12.27.2010

Accuride and Rule 2019

Last week, the Wall Street Journal ran an article entitled: "For Accuride Investors, a Big Payday: Big Bondholders Parlayed Position at Negotiating Table During Bankruptcy Into $132 Million Gain." (subscription required). A number of people emailed me the above article and asked me my thoughts on it. But first some background.


For those interested, the Accuride docket can be found here: Accuride bankruptcy docket

In April 2010 (docket #968), Dow Jones & Company (publisher of the WSJ) submitted a motion to unseal the Accuride's ad hoc note holder's groups Rule 2019 disclosures which at that point had been sealed. What is Rule 2019 you ask? From the same motion:
"Rule 2019(a) requires that unofficial committees or ad hoc groups disclose, inter alia, (1) the nature and amount of their claims or interests; (2) the date of acquisitions of their claims or interests acquired in the year prior to the filing of the bankruptcy case; (3) the amount paid; and (4) any subsequent sales of claims or interests."
In other words what / when they paid for certain securities...

Eventually, after objections from the ad hoc group, the judge ruled to release the 2019 disclosures. The below document is where all the details can be found:



There was a very interesting quote from the aforementioned Dow Jones motion to release the 2019 disclosures:
"Chapter 11 proceedings have emerged as the preferred venue for mergers and acquisitions, where private investors quickly buy, trade, and break up companies. These investors may attempt to force a company into bankruptcy."
What is this? Pretty Woman?

In the article mentioned above, another interesting quote emerged. This time from Deirdre Martini, a managing director at Wells Fargo Capital Finance and former U.S. Trustee:
"The evolution of distressed investing has made a mockery of the underpinnings of our bankruptcy process, which is total transparency," said Deirdre Martini, a managing director at Wells Fargo Capital Finance and former U.S. Trustee, the government watchdog for cases in federal bankruptcy courts. Chapter 11 was created decades ago as a way to give ailing companies a chance to fix their balance sheets and operations, and reimburse supportive creditors as much as possible, she said.

"The bankruptcy code's focus was never intended to garner profits for distressed investors," she said.
Now that I completely disagree with. Whether it be the blanketed releases the code has ALWAYS allowed to the 2005 changes which has made pre-packs basically inevitable, the code has been welcoming to investors with fresh capital to rehabilitate debtors and capture a profit on that investment. Do you truly think anyone is going to put up $140M of capital and expect a mid single digit return on that capital for a bankrupt company?

The WSJ quote above, as it relates to the bankruptcy as the preferred M&A route for investors - of course it is. Have you ever actually read the releases involved in a confirming disclosure statement and plan? No one is liable for anything. Furthermore, given the litany of legacy liabilities and trial lawyers that profit from any ailment under the sun, why would any investor pursue M&A OUTSIDE of the Chapter 11 process.

Yes - The purpose of Chapter 11 is to rehabilitate ailing companies. But ailing companies' securities trade at a significant discount to their healthy peers. Would you like me to buy high and sell low?

If anyone is to blame, blame the management teams. No where in the entire WSJ article does the author point to how well management teams have profited from Equity Incentive plans granting management teams anywhere from 6-15% of the post-re org company.

And because the code allows a company the exclusive right to file a plan for the first 18 months after the petition date, distressed investors HAVE to work with management teams and offer them a very large carrot to ensure their plan is accepted. Is this collusion at the expense of pre-petition junior creditors and equity holders? Not in my opinion. Remember - always look at the incentives of every party in an investing situation - It really can tell you a lot about how the chips will fall.



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12.22.2010

Happy Holidays from Distressed Debt Investing

Hey everyone - Wanted to wish you all a wonderful holiday season. I will be back next Monday with many a post in hand. Happy holidays!

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12.20.2010

Advanced Distressed Debt Concept: "A Gift"

As noted many times on this site, Chapter 11 cases are expensive. From paying $700-$1200/hour for senior lawyers, success based fees for financial advisors, and (in my opinion the most important) business issues such as loss of customers, suppliers, employees, etc costs start to add up. That being said, and because of certain 2005 changes to the bankruptcy code regarding exclusivity timing, more and more bankruptcies are going the prepack bankruptcy route. And to make sure things go smoothly, the creditors driving the show are offering a gift to possible dissenting classes to make sure the Chapter 11 proceedings go off without a hitch.


Last week, after all the hub bub of the Great Atlantic's bankruptcy filing, people seem to have forgotten that Insight Health filed for bankruptcy just a few days earlier. Here is the press release:
InSight Health Services Holdings Corp. (“Insight Imaging” or “the Company”) (OTCBB:ISGT.ob - News) today announced it had reached an agreement in principle with holders of a significant majority in aggregate principal amount of its outstanding senior secured floating rate notes due 2011 (the “Notes”) regarding a restructuring of the Notes. Insight Imaging has entered into a restructuring support agreement (the “Support Agreement”) with such holders (the “Supporting Holders”), which contemplates restructuring the Notes through a jointly agreed plan of reorganization to be filed with the bankruptcy court (the “Court”). The terms of such pre-packaged plan are set forth in a term sheet made part of the Support Agreement, but may be amended or modified in accordance with the terms of the Support Agreement (a “Qualified Plan”). The terms of the Qualified Plan contemplate an exchange of all of the Notes for all of the common stock of the reorganized Company upon exit from bankruptcy, resulting in the elimination of 100% of the Notes from the Company’s balance sheet.

The Support Agreement provides that the Supporting Holders will, among other things, vote to accept a Qualified Plan and support a debtor-in-possession financing facility (the “DIP Facility”). The Company is currently in discussions with Bank of America, N.A. (“Bank of America”), the administrative agent under its current revolving credit facility, regarding the DIP Facility. The Support Agreement will require Insight Imaging and certain of its subsidiaries to file a Qualified Plan with the Court, obtain a confirmation order from the Court and effectuate the Qualified Plan within the time-frames set forth in the Support Agreement.

Insight Imaging also announced that holders of greater than 75% of the principal amount outstanding of the Notes, the trustee under the indenture governing the Notes and the collateral agent under the security documents relating to the Notes have entered into an agreement to forbear from exercising their remedies under the Notes, the indenture and related security documents as a result of events of default arising from the November 1, 2010 interest nonpayment and the expiration of the applicable 30-day grace period. The forbearance period ends not earlier than December 10, 2010, by which time the Company expects to have filed a prepackaged plan of reorganization. Bank of America has also extended the forbearance period under the Company’s revolving credit facility, as amended, from December 1, 2010 to December 15, 2010.

