Sand Spring Capital Funds Provide Bankruptcy Update: Discussions On-Going, Quarterly Distributions Unlikely as Cash Reserves Decrease

Last week, Sand Spring Capital III, LLC and its affiliates filed a letter to investors in their funds publicly with the bankruptcy court in Wilmington, Delaware which is overseeing their chapter 11 bankruptcy cases.  The letter, signed by two of the directors of the funds, describes itself as a “status update pursuant to section 105 of the Bankruptcy Code” and provides a summary of “key developments” to date in the bankruptcy cases and offers some insights into the funds’ “next steps” in the cases.  The group of funds which are covered by the bankruptcy filings (with the last four digits of each entity’s tax identification number) are:

  • CA Core Fixed Income Fund, LLC (7053)
  • CA Core Fixed Income Offshore Fund, Ltd. a/k/a CA Core Fixed Income Fund, Ltd.  (N/A)
  • CA High Yield Fund, LLC (7155)
  • CA High Yield Offshore Fund, Ltd. a/k/a CA High Yield Fund, Ltd. (N/A)
  • CA Strategic Equity Fund, LLC (7141)
  • CA Strategic Equity Offshore Fund, Ltd. (N/A)
  • Sand Spring Capital III, LLC (9691)
  • Sand Spring Capital III, Ltd. (N/A)
  • Sand Spring Capital III Master Fund, LLC  (4004)

The funds voluntarily filed for chapter 11 protection in Delaware on October 24, 2011.  According to earlier court filings, the debtor funds are “investment vehicles that hold securities and other assets for investment purposes for the benefit of their membership interest holders . . . and their shareholders.” The various debtors had the following investment objectives:

  • Fixed Income Funds: “to provide investors with a return exceeding that of the Lehman Brothers Aggregate Bond Index, a broad-based investment grade bond index. The Fixed Income Debtors sought to achieve that objective primarily through investment in a diversified portfolio of fixed income securities that are primarily investment grade.”
  • High Yield Funds: “to provide investors with a return exceeding that of the Lehman Brothers High Yield Composite Bond Index, a broad-based high yield bond index. The High Yield Debtors sought to achieve that objective by investing in a diversified portfolio of fixed income securities that are primarily non-investment grade.”
  • Strategic Equity Funds: “to provide investors with a return exceeding that of the Dow Jones Wilshire 5000 Composite Index, a broad-based equity index. The Strategic Equity Debtors sought to achieve that objective primarily through investment in a diversified portfolio of equity securities.”
  • Sand Spring Funds: “to provide investors with positive absolute returns over the long term by seeking investments in a wide variety of opportunities in distressed and highly leveraged companies. The Sand Spring Debtors sought to achieve that objective primarily through investment in the distressed financial instruments of North American companies and subordinated tranches of asset-backed securitizations.”

As of the bankruptcy filings, the majority of the funds total assets were in Collybus CDO A2 notes.  Each fund had at least 40% of its total assets invested in the Collybus CDO notes, with CA Strategic Equity Offshore Fund, Ltd. and Sand Spring Capital III Master Fund, LLC each having over 80% of their total assets invested in the CDO notes.  According to last week’s letter, the market for the Collybus CDO notes “remains depressed and illiquid.”  In addition, the letter reports that the funds’ “remaining cash reserves are reaching the point where we have to manage them prudently and hold back sufficient reserves for on-going expenses and for the possible settlement of various claims in an approved plan of reorganization.”

As a result, while the funds are “actively implementing ways to reduce ongoing expenses to minimize the impact of the chapter 11 cases,” the letter states that distributions to investors “are unlikely to continue to be quarterly at this point.”  The funds are still determining whether they will have sufficient liquid assets to make an annual distribution.

For more details, the full status update letter is embedded below.  For background, we’ve also embedded the declaration of Hobart Truesdell, a principal of Walker, Truesdell, Roth & Associates which acts as agent of the on-shore funds. This declaration was filed at the same time as the initial bankruptcy petitions in October 2011.