PwC audit found no problems at Third Avenue's failed junk bond fund

By Tim McLaughlin

BOSTON (Reuters) - Third Avenue Management's failed junk bond fund received a clean bill of health in its final annual report from outside accounting firm PricewaterhouseCoopers LLP, which said the fund's liquidation this month did not change its audit opinion.

PwC's audit opinion, released Dec. 24th, is contained in the annual report for the Third Avenue Focused Credit Fund. The fund's fiscal year ended Oct. 31, before its liquidation was announced on Dec. 9th.

"Our opinion is not modified with respect to this matter," PwC said, referring to the junk fund's liquidation.

PwC said an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in a fund's financial statements and significant estimates made by management.

New York-based Third Avenue Management LLC, founded by famed distressed investor Marty Whitman, shut down the fund and blocked investor redemptions amid losses of nearly 30 percent, compared with 4 percent in the high-yield fund category. Its assets shrank to less than $800 million from more than $3 billion, according to Lipper Inc data.

The fund made big bets on illiquid, hard-to-trade assets that included bankruptcy-related claims.

The fund's portfolio management team, led by Tom Lapointe, remained optimistic even though the fund was taking heavy losses and encountering an accelerated amount of investor withdrawals.

"We believe there is significant upside in the fund as the fundamentals of the credits in the portfolio are healthy and positioned to capture significant upside as market conditions normalize," according to the Focused Credit Fund's portfolio management discussion. The comments reflect the fiscal year that ended Oct. 31.

Even so, the fund's management team conceded some big misses before its collapse. For example, a big bet on Houston-based Global Geophysical Services, a provider of seismic data for exploration and production companies in the energy sector, turned out to be one of the fund's biggest performance detractors during the fiscal year.

"In Global Geophysical Services, our investment thesis has been impaired, mainly as a result of the dramatic drop in commodity prices," the fund said in its annual report. The fund had about $82 million worth of exposure to the company, which emerged from bankruptcy in February.

(Reporting By Tim McLaughlin; Editing by David Gregorio)

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