Chrysler LLC's bankruptcy is hitting Reams Asset Management.
In fact, 37 of the 40 pension fund and foundation clients that were listed in the automaker's bankruptcy filing as holders of senior Chrysler debt were clients of the Columbus, Ind.-based manager. They include the Bill & Melinda Gates Foundation, the Indiana State Police Pension Trust, the Los Angeles Fire & Police Pension System, the Seattle City Employees Retirement System, the Ventura County (Calif.) Employees' Retirement System and the Michigan Municipal Employees' Retirement System.
Reams is a fixed-income manager with about three-quarters of its $7.9 billion in assets under management in its flagship core-plus fixed-income strategy.
Reams President David McKinney declined comment.
Reams' clients are taking a loss on their holdings of Chrysler's secured bonds, which are paying 29 cents on the dollar under a deal brokered by the U.S. Treasury Department.
The $5 billion Michigan Municipal Fund, Lansing, lost about $1 million on $3.4 million of Chrysler secured debt that was purchased in August 2008 at 43 cents on the dollar by Reams, confirmed Lisa Bond Brewer, a spokeswoman for the system. Chief Investment Officer Jeb Burns said the loss will be absorbed and the pension fund won't be adversely affected, but investment staff obviously is not happy.
"It's as OK as it can be," Burns said in an interview. "The auto companies were on track to improve, and then the global financial crisis hit and their plans fell apart. They couldn't go from selling 60 million cars to nine million cars and not experience a drastic impact."
The $2 billion Ventura County Employees' Retirement System, Ventura, Calif., owned about $2.5 million of Chrysler debt through Reams, confirmed Tim Thonis, retirement administrator. The debt, set to mature in November 2013, had dropped to about $1.5 million in value as of April 30, Thonis said. He could not confirm when the purchase was made.
Thonis said the investment represents about 1% of the $250 million fixed-income portfolio Reams runs for the system. He declined comment on Reams' decision to purchase the securities but noted that the decision "gets reflected in the manager performance and their evaluation."
The $6.9 billion Montana Investment Board, Helena, was one of the few public funds to invest in Chrysler bonds on its own. Financial statements from the system's website show the Montana board invested $1.3 million in a secured Chrysler bond set to mature in August 2013. The investment would have matured to almost $3 million at maturity, but the government offer instead will result in a $450,000 loss.But the Chrysler bond losses come at a difficult time for Reams. Its core-plus strategy returned -13.68% for the one-year period ended March 31, according to eVestment Alliance LLC, Marietta, Ga. In contrast, eVestment's median Core Plus Fixed Income Universe returned -3.02% for the same period, while the Barclays U.S. Capital Aggregate returned 3.1%.
The strategy has returned an annualized gross 0.1% for the three-year period ended March 31 vs. 5.8% for the index. For the five-year period, it returned an annualized 1.1%, compared to 4.1% for the index.
According to information on Reams' website, the company's assets under management peaked at $10.9 billion in 2006, dropping to $10.8 billion in 2007 and $9 billion by the end of 2008. As of March 31, that figure had slipped to $7.9 billion.
With securities purchased at distressed levels, secured lenders could conceivably make a profit on the government offer.
But the government's offer lags the typical recovery rate of 63.4% for senior secured bank loans in 2008, 68.6% in 2007 and an average of 69.9% from 1982 to 2008, according to Moody's Investors Service, New York.
David Keisman, a Moody's analyst, said it is difficult to compare the recovery rate on the secured bonds to those offered historically because of the government's involvement in the April 30 bankruptcy.
"It was not a clean bankruptcy," he said, noting that the federal government did not follow the typical priority of secured lenders being paid ahead of non-secured lenders.
Data Editor Aaron Cunningham and Senior Reporter Christine Williamson also contributed to this story.