We've Got A Plan ("The Plan") For The Shit ("The Shit") Hitting The Fan ("The Fan")

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November 3, 2008
Dear Blue Mountain Credit Alternatives Fund Investors:

Since our most recent investor call, the financial markets continue to be volatile and liquidity across asset classes remains limited. In addition, several of our large fund-of- funds investors, most of whom have been invested in Blue Mountain Credit Alternatives Fund ("BMCA") since 2004 and have been strong supporters of the firm, are themselves facing liquidity pressures from their own investors. As a consequence, and despite both our distinguished performance through the credit crisis and some of the best investment opportunities we've ever seen, as of October 31, 2008, BMCA investors have submitted significant redemption notices representing a meaningful percentage of BMCA assets under management for dealing dates through February 2009.
We believe that meeting these redemptions from free cash would be imprudent, particularly in this volatile market environment. Therefore, we believe the only way to meet these redemptions would be to sell large portions of BMCA's portfolio into
extraordinarily illiquid markets at what would likely be a very high liquidation cost based
on our current estimates. Put simply, the bid / offer around mid-market valuations is at exceptional and unprecedented levels. If we were to unwind or sell positions to meet current redemptions, the severe liquidation costs would be borne inequitably by the remaining investors. Moreover, selling our most liquid positions would further disadvantage remaining investors and later redeemers by leaving them with a less liquid portfolio.
We are not comfortable with this state of affairs. Accordingly, we have developed a redemption and recapitalization plan (the "Plan") designed to protect all of our investors
by addressing the liquidity needs of our redeeming investors and building a more stable investment foundation for the future success of BMCA.
Given the solid year-to-date performance across our open hedge funds, our plan is designed to allow BMCA to continue to navigate current markets from a position of strength.
Please be aware that our ability to implement the Plan and the cost to redeeming investors of the Plan will depend upon a number of factors, including (i) the amount that investors wish to redeem versus the amount that investors wish to keep in BMCA, (ii) dealer behavior, (iii) prevailing liquidity levels, (iv) the feasibility of effectively segregating a liquidating portfolio, and (v) overall market conditions.
In the event that we are unable to implement the Plan we will likely suspend all
redemptions until these illiquid markets abate consistent with our fiduciary obligation to
protect the interests of all investors. In this event, the schedule of future redemptions
might remain uncertain for an extended period of time.
The Plan
Based on our judgment of the current market and consistent with our fiduciary
obligations to all BMCA investors as well as the rights granted to us in BMCA's
governing documents, it is our current intention to:
• Temporarily suspend all pending redemptions from BMCA;
• Waive the notice and lock-up provisions of BMCA immediately for all investors;
• Require that all investors elect, by November 10, 2008, to either (i) redeem their
existing investment (which going forward will be denominated Class R Shares, in
the case of the offshore feeder or Class R Interests, in the case of the onshore
feeder) or (ii) exchange all or a portion of their existing investment into any one
or a combination of 3 locked-up classes (Classes Q, A1 and A2) each with fee
breaks consistent with longer lock-up periods (see below for a description of each
Class). We expect that this redemption and exchange will take effect on or before
December 31, 2008 (the "Roll Date"). Investors who have previously submitted
redemption notices may also elect to revoke such redemptions in whole or in part
and reallocate to any of the locked investment classes;
• Segregate a sub-portfolio (the "Redeeming Portfolio") of BMCA's positions that
is, to the extent practicable, substantially similar to BMCA's entire portfolio on
the Roll Date with a net asset value equal to the value of the redeeming Class R;
• Liquidate the Redeeming Portfolio as soon as practicable, with the costs of such
liquidation borne by Class R. It is our current intention to attempt to substantially
liquidate the Redeeming Portfolio on or before December 31, 2008; however, we
cannot presently commit to accomplishing this objective by year end. Due to the
severe illiquidity that currently prevails in the market, we caution investors who
choose Class R that the cost of liquidating the Redeeming Portfolio, based on our
current estimates, will likely be extremely high;
• Continue to actively manage the remaining portfolio attributable to the three
locked investment classes (the "Locked Portfolio") to capitalize on the
unprecedented market opportunities currently available; and
• Open Classes A1 and A2 to new investments after the Roll Date.
We have reviewed the Plan with our attorneys, our independent auditors, and BMCA's
outside Directors and we believe the Plan appropriately balances the interests of all
