Millennium's Bond Buzz

The hedge fund could be preparing to tap the public debt markets.
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Millennium Partners

may be eyeing a bond offering.

Earlier this year, the multistrategy hedge fund got its first public debt rating from Fitch. An official familiar with the hedge fund's plans says Millennium obtained the Fitch rating to give it the option of making a public offering.

A public debt offering by Millennium, whose unsecured long-term debt scored an investment-grade triple-B rating from Fitch, would mark only the second such deal by a hedge fund. Citadel hit the market in December with $500 million in five-year bonds.

The news comes as hedge funds increasingly eye the public markets for funding. Last month,

Fortress

(FIG)

became the first U.S. hedge fund to sell shares to the public. Its shares doubled in their first day of trading on the

New York Stock Exchange

. Talk of a Citadel IPO has been swirling around Wall Street as well.

The news comes as huge sums of money flow into hedge funds, private equity and other so-called alternative investment classes, as investors try to seek out superior returns.

"Many of the funds are considering" approaching the public debt markets, explains Eileen Fahey, an analyst at Fitch in Chicago. "Once you reach a certain size, you don't want to be too dependent on prime brokers."

Millennium, with $8.9 billion in assets, was founded by Israel Englander in 1989. Calls to Englander were directed to spokesman Roy Winnick at public relations firm Kekst. Winnick declined to comment.

Since investing in hedge funds is restricted to qualified investors, such as private institutions or wealthy individuals with an appetite for risk, obtaining a rating can open the field of possible funding sources. That's particularly so with a rating of triple-B or better, which qualifies as investment grade for institutional investors such as pension funds and insurance companies.

Currently, rating agencies provide confidential ratings for a handful of hedge fund managers, which are used in marketing privately placed debt to select group of qualified investors, says Fahey. She notes that many of those private ratings are below investment grade.

Charles Davidson, director at Standard & Poor's financial services ratings group in New York, says hedge fund managers are investigating more ways of tapping permanent financing sources so that they are no longer beholden to prime brokers.

Prime brokerage firms clear trades and lend hedge funds cash to make trades that allow them to properly hedge their bets.

Bulge bracket investment firms such as

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

, which have large prime brokerage operations, can charge steep fees for their financing services and can require firms to post significant collateral when the markets turn lower.

And with institutional buyers scouring for richer-yielding bonds, the public markets might offer a cheaper alternative, Fahey explains.

"If

prime brokers start raising requirements

to obtaining funding, that's going to be restrictive to a fund," says Davidson. "The hedge funds want to make sure they have dry powder."

Fitch and S&P have seen requests from hedge funds interested in obtaining ratings increase significantly.

"There have been a lot more phone calls

from firms that want a credit rating," says Fahey, though she declines to say how many companies she's had conversations with. Davidson would only say that interest has increased. "The hedge fund market is becoming more of an institutional market," Fahey adds.

Mark Kiesel, executive vice president at Pacific Investment Management, a portfolio manager overseeing some $50 billion in corporate bonds, believes that hedge funds are simply looking to take advantage of investors' appetite for debt.

"Issuers are trying to issue into demand," says the Newport Beach, Calif.-based money manager. "In general, there's been a slight change in appetite for credit," he remarks.

Kiesel says investors have short memories and all too easily forget blowups. He points to Long Term Capital Management in 1998 and hedge fund Amaranth Advisors last year.

Millennium Partners is no stranger to troubles. Englander, Terence Feeney, Fred Stone and Kovan Pillai had to pay $180 million in fines and restitution two years ago to settle allegations that Millennium engaged in abusive mutual fund trading.

Fahey at Fitch says Millennium's credit rating reflects its ability to service its debt. She says its history was not a factor.

For his part, money manager Kiesel plans on steering clear of hedge fund bonds.

Pimco has been "taking a very defensive view of the world," Kiesel says. "Investors have been gravitating to all types of risk that they wouldn't ordinarily get into."