Pacific Investment Management Co., manager of the world's largest mutual fund, is raising at least $1 billion for a private fund to buy troubled loans from banks divesting assets to meet new rules, said two people briefed on the plans.
The Pimco Bravo fund, short for Bank Recapitalization and Value Opportunities, will acquire commercial and residential mortgage loans and other debt, according to a prospective investor who asked not to be named because the capital raising is private. Pimco plans to work with a loan servicer to renegotiate the terms of the acquired debt directly with creditors, the client said.
Financial institutions are selling assets after the 27-nation Basel Committee on Banking Supervision adopted standards in September that will more the double the ratio of capital banks must hold in relation to the amount of risk on their balance sheets. Pimco, a Newport Beach, Calif., unit of the German insurer Allianz SE best known for its fixed-income mutual funds such as those run by Bill Gross, has raised at least $5 billion from institutional clients to buy distressed mortgages and bonds backed by real estate loans since the global credit crisis began in late 2007.
"Valuation is in Pimco's wheelhouse, and valuation is really the main challenge to this type of investing," Geoff Bobroff, an independent fund consultant in East Greenwich, R.I., said in a telephone interview.
The Pimco Distressed Mortgage Fund LP, opened before the peak of the crisis in October 2007, returned 54% in the year that ended Sept. 30 after losing almost a third of its value in 2008, the investor said. The Pimco Distressed Senior Credit Opportunities Fund climbed 28% in the year through September, according to the investor.
The number of banks considered "problem" lenders by the Federal Deposit Insurance Corp. rose even with the economic recovery, as bad loans remained on balance sheets. The FDIC's list increased 7% in the second quarter, to 829 banks.
Pimco's institutional fund will target smaller lenders and community banks, and won't buy consumer debt such as credit card and auto loans, the investor said. Mark Porterfield, a Pimco spokesman, declined to comment.
"Pimco is using a very wise combination of strategies to take advantage of dislocations in the banking system," Eric Petroff, director of research at the consulting firm Wurts & Associates in Seattle, said in an interview.
Dozens of money managers have opened funds to invest in mortgage-related credit to take advantage of cheap prices since that market started unraveling three years ago. Most, like Pimco Bravo, are targeted at institutional investors such as pension funds.
An investment unit of Cargill Inc., the Minneapolis food producer, said last month that it had raised $373 million to buy debt assets from banks. DoubleLine Capital LP in Los Angeles, started by former TCW Group Inc. investment chief Jeffrey Gundlach, has gathered $79 million for a fund to invest in mortgage-related assets, according to Nov. 2 filing with the Securities and Exchange Commission. Ken Griffin's Citadel LLC in Chicago has collected $225 million for a residential mortgage opportunities fund, according to an August regulatory filing.
Distressed securities are mostly loans and low-rated, high-yield bonds whose issuers are having trouble meeting interest and principal payments. They typically sell below face value, and investors can profit if prices rebound or the securities are swapped for equity in a restructuring.