Colony's Barrack Says Firm May Soon Buy Asset-Backed Securities

By Hui-yong Yu

Nov. 22 (Bloomberg) -- Thomas Barrack Jr., who founded Los Angeles-based Colony Capital LLC in 1991 and purchased loans at discount prices during the U.S. savings and loan crisis, says it may soon be time to buy asset-backed securities.

"My gut feel is that there will be the beginning of a buying opportunity in the fourth quarter," Barrack said in an interview. The decision depends on whether banks and securities firms take additional writedowns for assets affected by the collapse of the subprime mortgage market, he said.

Financial institutions, including Bear Stearns Cos., Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley, have collectively disclosed about $50 billion of writedowns for assets tied to subprime mortgages. Analysts at Goldman Sachs Group Inc. and investors such as David Tice and Jim Rogers predict there's more to come, further pushing down prices for collateralized debt obligations, which package loans into new securities.

Colony, which has invested more than $36 billion in real estate-related assets, isn't interested in buying subprime mortgages, Barrack said. Instead, the company might purchase securities affected by their collapse that are backed by sufficient collateral such as loans to finance leveraged buyouts, he said.

"The asset-backed derivatives market is still a falling knife and it will take a few quarters to narrow the gap between sellers' hopes and buyers' expectations," Barrack said in the Nov. 16 interview.

Better Than 1990
Still, the real estate market is in better shape now than it was in 1990, Barrack said. Outside of single-family home loans, the default rate in North America is low and there isn't the oversupply of commercial property that prevailed back then, he said.

"The excess which is the cause of the current credit crunch is an oversupply of derivative asset-backed securities," the 60-year-old Barrack said. "Supply and demand of real estate product in most asset classes and in most geographic regions is actually in good balance."

Colony also may try to acquire a mortgage lender in anticipation of a market rebound, Barrack said. J.C. Flowers & Co., the U.S. buyout firm led by J. Christopher Flowers, bid for Northern Rock Plc, the U.K. mortgage lender bailed out by the bank of England.

As Colony examines buying opportunities in the U.S., overseas investors flush with oil revenue and foreign reserves have been looking at Colony as a potential investment.

Libyan Refiner
"We have been approached, as have many of the top private equity firms, by a few of the sovereign trusts from the Middle East and Far East," Barrack said, declining to identify them.

Carlyle Group, Blackstone Group LP and Och-Ziff Capital Management Group LLC are among the U.S. buyout and hedge funds that have sold minority stakes to overseas investors to secure long-term capital.

Colony is close to completing the 4 billion-euro ($5.9 billion) acquisition of Tamoil SA, Libya's state-owned oil refiner, in what would be Libya's largest private asset sale, Barrack said. Geneva-based Tamoil would be Colony's first buyout in the energy industry.

Tamoil owns refineries in Germany, Italy and Switzerland and more than 3,000 filling stations in Europe. Libyan leader Muammar Qaddafi has been seeking foreign investment since the U.S. and Britain ended economic sanctions in 2004 after he agreed to stop supporting terrorists.

"We are working side by side with the Libyan government in order to effectuate a successful and timely closing," Barrack said.

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