Kip Hallman, Insight Imaging’s President and CEO, stated, “This restructuring is being undertaken to eliminate more than $290 million of debt, substantially improving our cash and liquidity position. We intend to complete the reorganization as quickly as possible. In the meantime, we will continue to operate our business as usual to provide quality services to our customers and our patients. We look forward to emerging as a much stronger business, with a capital structure that will enable us to maximize the long-term value of the company.”
For those interested, you can find the Insight Health bankruptcy docket here: Insight's Chapter 11 docket

As those in the distressed community will know, this will not be the first trip to the rodeo for Insight. From the disclosure statement:
On May 29, 2007, InSight Health Services Holdings Corp. and InSight Health Services Corp. Filed voluntary petitions to reorganize their business under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700) (the “2007 Reorganization”). The filing was in connection with a prepackaged plan of reorganization and related exchange offer. On July 10, 2007, the Delaware bankruptcy court confirmed InSight Health Services Holdings Corp. and InSight Health Services Corp.’s Second Amended Joint Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and InSight Health Services Holdings Corp. and InSight Health Services Corp. emerged from bankruptcy protection on August 1, 2007. Pursuant to the confirmed plan of reorganization and the related exchange offer, (1) all of InSight Health Services Holdings Corp.’s then existing common stock, all options for the common stock and all of InSight Health Services Corp.’s 9.875% senior subordinated notes due 2011, or senior subordinated notes, were cancelled and (2) Holders of InSight Health Services Corp.’s senior subordinated notes and Holders of InSight Health Services Holdings Corp.’s common stock prior to the effective date received 7,780,000 and 864,444 shares of newly issued common stock, respectively, in each case after giving effect to a one for 6.326392 reverse stock split of such InSight Health Services Holdings Corp.’s common stock.

While the reorganization attempted to deleverage InSight Health Services Holdings Corp.’s and InSight Health Services Corp.’s balance sheets and improve their projected cash flow after debt service, both still have a substantial amount of debt, which requires significant interest payments. As of September 30, 2010, the Debtors had total indebtedness of approximately $298.3 million in aggregate principal amount, including InSight Health Services Corp.’s $293.5 million in principal amount of Senior Secured Notes.
Looks like we have ourselves a good ole' Chapter 22 on our hands.

Who are the parties of interest here? Well we know a Plan Support agreement will have been filed in a pre-pack like this, so let's take a look at the disclosure statement and see what we can find. On page 494 - 496 of the PDF, one can see that J.P. Morgan's Credit Trading Group and affiliates of Black Diamond have signed the agreement. To give you a sense of how this bond has traded over the past few years, take a peak:


According to Trace (the graph above is based on Trace versus my message runs) there was a million + dollar worth of bonds traded on the 22nd of November. Alex Bea, a fantastic distressed debt trader from JPM who was the axe in this name, stoppped making markets sometime in October - thinking they got restricted and all that was left was sporadic runs from a number of brokers / dealers.

For the rest of this post, I will assume the bonds trade at 25 cents on the dollar. The allowed claim, according to the plan, of the Insight secured floaters is $293.5M with very little debt ahead of you in the capital structure. There has been a $15M DIP authorized which, according to the disclosure statement, will be rolled into a $20M revolving exit facility.

The disclosure statement also came with projections:


As you can see, the company plans to emerge with very little debt and a marginal cash balance. What does that mean for our bonds?

Insight Health has two direct publicly traded comps: Alliance Healthcare Services (AIQ) and Radnet (RDNT). Both stocks have had lackluster performance in the face of declining reimbursement rates in a predominantly fixed cost structure combined with hefty debt loads. According to Bloomberg, RDNT trades at 5.1x 2011 EBITDA and AIQ trades at 4.9x EBITDA. What does that mean for Insights bonds?

According to the projections, Insight looks to generate approximately $25M of EBITDA in 2012 (full year 2011 not really helpful given reorg costs). At 5.0x, this translates into $125M of value versus $293.5M of claims or 40 cents on the dollar - which at a purchase price of 25 gives us approximately a 25% IRR over 2 years. Not too shabby. Of course, if we haircut the multiple 1.0x turns reflecting the weaker mobile business of Insight, we get an IRR closer to 16%.

As we've talked about in previous posts, one really has to scrutinize projections. Why? Because management's incentive is to create a low valuation for the stock so their upside is greater. In Insight's case:
The Management Equity Plan will provide for a certain percentage of New Common Stock, not to exceed eight percent (8%) of the fully diluted New Common Stock, to be reserved for issuance as options, equity or equity-based grants in connection with the Reorganized Debtors’ management equity incentive program and/or director equity incentive program. The amount of New Common Stock, if any, to be issued pursuant to the Management Equity Plan, and the terms thereof shall be determined by the New Board on or as soon as reasonably practicable after the Effective Date.
The scrutiny of projections will be for another post. The question I am trying to address: If the floaters are going to make 16-25% in possibly artificially low projections and management is making off with possibly 8% of the company, what is happening to the equity? The equity is receiving a "gift".

You think I am using that term as slang. No, gentle reader, it really is called a a "gift":


Now what are the specifics of this gift:
  • They are warrants to buy up to 2% of stock on a fully diluted basis
  • Three year expiration
  • Exercisable when enterprise value is greater than $215M
Exercisable when EV is greater than $215M? In 3 years?? $215M on the contemplated $25M of EBITDA is an 8.6x multiple. Or backing into the cash flow required on a more realistic 5.0x multiple, EBITDA would have to grow 20% a year for the next three years to reach $43M for these warrants to be in the money. In my opinion, highly doubtful.

If you had simply read that you were getting warrants for 2% of the company you may have been happy (albeit nearly a 99% drop in the stock) and have even considered getting long the equity in a spec play out of Gordon Gekko's playbook. But that gift is in all likelihood a donut to placate equity holders that just want SOMETHING. As I try to stress often on this site, I spend just as much time on the document side of things as I do looking at business and industry trends. Always read the fine print in distressed debt. It can save you many a land mines in the future.

