $2.9 billion in assets to the venture.
In April an affiliate of Harbinger Global Wireless filed with the U.S. Patent and Trademark Office to register LightSquared as a trademarked name.
Clearly, even before the UBS-arranged loan, Harbinger investors had a lot riding on Falcone’s wireless bet. And after the loan, the stakes would appear to be even higher.
For example, Falcone listed 12.9 million shares of Spectrum Brands, known for selling everything from pet care products to small appliances like the George Foreman grill, as collateral. The collateral is valued at roughly $370 million and makes up about a third of his total stake in the company.
Falcone also listed 155.6 million shares in mining company Ferrous Resources Ltd, which had planned to go public but postponed in June amid tough market conditions.
Most likely, an IPO would have raised a lot of cash for Falcone. But since there was none, he may have been forced to mark down the value of those assets in his portfolio, a possible reason for the drop in returns.
Reporting by Matthew Goldstein and Svea Herbst-Bayliss; editing by John Wallace