BlackRock, Highfields Eye Distressed Mortgages

Investment manager Blackrock (BLK) and hedge fund Highfields Capital Management are joining together to form a company that will buy and restructure distressed mortgage loans.

The new company will be named Private National Mortgage Acceptance Company, or PennyMac. It will raise money from private investors and then use those funds to buy troubled mortgages from banks and other holders. It was only a matter of time before an opportunistic asset manager would capitalize on the dislocation of the U.S. debt market.

Goldman Sachs analyst Marc Irizarry recently commented that "distressed debt investing accelerates in years following increased high-yield debt issuance. Substantial high-yield issuance over the past two years ($250 billion) implies an equally fulfilling distressed opportunity on the horizon."

Both BlackRock and Highfields will serve as strategic partners, and PennyMac will access BlackRock's capital markets and mortgage expertise, including risk management analytics. Jonathon S. Jacobson, Highfields co-founder and senior managing director said in a statement, "Over the next two to three years, we anticipate that the volume of bank-held nonperforming mortgages will grow dramatically. PennyMac will be extraordinarily well positioned as both a buyer and servicer of these assets."

Blackrock had already broken into the market having recently raised $5 billion for two distressed funds, BlackRock Credit and BlackRock Mortgage. Irizarry has a buy rating on the stock, and as of last week, his price target and estimates were under review. The stock shot up $13.77 to $219.87 with the announcement on Monday.

Rival Invesco (IVZ) is also involved in distressed debt, and its shares were climbing $1.01 to $25.55.

Other companies that Irizarry named as being able to take advantage of the market are Federated Investors (FII) and Oaktree Capital. Federated shares were advancing $1.06 to $40.75.