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12.13.2010

Great Atlantic Bankruptcy (GAP)

Before I begin, I need to correct something I wrote last night introducing the GAP bankruptcy: Rejected lease claims are unsecured claims in a bankruptcy. The GAP 2nd lien notes should be senior to these rejection claims. Chalk it up to lack to sleep. For you real bankruptcy buffs: 502(b)(6) of the Code sets damages at the greater of one year or 15% of the lease (not to exceed three years). Apologies on my part. Net/Net it helped the recovery of the bonds. To note, bonds are up 3-4 points today (went out the day 83-34/flat).


Now to the fun stuff: Great Atlantic announced its decision to file Chapter 11 in the Southern District of NY. To access the docket, you can go here: http://www.kccllc.net/APTea

Now, the DIP is definitely large - but the increased size is to account for taking out existing LOCs and pre-petition bank debt. The DIP will be structured as a $450M RC and a $350M term loan. Pricing is talked at L+750 with a 1.75% Floor. From the docket: "...to secure an $800 million debtor-in possession financing facility, consisting of (i) a $350 million term loan facility to refinance the Debtors’ prepetition senior secured credit facility and provide approximately $187 million in incremental liquidity and (ii) a $450 million revolving facility, including access to a $250 letter of credit sublimit and (b) grant adequate protection to the Debtors’ secured lenders." Essentially, this number was near the upper limit allowed under the pre-petition intercreditor agreement.

As noted in previous posts, one of the most important documents to get yourself associated with a new bankruptcy proceeding is the First Day Affidavit. You can find GAP's here: GAP's First Day Proceedings Affidavit.

A few interesting takeaways from the document:
  • "The Debtors’ primary retail operations consist of supermarkets operated under a variety of well-known trade names, or “banners,” including A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors. As of September 11, 2010, the Debtors reported total assets of $2.5 billion and liabilities of $3.2 billion. The Debtors currently employ approximately 41,000 employees. "
  • Points out three "significant legacy costs" - Dark store leases, an unfavorable supply agreement with C&S Wholesale (a high yield issuer itself), employee costs (pensions, high labor % of sales)
  • LTM Revenue: $8.4B, down from $9.5B in 2008 and $8.8B in 2009
  • LTM EBITDA and EBITDA Margin: $104M and 1.2% respectively, down dramatically from 2008 of $333M and 3.5% respectively.
  • 95% of employees under collective bargaining agreements (39 separate agreements)
  • Paid $1.4B for Pathmark in 2007
  • "The Debtors’ estimated dark store net rental expense will be $77 million in 2011 alone."
  • Cap Structure:
  • Sames Store Sales down 6.9% YTD
  • Cost Savings Efforts Paying Off: "These initiatives have already generated total cost savings of approximately $40 million on an annualized basis, including over $10 million in annual salary savings"
  • Really putting a lot of blame on C&S through this entire document.
  • $858M of NOLs and $121M in business tax credits
Will be a very entertaining case. Interestingly a few months ago, one Distressed Debt Investors Club member pitched the second liens as a long (they were in the high 60s at the time) right when another member pitched the unsecured bonds as a short. Been a tough ride for 6.75% of 2012:


We will continue monitoring the GAP bankruptcy - think this one could get interesting.

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12.12.2010

One of my favorite pieces of investing from Michael Price

Michael Price is a legendary investor and someone I try to learn from whenever I get the chance. I mean, this is one the guys that taught Seth Klarman how to invest capital. A few years ago, Michael Price gave a speech to Bruce Greenwald's Value Investing course at Columbia Business School. While I do not have the transcript directly in front of me, his words can be summarized as follows: "Read proxies and bankruptcy disclosure statements because they tell you what rational buyers are paying for businesses."


Now this is not theoretical data - i.e. this stock should trade at 6x or 9x - this is a real buyer, with real capital at risk, deploying that capital to buy a certain asset or company. And that information holds value and is very rarely discussed or even analyzed by the sell side.

For those that are interested on Bloomberg, you can make a macro to type in NSE "PREM14 A", and assign that macro to a button and have all the proxies filed at the tip on your hand. For disclosure statements, the process gets a little trickier - you have to monitor the docket to determine when the disclosure statement actually gets filed.

To be sure, many times this information needs to be sensitized relative to company specific factors. For example, I think it would be ludicrous to use most on the run proxy statements to value a distressed company in the same industry. Or if a company is heavily capital intensive versus an asset light company in the same industry - those companies should trade at different multiples because of the ability of the asset light company to better translate EBITDA into real tangible free cash flow. Make sure you are comparing apples to apples here.

Let's take a real world example: On Friday, Great Atlantic said it may file bankruptcy as soon as this weekend. Great Atlantic is always a hot topic among distressed investors. I know many people that bought near dated puts on the company thinking that any rescue effort would fall short. Seemingly it has. Rumors were swirling around the market on Thursday with bonds down 4 or 5 points on the session and then dropping further on Friday.

In January of this year, Penn Traffic, a regional grocer that has filed three times in the past ten years, sold substantially all its assets for $85M to Tops Markets. Here is the disclosure statement: Penn Traffic 2nd Disclosure Statement. According to the Affidavite of the Chief Restructuring Officer:
"Tops proposed a multifaceted transaction pursuant to which it would acquire a substantial number of stores as going concerns with commitments to employ the unionized workers at those stores, act as the Debtors’ liquidation agent with respect to underperforming stores to conduct going out of business sales and liquidate the merchandise in the Debtors’ closing stores, extinguish approximately $72 million of prepetition withdrawal liability claims which otherwise would have been asserted by one of the Debtors’ multi-employer pension funds, and consensually reduce by approximately $27 million the claim of the Debtors’ largest supplier."
Using $85M, and the 2009 financials, this represented ~0.1x revenue, 7.7x adjusted EBITDA. What does this mean for GAP?
  • LTM Revenue is ~$8.5B. Using PTFC's multiple gets you to $850M valuation
  • LTM EBITDA is $100M. Using PTFC's multiple gets you to $770M
***Note - I have edited this section for an error I made last night - score it at "Error - Lack of Sleep" for viewers at home***

But this is where things get tricky. GAP has talked about in previous conference calls there is a $100M cash flow loss from dark store rent. Seemingly in a bankruptcy they could get rid of these leases. There is ~$130M available outstanding on the term loan, ~$140M in cap leases, as well as a plethora of other claims: Long term real estate liabilities, pensions, etc.

