LNG eyes debt play on cash-strapped companies

By Jane Baird

LONDON (Reuters) - Hedge fund LNG Capital is eyeing the debt of companies at risk of running short of cash, seeing the potential for high returns at an early stage of the credit crisis when companies are still able to tap rescue capital.

When a corporate borrower raises money or sells assets to get over a liquidity hump, its discounted short-term bonds -- those maturing in up to 18 months -- can become a buy, said the fund's chief investment officer and founder, Louis Gargour.

Gargour cited British Airways (BAY.L), Danish service provide ISS, Finnish paper company M-real (MRLBV.HE), Italy's Wind Telecomunicazioni SpA, U.S. film studio Metro-Goldwyn-Mayer, miner Rio Tinto (RIO.L) and ArcelorMittal (ISPA.AS), the world's largest steelmaker, as examples.

Many of these companies are industry leaders with healthy cash flows, but which have a lot of debt maturing over the next two years.

"Looking for exploitable dislocations, with the expectation that a large number of investors will be biased toward rescuing a company by lending it money or buying in outright in a trade sale or acquisition should lead to a long bias at initial stages of the credit cycle," Gargour said.

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The LNG Zenith High-Yield Bond Fund returned around 27.3 percent in euros in the six months to end-June.

Looking at the performance of U.S. versus European high-yield corporate indexes over the past three credit crises, the hedge fund found that the European side tends to underperform in bad times.