investors. We have discussed the details of the Plan with many of BMCA's largest
investors over the last several days and the feedback has generally been positive and supportive. We believe the Plan is equitable to all investors and would enable BMCA to
move forward to seize outsized investment opportunities for remaining and new investors.
Description of the various classes
Class R
Current portfolio positions valued under our standard mid market methodology and equal
to the aggregate net asset value of all Class R shares and interests on the Roll Date will be
segregated (or "ring fenced") into the Redeeming Portfolio and liquidated as soon as
practicable thereafter. All of the costs of liquidation will be borne by the Class R shares
and interests pro rata. Class R investors will begin receiving the net proceeds of
liquidation pro rata as soon as practicable after the liquidation.
In assembling the Redeeming Portfolio, we will carefully identify BMCA positions that
are, to the extent practicable, substantially similar to BMCA's portfolio as a whole and
that equal the aggregate net asset value of all of the Class R shares and interests. We will
work closely with our auditors, PricewaterhouseCoopers, on the segregation process.
The Redeeming Portfolio and the Locked Portfolio may not, in many cases, be matched
instrument for instrument as many of the trades are not divisible, but will each be broadly
representative of the current BMCA portfolio. PricewaterhouseCoopers will incorporate
an ongoing review of the segregation and liquidation process as it is happening and as
part of their annual BMCA audit.
We intend to begin making distributions to Class R investors as soon as practicable after
the liquidation of the Redeeming Portfolio and we will continue to make distributions
until the Redeeming Portfolio is fully liquidated.
We will manage the Locked Portfolio consistent with the strategies and other terms
contained in the Private Placement Memoranda dated November 2008.
Class Q
• Liquidity
─ Quarterly liquidity on 90 days notice, with the first possible redemption /
withdrawal date being June 30, 2009 (with notification no later than
March 31, 2009).
─ Beginning in 2009, performance allocation made annually at year end or
in connection with any redemption or withdrawal.
─ Individual Investor Gate: Maximum redemption / withdrawal by any
investor on any quarterly date in 2009 may not be more than 20% of the investor's net asset value immediately prior to such redemption /
withdrawal.
─ No individual investor gate beginning 2010.
• Fees/Allocations:
─ For 2009, management fee of 1.75% annually and performance allocation
of 17.5% annually.
─ For 2010 and thereafter, reverts to 2% / 20%.
Note that Class Q will be closed to new investments, and will only be offered to existing
investors in exchange for their existing shares / interests.
Class A1
• Liquidity
─ One-year rolling hard lock.
─ 6 months notice (for example, assuming a Roll Date of December 31,
2008, the first date for redemption / withdrawal would be December 31,
2009 with notice no later than June 30, 2009).
─ Waiver trigger: In the event that BMCA receives notice (from all Classes
except Class R) of aggregate redemptions / withdrawals representing more
than 20% of BMCA's net asset value (excluding Class R) for dealing dates
in any consecutive three month period, notice requirement waived and the
one-year lock lifted. (This waiver trigger protects Class A1 investors from
large redemptions by Class Q investors).
• Fees
─ Management fee of 1.5% annually.
─ Performance fee of 15% paid on rolling basis at expiry of one-year lock.
Any additional Class A1 investments made subsequent to the Roll Date
will be tracked separately for performance fee calculation purposes.
Note that Class A1 will be open to new investments on a monthly basis from both
existing and new investors.
Class A2
• Liquidity
─ Two-year rolling hard-lock.
─ 6 months notice (for example, assuming a Roll Date of December 31,
2008, the first date for redemption / withdrawal would be December 31,
2010 with notice no later than June 30, 2010).
─ Waiver trigger: In the event that BMCA receives notice (from all Classes
except Class R) of aggregate redemptions / withdrawals representing more
than 20% of BMCA's net asset value (excluding Class R) for dealing dates
in any consecutive three month period, notice requirement waived and the
two- year lock lifted. (This waiver trigger protects Class A2 investors
from large redemptions by Class Q and Class A1 investors).
• Fees:
─ Management fee of 1% annually.
─ Performance fee of 10% paid every two years on a rolling basis at expiry
of two-year lock (payable only on total performance throughout the two
year period). Any additional Class A2 investments made subsequent to
the Roll Date will be tracked separately for performance fee calculation
purposes.
Note that Class A2 will be open to new investments on a monthly basis from both
existing and new investors.
BlueMountain Franchise
Our BlueCorr Fund, Equity Alternatives Fund and the 6 long term locked funds we
manage have a total of $2.4 billion in assets. In addition BlueMountain manages 3 CLOs
with $1.4 billion in underlying assets. Please note the summary chart below.


*The last part is an image because the file didn't allow the text to be grabbed.

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