Where does this leave us on our $260M of the 11.375% notes. Normalized EBITDA is probably somewhere between $150-$200M after adding back the lease losses. Using $150M and 7.7x multiple gets you to $1.15B in value. Less $130M in term loans, $140M in cap leases gets you to about $900M in value. But given how fast a grocer turns over its inventory as well as a large number of LOCs on the balance sheet, I believe a DIP here will be fairly substantial. For the last 4 years, accounts payable at the 4th quarter is around $200M, so I'll use that. We then have to add in admin expenses. I generally model 2-5% of total debt outstanding depending on the complexity of the case - I'll use 3.5% here which is another $50M of claims.

We are down to $650M in value versus our 11.375% notes. This leads me to believe these bonds are the place to play in the structure - I wish they were lower, but at 80 cents on the dollar, you are getting a decent (albeit possible inadequate) margin of safety here. Other reasons: The 2nd lien notes are guaranteed by the operating subs whereas all other debt (other than credit facility) is not. The bank debt looks to be money good here and seemingly the 11.375% quotes will be the fulcrum security.

We know we have any interested party here: Yucaipa is deeply involved here. Do they step up to take out the fulcrum security to gain control of GAP once and for all? Other things that keep me interested in this case: GAP has a number of brands they could sell to interested parties. While food deflation is all the rage among grocers, I believe this a temporary phenomenon. An investment in GAP's second lien notes may be one of the cheapest ways to play a wave of food inflation over the next few years. And remember, a rational buyer bought similar assets just 10 months ago at the 7.7x valuation - call them crazy if you think I shouldn't be using that multiple. We will continue to monitor this distressed debt case closely in the coming months.

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12.06.2010

Updated List of Distressed Debt Hedge Funds

Thank you to all who helped me add a few names I missed on our list of distressed debt hedge funds. Some of you also suggested I sort the list alphabetically. Here is the new list of distressed debt hedge funds. If I missed anyone or you would like to be added to the list, please email me (hunter [at] distressed-debt-investing.com). Going forward, I will use this post to keep a list of all distressed debt / event driven hedge funds I come across, combining with linking these to relevant websites and 13Fs.


