Lone Star-Merrill deal marks power shift to funds

By Walden Siew and Dane Hamilton

NEW YORK (Reuters) - Lone Star's deal to buy bad loans from Merrill Lynch & Co MER.N signals a growing power shift as private equity firms mop up after the year-long credit crisis.

Merrill Lynch said on Monday it will take a $5.7 billion (2.9 billion pound) third-quarter write-down as it unloads large holdings of risky debt. More than $400 billion of write-downs and losses at major banks since last year characterized the first phase of the financial crisis.

"The second part of the story is the distressed funds that have been raising funds to take advantage of motivated sellers," said Frank Morgan, president of the UK-based Coller Capital's U.S. unit in New York, where it has $8.5 billion in assets under management.

The Merrill deal included the sale of $30.6 billion of repackaged debt known as collateralized debt obligations, or CDOs, to buyout firm Lone Star Funds, for just $6.7 billion, or about 22 cents on the dollar.

Dallas-based Lone Star has some $23 billion under management, making it one of the larger buyout funds, but it has a reputation for secrecy. It was founded in 1995 by financier John Grayken, who formerly worked for billionaire Robert Bass.

Funds specializing in distressed assets swelled to $129 billion, their highest ever, from $118 billion at the end of 2007, according to industry tracker Hedge Fund Research.

Other funds, including Marathon Asset Management and Avenue Capital Group, recently have raised billions of dollars for distressed opportunities, according to sources familiar with the two funds. The companies declined to comment on their fund-raising activities.

Lone Star, which recently raised $10 billion in two funds, declined to comment. The Lone Star deal will result in a $4.4 billion write-down for Merrill and it will finance about 75 percent of the purchase price, Merrill said.