After we announced the hedge fund manager interview series last week, we reached out to one of the first hedge fund managers we interviewed here on Distressed Debt Investing: Peter Lupoff of Tiburon Capital Management (you can find Peter Lupoff's interview here).
A little over a year ago, I launched the How to Get a Hedge Fund Job Blog. There, I help readers navigate the somewhat tumultuous maze that comes with getting a job on the buy-side ranging from resume tips, case study preparation, and success with interviews.
Yesterday, we brought you the first part of a two part series interviewing hedge fund manager Harris Kupperman. After the interview, for those interested, Harris runs a fantastic blog: http://adventuresincapitalism.com/ that I suggest you check out. Enjoy the second part of the interview!
Over the last two of three months, I have toyed with the idea of doing something like Value Investor Insight for emerging hedge fund managers. Over the years I have met some truly incredible investors running smaller funds that most have never heard of. These investors are not trying to build an empire but are instead content to manage smaller pools of capital without the head ache or managing a $1b fund. Some of these investors have absolutely incredible track records and are full of investing wisdom. Because of a number of major projects I have going on across the sites (one will be announced Monday), I thought it better to start the series right here on the blog for all to see. I will be working with Shaun Noll, founder and managing partner of Stirling Capital Management -who did today's interview- to bring you a series of interviews over the next few months.
One of the reasons I have always enjoyed being involved in the high yield and distressed debt markets is the ability to really dig through things that have been completely beaten down and no one wants to touch.
- MUS: BlackRock MuniHoldings Quality Fund
- PML: PIMCO Municipal Income Fund II
- FMN: Federated Premier Municipal Income Fund
- HYD: Market Vectors High Yield Municipal Index ETF
- A huge supply calendar: JP Morgan notes that next week could be the record for muni supply coming to market IN U.S. HISTORY (my emphasis added)
- Republicans win election means state budgets get less support from the federal government which means increasing stress on ability of municipalities to pay (and certain muni provision as part of President Obama's stimulus bill that need to be re-upped)
- Everyone and their mother front-running the Fed and the subsequent unwind (compounded by the unwind of the long end of the Treasury curve as well)
- Leverage, leverage, leverage. Most of these closed end muni ETFs are levered one way or the other. Further, and I really cannot believe they still exist after the debacle that was 2008, municipal arbitrage hedge funds probably were probably crushed with the recent moves in the curve. Borrow short to invest long? Even with hedging via swaps and swaptions, imbalances between the muni curve and treasury curve arise and when you are 20x levered disaster can strike.
- Concerns over BABs expiration: If you didn't know, the Build America Bonds program expire on December 31st. Issuers want to sell as much paper as possible to avoid the chance the interest credit gets removed - again more supply on the market.
- Muni mutual fund flow is nill at best: According to AMG, approximately $45M has been put to work in the last two weeks in municipal bond funds. The average weekly inflow this year is over $650M.
- The economy and general risk concerns (i.e. Allied Irish Bank, Asia raising rates, etc)
One of the my favorite times each quarter is the 45th day after quarter end when hedge funds report their holdings in stocks. My good friend Jay at Market Folly is far and away the best coverage of 13Fs out there and I strongly you suggest you frequently check his site for analysis of some of the best hedge funds in the world.
- Royal Capital Management: A well regarded long/short hedge fund that also has played in Lear.
- Apollo Management: Self-explanatory - one of the best.
- Wayzata Investment Partners: All over the distressed scene playing in recent bankruptcy emergences like Neff, Rath Gibson, and Merisant
- Columbus Hill Capital: Started by a former Appaloosa partner (they are also located in Short Hills, NJ), their 13F has names like Dana, MGIC, PMI, Lear as well as some well known large caps like BAC and IP.
- Elm Ridge: Started by Ron Gutfleish who spent time at Omega and GSAM, Barron's wrote in April 2004: "Gutfleish and his posse run their hedge-fund operation from an ultramodern New York office building on Third Avenue. They pride themselves on their ability to stir the pot of controversy. In the almost four years it has been in operation, Elm Ridge has won a reputation for being able to make money in all sorts of markets by aggressive analysis and bare-knuckle trading."
- Brigade Capital: One of the newer members of the distressed pack but also highly highly regarded. Very smart group of portfolio managers and analysts there that play up and down the capital structure and strategies.
- JGD Management i.e. York Capital: Blue chip and as best as they come.
- P Schoenfeld Asset Management: Check their website. Great stuff.
- Litespeed Management: Well regarded event-driven fun run by Jamie Zimmerman, playing in merger arb, distressed debt, and special situations.
My good friend Miguel Barbosa has put up some absolutely amazing content at his blog Simoleon Sense.