List of Hedge Funds Participating in Distressed Debt

1798 Global Partners
AAC GP LLC
Abrams Capital Management LLC
Advantage Advisers Multi Manager LLC
Advent Capital Management
AEGON USA Investment Management LLC
Ahab Capital Management LLC
Alcentra Inc
ALJ Capital Management
Anchorage Capital Partners LP / Anchorage Advisors LLC
Angelo, Gordon & Company
Apex Capital Management
Apollo Management
Appaloosa Management
Archview Investment
Ares Management LLC
Aristeia
Armory Advisors LLC
Arrow Investments Inc
Arrowgrass
Atalaya Cap. Mgmt.
Audax Credit Opportunities
Audax Group LP
Aurelius Capital Management
Aurora Resurgence Mgmt. Partners
Avenue Capital Group
Babson Capital Management LLC (David L. Babson & Co. Inc)
Basso Capital Management L.P
Baupost Group
Bay Harbour Management
Bayside Capital
Beach Point Capital Management LP
Beltway Capital
Bennett Asset Management Corp
Berens Capital Funds
Black Diamond Capital Management
Black River Asset Management LLC / CarVal Investors LLC (Cargill Inc)
BlackEagle Partners
Blackport Capital Fund
Blackrock
Blackstone Group
Blue Mountain Capital Management LP
Blue Ridge (Blue Water) Capital Management LLC
Blue River Asset Management
Blue Wolf Capital
BlueBay Asset Management
BlueCrest Capital Management LP
Bond Street Capital
Boone Capital Management
Brencourt Advisors
Bridgehampton Capital Management LLC
Brigade Capital Management
Brookfield Asset Mgmt.
Campbell GP
Camulos Capital
Candlewood Investment Group, LP
Canyon Capital Advisors LLC
Cape One Financial LLC
Cargill Value Invstmt
Carl Marks & Co.
Carlyle Strategic Partners
CarVal Investors
Caspian Capital
Catalyst Investment Mgmt.
Catalyst Partners
Caxton Associates
CDK Group
Centerbridge Capital
Cerberus Capital Management L.P / Madeleine LLC / Ableco Finance LLC
Cetus / Littlejohn
Chicago Fundamental
Citadel
Cohanzick Management LLC
Columbus Hill
Commonwealth Advisors Inc
Concordia Advisors LLC
Contrarian Capital Management
Corsair Capital Management LLC
Covalent Capital Partners
Courage Investments Inc
CQS
Creedon Capital Management (Creedon Kelly & Partners)
Cypress Mgmt
Cyrus Capital Partners
D.B.Zwirn & Co. L.P.
D.E.Shaw Group
Dalton Investments
Davidson Kempner Capital Management LLC (MHD Management Co. LLC)
DDJ Capital Mgmt
Deephaven Captial Management LLC
Deerfield Capital Management LLC  
Del Mar Asset Management 
Delaware Street Capital
Deltec Asset Management LLC
DKPR Wolf Point Mgm.t
DKR Capital Inc
Drake Mgmt.
Dreman Value Mgmt.
Drucker Capital
Dune Capital Mgmt.
Durham Asset Management
DW Investment Management, LP (Brevan Howard)
Eagle Rock Capital
Eight Capital Management Ltd
EJF Health Care GP LLC
Elliott Advisors
Endurance Asset Management LLC
EOS Partners
Epic Asset Mgmt.
ESL Investments Inc (Edward Lampert)
Eton Park Capital Management
Everest Capital LLC
Ewing Management
Fairholme
Falcon Point Capital
Farallon Capital Management LLC
Faxtor Securities BV
Fernwood Associates LTD
FH International Financial Services Inc
Fir Tree Partners
FirstCity Crestone, LLC
Forest Investment Management LLC
Forstmann Little & Co.
Fortress Investment Group LLC
Franklin Mutual Rec
FrontFour Capital Group LLC
Fulcrum Capital Mgmt.
Fundamental Capital Management LLC
Further Lane Securities
Gabriel Capital Corp
Gates Capital Management
Glenview Capital Management
GLG Partners, NA
Global Credit Advisors
Golden Capital
GoldenTree Asset Mgmt.
Goldman Spec Situations
Gores Group
Gracie Capital LLC
Gradient Partners
Gramercy Advisors LLC
Gramercy Capital
Gravity Partners LP
Greenhill Capital Partners
Greenlight Capital
Greywolf Capital Management LP
Gruss Asset Management
GSC Capital (Greenwich Street Capital Partners)
GSO Capital Partners LP
Guggenheim Investment Management
H Partners
H.I.G.
H2 Capital
Hain Capital
Halbis Capital Management USA Inc
Halcyon Partners LP / Halcyon Asset Management LLC
Harbert Fund Advisors
Harbert Management Corporation
Harbinger Capital Partners
Harbour Town Funding LLC
Harvest Management LLC
Havens Advisors LLC
Hayman
HBK Investments LP
HBV Capital Management
Helios Capital Management
Hicks, Muse, Tate & Furst Inc.
HIG Brightpoint Cap.
Highbridge Capital Management LLC
Highland Capital Management LP
Hudson Bay Capital Management
Huizenga Capital Mgmt.
IBS Capital Corp
Icahn Capital Corp.
Icahn Capital Corporation / Thornwood Associates LP (Controlled by Carl Icahn)
Insight Investments LLC
Intermarket Corporation
Invesco
Ivory Investment Management
J.H. Whitney & Co.
Jana Partners LLC
JLL Partners
JMB Capital
JP Morgan Asset Management
K Capital Partners
Karsch Global Credit
Katonah Scott's Cove Cap. Mgmt.
Kayne Anderson
KD Distressed Capital
Kellner DiLeo Cohen & Co., LLC
Kilimanjaro Advisors
King Street Capital Management LLC
Kistefos AS
KKR FINANCIAL Holdings LLC / Kohlberg Kravis Roberts & Co. LP
Knighthead Capital
KPS Special Situations Fund
KS Capital Partners
Lampe, Conway & Co. LLC
Latigo Partners LP
Laurel Ridge Asset Management LP / Laurel Ridge Partners
Leucadia Nat'l Corp.
Levco Debt Opps
Levine Liechtman Capital Partners
Lighthouse Investment Partners LLC
Linden Advisors
Litespeed Management LLC / Litespeed Partners LP / Litespeed Capital LLC
Littlejohn & Co.
Loeb Partners / Third Point Management
Lone Star Partners
Longacre Fund Management LLC
Longroad Asset Management
Luxor Capital
Lydian Asset Management
Lyster Watson
Maglan Capital
Magten Asset Management Corp
Marathon Asset Management LP
Marblegate Asset Management
Mariner Investment Group LLC (Caspian Capital Partners)
Marlin Equity Partners
Mason Capital Management
MatlinPatterson Global Advisors LLC / MatlinPatterson Capital Management LP
McDonnell Investments
Mellon HBV
MHR Fund Management LLC (Rachesky)
Mill Rock Investment Advisors
Millennium Global
Millennium Management
Millroad Partners
Mittleman Brothers Partners
MJ Whitman Mgmt Co.
Moab Capital Partners LLC
Monarch Alternative Cap.
Monomoy Capital
Moore Capital Management
Morgens Waterfall Vintiadis & Co. Inc
Moriah Capital Management LP
Mount Kellett Cap. Mgmt
MSD Capital
Mudrick Capital Management
New Generation Advisers
Newport Global Advisors
Normandy Hill Capital
North Run Partners
Oak Hill Capital Partners / Oak Hill Investment Managemetn LP
Oaktree Capital Management (OCM)
Och Ziff Capital Management Group LLC / Och Ziff Friedheim / OZF Management LLC
Octavian Advisors
Onex Corp. / Onex Capital Management LP
Onex Credit Partners
ORE HILL PARTNERS LLC
Outrider Management
Owl Creek
P. Schoenfeld Asset Management
Pacholder Assoc., Inc.
Pacific Altern. Ast Mgmt.
Pacific Capital Advisors
Pacificor LLC
Paige Capital
Panagaen Capital Management
PAR Investment Partners
Parallax Capital Partners LLP
Pardus Capital Management LLC
Patriarch Partners LLC
PAULSON & CO INC
Pegasus Investment Partners LP
PENN Capital Management Company Inc
Pequot Capital Management LLC
PERELLA WEINBERG PARTNERS CAPITAL MANAGEMENT
Perry Capital
Pershing Square Capital Management LP
Phoenix Investment Adviser
Pimco
Pine Creek
Pine River Capital Management
Pinewood Capital Partners
Plainfield Asset Management
Platinum Equity Capital Partners
PMI
Post / Beach Point
Principal Global Investors
Private Advisors LLC
Prophet Equity
Providence Equity
Pursuit Partners LLC
Quadrangle Group LLC (Quadrangle GP Investors LLC / Quadrangle Equity Investors Ltd / Quadrangle Equity Management LLC)
Quattro Global Capital LLC
Questor Management
QVT Financial LP
R2 Investment (Amalgamated Gadget LP / Q Investment)
R3/Blackrock
Radius Partners
RAMIUS Capital Group (RCG)
Redwood Capital
Relativity Fund
Remedial Capital
Resolution Partners
Restoration Capital Management LLC
Resurgence Asset Management
Resurgence Corp. Fund
RMBS Management LLC
Royal Capital Management
SAC Capital Advisors LLC (Sigma Captial Management LLC)
Sabretooth Capital
Salisbury Capital
Sandell Asset Management Corp.
Sandler Capital Management
Sankaty Advisors LLC
Satellite Asset Management LP
Saybrook Capital
Schultze Asset Management LLC
Scoggin Capital Management LP
Scott's Cove Capital Management LLC
Seix Investment Advisors
Senator Investment Grop
Seneca Capital Advisors / Seneca Capital Investments LP
Shenkman Capital Management Inc
Sierra Liquidity Fund
Signature Cap. Partners
Silver Lake Financial
Silver Point Capital
Simran Capital Management LLC
Smith Management / Alden Global Capital
Solus Alternative Mgmt.
SOROS Fund Management
Soros NY
Southpaw Asset Management
Spectrum Asset Management
Spring Street
Stairway Capital Advisors
Standard General Mgmt.
Stanfield Capital Management
Stark Investment LTD Partnership
Steel Partners
Stone Harbor Inv. Ptnrs
Stone Lion
Stone Tower
Stonehill Capital Management LLC
Stony Lane Partners
Strategic Value Partners LLC
Summit
Sun Capital Partners Inc
Sunrise Partners LLC
TA Mckay & Co.
Taconic Capital Partners (Taconic Capital Advisors / Taconic Capital Management)
Tålamod Asset Management
TCW Group Inc (TCW/Crescent Mezzanine LLC)
Tennenbaum Capital Partners LLC
TENOR CAPITAL MGMT COMPANY LP
The Broe Companies
The Carlyle Group / Carlyle Investment Management LLC
The Occasio Fund LLC
Third Avenue Management LLC
Thomas H. Lee Partners
Tiburon Capital Mgmt.
Tontine (Capital) Partners LP / Tontine Associates LLC
Toscafund Asset Management
TPG Capital LP (Texas Pacific Group)
TPG Credit Management
Tradewinds Investment Management
Treadstone Group
Triage Capital Management LP
TRICADIA CAPITAL LLC
Trilogy Capital
Trust Co. of the West
Tuckerbrook
Tudor Investment Corp.
Turnberry Capital Management LP
Tyndall Partners
Valinor Capital Partners, LP
Van Kampe
Varde Partners, Inc.
Vector Capital
Venor Capital Management LP
Ventura Capital Management LLC
Versa Capital Management
Viking Global
Visium
VR Group
W.L. Ross & Co. Inc
W.R. Huff Asset Management Co. LLC
Warburg Pincus LLC
Washington Corner Capital Management
Water Tower Capital
Watershed Asset Mgmt.
Wayzata Investment Partners LLC
Wellington Management Co. LLP
Wellspring Capital Management LLC (Wellspring Capital Partners LP)
Welsh, Carson, Anderson & Stowe (WCAS)
Wexford Capital LP
Whippoorwill Associates, Inc.
Whitebox
Wilfrid Aubrey LLC
William E. Simon & Sons
Wingate Partners
Wintergreen
Woodside Management
York Capital Management
Z Capital Partners LLC / Z Capital Management LLC

Read more...

12.05.2010

High Yield Strategy: Expectations for 2011

As most of you know, I spend a large portion of my time investing in the high yield asset class. This has been a fruitful effort this year with high yield return about 13% this year. A lot of this performance was due to the tightening of the treasury curve (10 year treasuries returned about 10% this year). High yield spreads are at 600bps now, starting the year 650bps. All returns are not made equal and our call on investing in the cross over space has outperformed on a total return basis.


With that said, I always like to look at what strategists are saying for next year. This year the returns expectations are in a fairly tight range with a few outliers. For example, Banc of America is forecasting total returns of 10.3% for 2011. JP Morgan is forecasting an 8% return. And Barclays is projecting a 5-6% return.

While I am not a top down kind of guy, it is important to remember some of the factors that will contribute and detract from total returns next year:
  • Assumptions of default rates
  • Treasury curve
  • Prices and call prices
  • Relative value
  • X Factors
Let's take a look at these in turn.

Assumption of Default Rates

High yield and leverage loan strategist use the forward looking default rate and recovery rate assumptions to make total return forecasts of the respective asset classes for next year. This year bonds and loans defaulted at a rate of about 2% and 3% respectively by count (versus by par amount which is lower for both high yield and leveraged loans). The consensus for next year among the various strategist is 1-3% for both asset classes - with most experts forecasting bonds to have a lower default rate versus loans.

As most people in the credit markets are aware, the 2011 maturity schedule is scant. In 2011, approximately ~$50B of high yield bonds mature as well as ~$20B of leveraged loans. To give you a sense of that relative size, there has been over $280B of new issue activity this year (all time record). Even in the doldrums of 2002 and 2008, high yield did over $50B in supply.

While there is always a chance that liquidity dries up dramatically because of some exogenous event (terrorism, massive fraud, etc - see X Factor section), I too believe default rates will be low next year. I also believe that recovery rates will be lower than expected on the gut feel that if a stressed issuer has not refi'd into the ridiculous supply we've seen this year, the business must be horrible to begin with.

Treasury Curve

As can be seen from returns this year across fixed income products, the treasury curve is one of the most important variable to look at when calculating forward looking returns. I may have missed one or two strategies in my research of the bulge brackets, but consensus across Wall Street is for an increase in treasury rates across the curve. And this is important because as coupons for high yield have decreased and maturities have extended, duration has increased. We are looking at some of the lowest coupons across the rating spectrum as well as the steepest credit curves I can remember - the curve definitely matters more today than in most previous cycles.

The chance of a Fed increase is quite small throughout the year. Using FFIP on Bloomberg, one can see that for the November 2011 Fed meeting, there is a 26% chance of an increase to 50bps, a 7% chance of an increase to 75bps, a 45% chance of no change, and a 21% chance of a decrease to 0.

With that said, if market participants start to see inflation expectations begin to pick up in CPI, PPI, etc the treasury curve will rise. If you look at what makes up CPI you can get a good sense that numbers will start to tick higher. Let's go through them:
  • Food ~ 15% of basket. Food deflation is the talk of the town among grocers though expectations are for normalization next year. Let's call it flat.
  • Housing ~ 42% of basket with OER being a large portion of that with the balance going to utilities. Listen to most of the apartment REITs and they will tell you they have regained pricing power in all but the worst areas. Utilities definitely going higher. Housing costs going up.
  • Apparel ~ 4%. Look at cotton. Definitely going higher after 10 years of apparel deflation.
  • Transportation ~ 17%. Made up of vehicles and fuel. Vehicle prices probably going higher. Fuel more than likely going higher.
  • Medical Care ~ 7%. Don't even need to explain - going higher.
  • Recreation ~ 6%. This is a catch all for many categories. I'll call it flat.
  • Education ~ 6%. Definitely higher.
  • Other goods (tobacco + personal care) ~ 3%. Tobacco higher, personal care flat.
Just looking at that list you can see CPI will be higher. And I have a sneaking suspicion that even in spite of very high unemployment rates, you will see wages go higher. And let's not forget the ballooning of the Fed balance sheet or that M2 which was growing at 1% per year in March of 2010 is now growing at over 3%.