- Deep water drilling moratorium enacted in the Gulf due to the BP spill - a 6 month halt on drilling could cost lots of money for ATP as 60% of their reserves are located in deepwater GOM. That combined with a heavy capex program - people begin to worry about the future cash flow potential of this company. People even begin to mention a possibly bankruptcy due to a cash crunch. Sell side starts downgrading en masse (i.e. time to start looking at it as a long)
- Bonds continue to weaken. On the 8th of June, bonds are down 4-6 points in thin trading. Reason: The purported second leak that didn't actually exist. A downgrade to CCC+ did not help either.
- Bonds start moving higher as rumors that the drilling moratorium on deep water drilling could end sooner. Stock moving 10-15% a day up also seemed to help.
- Louisiana judge lifts ban - bonds shoot up - felt like a short squeeze really as bonds felt heavy post.
- ATP place a new $150M term loan (with an option to extend to $500M). Market begins to start pricing ATP as a going concern versus a liquidation (despite the possible increased priming)
- Bonds weaken as representatives from the House begin discussing the $75M liability cap (i.e. insurance would be prohibitively expensive for someone like ATP) and a new moratorium is put into place.
- Bonds move up on no volume/news until ATP releases disappointing 2Q numbers - then bonds move down on substantial volume
- Beginning of September there was rumors on another rig explosion: One bold trader made a 75-80 market.
- Bonds begin to drift higher on seemingly no news. Then company announces a $350M TL to monetize ATP Titan. Bonds continue to move higher.
- Rumors that the deepwater drilling ban will end early keeps the bonds moving higher still. Sell side starts to get bullish again - i.e. time to possibly lock in some gains.
- 2nd Telemark Hub begins production. Bonds and stock continue to climb.
- More rumors about the lift in the drilling moratorium. Bonds and stock climb further.
- Moratorium conditionally lifted - bonds go bid without (no sellers) in the mid 90s.
Over the past week, many high yield and credit strategist put out a number of pieces on the recent rise of LBOs. What has driven this renewed interest in the LBO space? Lower cost of debt capital in the form of all time low yields across the B and BB space. While we have not seen LBOs like we did in the first half of 2007, conditions are ripe for a dramatic increase in the number of take private transactions for the rest of the year and into 2011 - especially if the Fed continues keep the curve at near all time historic lows.
"The Company may redeem the notes, in whole or in part, at any time or from time to time at a specified make-whole premium. Upon the occurrence of a change of control triggering event (as defined in the Indenture), each holder of notes will have the right to require the Company to repurchase such holder’s notes, in whole or in part, at a purchase price in cash equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of purchase. The Indenture contains covenants limiting the Company’s ability and the Company’s subsidiaries’ ability to create certain liens, enter into sale and lease-back transactions, and consolidate or merge with, or convey, transfer or lease all or substantially all the Company’s assets to, another person. However, each of these covenants is subject to certain exceptions."
“Change of Control” means the occurrence of any of the following events:(1) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company;(2) individuals who on the Issue Date constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved or ratified by a vote of a majority of the directors of the Company then still in office who were either directors on the Issue Date or whose election or nomination for election was previously so approved or ratified) cease for any reason to constitute a majority of the Board of Directors of the Company then in office;(3) the adoption of a plan relating to the liquidation or dissolution of the Company; or(4) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company (determined on a consolidated basis) to another Person other than (i) a transaction in which the survivor or transferee is a Person that is controlled by the Permitted Holders or (ii) a transaction following which (A) in the case of a merger or consolidation transaction, holders of securities that represented 100% of the Voting Stock of the Company immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or consolidation transaction immediately after such transaction and (B) in the case of a sale of assets transaction, each transferee becomes an obligor in respect of the Notes and either (i) each transferee becomes a Subsidiary of the transferor of such assets or (ii) holders of securities that represented 100% of the Voting Stock of the Company immediately prior to such transaction (or other securities into which such securities are converted as part of such transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of the transferee.Notwithstanding the foregoing, a transaction will not be deemed to involve a Change of Control if (1) the Company becomes a direct or indirect wholly-owned subsidiary (the “Sub Entity”) of a holding company and (2) holders of securities that represented 100% of the Voting Stock of the Company immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of such holding company; provided that, upon the consummation of any such transaction, “Change of Control” shall thereafter include any Change of Control of any direct or indirect parent of the Sub Entity.
“Permitted Holders” means Barry Diller, Liberty Media Corporation and their respective affiliates and any group (as such term is used in Section 13(d) and 14(d) of the Exchange Act) with respect to which any such persons collectively exercise a majority of the voting power.