So I agree with the strategies - in my opinion in spite of the Fed holding tight, treasury rates will increase across the curve.

Prices and Call prices

About 9 out of every 10 bonds issued in the high yield market have call protection schedules. And according to a recent Banc of America piece that average price at which high yield bonds are callable today is 104. Currently, the average high yield bond is trading slightly less than par (it had gotten to as high as 102) so this call schedule theoretically should act as a speed bump for returns.

The current yield in the high yield market is about 7.8%. With that said, I think it is a stretch to think that the entire high yield market will trade to 104 without another leg down in the treasury curve which as mentioned above, we do not believe will happen.

Higher dollar prices also imply higher losses in defaults. As the market starts to look out to 2013 and 2014 where maturities are a serious issue it is my opinion that prices will begin to decline. But that is more of a early 2012 factor.

Relative Value

One reason I can get bullish on high yield is the fact that it's one of the best yielding asset classes in a sea of incredibly tight rates. Investment grade is getting ridiculous, municipals, in spite of recent weakness, are still tight (and have serious fundamental factors against it), EM debt is at an all tight low, bank debt is marginally attractive if not for the nearly free call option on rates, ABS (outside of CLO paper) is too tight, RMBS and CMBS are very attractive in some instances, but still on the whole, not terrible enticing.

With that said, on a daily basis I wear two hats: total return and spread products. Some of the money I help manage has to be invested (think insurance and pension money). In these accounts, I think select, high quality high yield with some positive tail events (make whole premiums, early take outs, no LBO risk) are the place to play. On a total return basis, not so much.

X Factors

Things like European sovereign woes, more failure of Congress to get their issues in order (How can I be writing this in the December and still not know what my tax rate will be next year), municipal budgets, terrorism risk, mortgage put backs, China currency and interest rate policy, etc. Hard to handicap some if not all of these. Seth Klarman has always talked about "disaster insurance." That is definitely the best way to play these. Yes you lose a small bit of performance if nothing happens, but if things get really bad, your 2011 returns will outperform.

Another thing I'll lop into X Factor are the animal spirits that have pervaded high yield and credit products in general in 2010. All time high in new issuance. This causes me to be very cautious putting money to work - call me contrarian if you must.

All in All

Low default rates combined with higher rates and probably flat spreads gets me to a 6-8% return for high yield in 2011. If I had to pick a number I feel like closer to 6% because inevitably one of those X Factors will show up (let's hope its not my tax rate going up). Here's to hoping.

Read more...

12.04.2010

Distressed Debt Hedge Funds

This week, I was sent a paper by Jongha Lim, a PHD student at Ohio State, entitled The Role of Activist Hedge Funds in Distressed Firms. In my opinion this is one of the best academic papers addressing distressed debt and distressed debt investing this year. I reached out to Jongha and we will be doing an interview with him in the coming weeks. Fascinating piece of work.


With that said, Jongha compiled a list of all funds participating in distressed debt and he is allowing me to use his data here. And if you would like to add yourself or another name to the list, please email me.

Cerberus Capital Management L.P / Madeleine LLC / Ableco Finance LLC
Oaktree Capital Management (OCM)
Angelo, Gordon & Company
Highland Capital Management LP
Appaloosa Management
Silver Point Capital
D.E.Shaw Group
Loeb Partners / Third Point Management
R2 Investment (Amalgamated Gadget LP / Q Investment)
Avenue Capital Group
Fortress Investment Group LLC
GSC Capital (Greenwich Street Capital Partners)
Citadel Investment Group LLC
Farallon Capital Management LLC
Stanfield Capital Management
Apollo Management
Ares Management LLC
Black Diamond Capital Management
Contrarian Capital Management
Elliott Associates LP
MatlinPatterson Global Advisors LLC / MatlinPatterson Capital Management LP
Satellite Asset Management LP
Sankaty Advisors LLC
W.R. Huff Asset Management Co. LLC
Harbert Management Corporation
Icahn Capital Corporation / Thornwood Associates LP (Controlled by Carl Icahn)
Taconic Capital Partners (Taconic Capital Advisors / Taconic Capital Management)
TUDOR INVESTMENT
Harbinger Capital Partners
AEGON USA Investment Management LLC
Bear Stearns Asset Management Inc
Blackstone Group
Davidson Kempner Capital Management LLC (MHD Management Co. LLC)
DDJ Capital Management LLC
Everest Capital LLC
LoneStar Partners LP
Mariner Investment Group LLC (Caspian Capital Partners)
SOROS Fund Management
Stark Investment LTD Partnership
Baupost Group LLCMA
Third Avenue Management LLC
Magten Asset Management Corp
SAC Capital Advisors LLC (Sigma Captial Management LLC)
Oak Hill Capital Partners / Oak Hill Investment Managemetn LP
Anchorage Capital Partners LP / Anchorage Advisors LLC
Babson Capital Management LLC (David L. Babson & Co. Inc)
Canyon Capital Advisors LLC
The Carlyle Group / Carlyle Investment Management LLC
ESL Investments Inc (Edward Lampert)
Fir Tree Inc
GSO Capital Partners LP
Halcyon Partners LP / Halcyon Asset Management LLC
Jana Partners LLC
KKR FINANCIAL Holdings LLC / Kohlberg Kravis Roberts & Co. LP
Marathon Asset Management LP
MHR Fund Management LLC (Rachesky)
Moore Capital Management
Och Ziff Capital Management Group LLC / Och Ziff Friedheim / OZF Management LLC
Onex Corp. / Onex Capital Management LP
Patriarch Partners LLC
PENN Capital Management Company Inc
Perry Capital LLC
Plainfield Asset Management
Sandell Asset Management
Seneca Capital Advisors / Seneca Capital Investments LP
Stonehill Capital Management LLC
TCW Group Inc (TCW/Crescent Mezzanine LLC)
Turnberry Capital Management LP
Varde Partners Inc
W.L. Ross & Co. Inc
Wayzata Investment Partners LLC
Fernwood Associates LTD
Harbour Town Funding LLC
HBK Investments LP
Welsh, Carson, Anderson & Stowe (WCAS)
Hicks, Muse, Tate & Furst Inc.
PAR Investment Partners
Oak Hill Advisors LP
1798 Global Partners
Abrams Capital Management LLC
Ahab Capital Management LLC
Bay Harbour Investments Inc
Bennett Asset Management Corp
Black River Asset Management LLC / CarVal Investors LLC (Cargill Inc)
Catalyst Investment Management Co LLC
Cohanzick Management LLC
Commonwealth Advisors Inc
Delaware Street Capital
Dune Capital Management LP
Durham Asset Management
Forest Investment Management LLC
Gabriel Capital Corp
Gracie Capital LLC
Gramercy Advisors LLC
Greenlight Capital Inc
Greywolf Capital Management LP
Harvest Management LLC
Highbridge Capital Management LLC
King Street Capital Management LLC
Latigo Partners LP
Laurel Ridge Asset Management LP / Laurel Ridge Partners
Litespeed Management LLC / Litespeed Partners LP / Litespeed Capital LLC
Longacre Fund Management LLC
Mason Capital Management
HBV Capital Management
ORE HILL PARTNERS LLC
Owl Creek Capital
Pershing Square Capital Management LP
Quadrangle Group LLC (Quadrangle GP Investors LLC / Quadrangle Equity Investors Ltd / Quadrangle Equity Management LLC)
RAMIUS Capital Group (RCG)
Scoggin Capital Management LP
Strategic Value Partners LLC
Sunrise Partners LLC
Tennenbaum Capital Partners LLC
TPG Capital LP (Texas Pacific Group)
Triage Capital Management LP
Trilogy Capital LLC
Venor Capital Management LP
Wellspring Capital Management LLC (Wellspring Capital Partners LP)
Wexford Capital LP
Wilfrid Aubrey LLC
York Capital Management
Z Capital Partners LLC / Z Capital Management LLC
Tontine (Capital) Partners LP / Tontine Associates LLC
Morgens Waterfall Vintiadis & Co. Inc
Pacificor LLC
QVT Financial LP
Sandler Capital Management
J.H. Whitney & Co.
Quattro Global Capital LLC
Wellington Management Co. LLP
Warburg Pincus LLC
Forstmann Little & Co.
Thomas H. Lee Partners
Lydian Asset Management
Creedon Capital Management (Creedon Kelly & Partners)
Kistefos AS
Dalton Investments
Deerfield Capital Management LLC
Greenhill Capital Partners
Mittleman Brothers Partners
Toscafund Asset Management
Blue River Asset Management
AAC GP LLC
Advantage Advisers Multi Manager LLC
Alcentra Inc
Apex Capital Management
Armory Advisors LLC
Arrow Investments Inc
Audax Group LP
Aurelius Capital Management
Basso Capital Management L.P
Beach Point Capital Management LP
Berens Capital Funds
Blue Mountain Capital Management LP
Blue Ridge (Blue Water) Capital Management LLC
BlueBay Asset Management
BlueCrest Capital Management LP
Boone Capital Management
Brencourt Advisors LLC
Bridgehampton Capital Management LLC
Brigade Capital Management
Campbell GP
Camulos Capital
Candlewood Partners LLC
Cape One Financial LLC
Carl Marks & Co.
Caxton Associates
CDK Group
Concordia Advisors LLC
Corsair Capital Management LLC
Courage Investments Inc
DB
D.B.Zwirn & Co. L.P.
Deephaven Captial Management LLC
Deltec Asset Management LLC
DKR Capital Inc
Eight Capital Management Ltd
EJF Health Care GP LLC
Endurance Asset Management LLC
EOS Partners
Epic Capital Management
Eton Park Capital Management
Fairfield Greenwich Advisors LLC
Falcon Point Capital
Faxtor Securities BV
FH International Financial Services Inc
FrontFour Capital Group LLC
Fundamental Capital Management LLC
Further Lane Securities
Gates Capital Management
Glenview Capital Management
GLOBAL CREDIT ADVISORS
Gravity Partners LP
Gruss Asset Management
Guggenheim Investment Management
Halbis Capital Management USA Inc
H Partners
Harbinger Capital Partners
Havens Advisors LLC
Helios Capital Management
Hudson Bay Capital Management
IBS Capital Corp
Insight Investments LLC
Ivory Investment Management
K Capital Partners
KS Capital Partners
Kellner DiLeo Cohen & Co., LLC
Kilimanjaro Advisors
KS Capital Partners
Lampe, Conway & Co. LLC
Levine Liechtman Capital Partners
Lighthouse Investment Partners LLC
Lyster Watson
Marblegate Asset Management
Millennium Management
Moab Capital Partners LLC
Moriah Capital Management LP
MONARCH ALTERNATIVE CAPITAL LP
Monomoy Capital
New Generation Advisers
OCTAVIAN ADVISORS LP
Outrider Management
P. Schoenfeld Asset Management LLC (PSAM)
Pacific Capital Advisors
Parallax Capital Partners LLP
Pardus Capital Management LLC
PAULSON & CO INC
Pegasus Investment Partners LP
Pequot Capital Management LLC
PERELLA WEINBERG PARTNERS CAPITAL MANAGEMENT
Pinewood Capital Partners
Private Advisors LLC
Pursuit Partners LLC
Redwood Capital
Restoration Capital Management LLC
Resurgence Asset Management
RMBS Management LLC
Salisbury Capital
Schultze Asset Management LLC
Scott's Cove Capital Management LLC
Seix Investment Advisors
Shenkman Capital Management Inc
Sierra Liquidity Fund
Simran Capital Management LLC
SOLUS ALTERNATIVE ASSET MANAGEMENT LP
Southpaw Asset Management
Sun Capital Partners Inc
TENOR CAPITAL MGMT COMPANY LP
The Occasio Fund LLC
Tradewinds Investment Management
TRICADIA CAPITAL LLC
Tuckerbrook
Ventura Capital Management LLC
VR Group
Washington Corner Capital Management
Whippoorwill Associates, Inc.
William E. Simon & Sons

Read more...

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.