Comprehensive Ira Sohn Notes (Part 1/2)

Yesterday, Distressed Debt Investing attended the Ira Sohn Conference. We were updating from the conference live at @DDInvesting - hopefully you were following along. We hope this will be some of the more comprehensive notes out there in regards to the 2011 Ira Sohn Conference. Enjoy!

(Note: After writing this monster, I split it into two as it was getting aggressively long)

Erez Kalir, Sabretooth Capital - "Economic Death as a Special Situation"
  • For those not familiar, Sabretooth Capital was formed by Erez Kalir and Craig Perry. Perry used to work at King Street Capital, followed by CSFB's credit prop group, and then starting a prop distressed trading effort at Swiss Re. Kalir worked at Eton Park and then a Julian Robertson seeded 'Tiger Cub'. Eventually Julian himself seeded the two with $65M in 2009.
  • Sabretooth's portfolio, in my opinion, looks very little like most Tiger Cubs' ... which makes sense given the pedigree of the founders: Distressed / Event Driven funds. Here is their 3/31 holdings as reported in their 13F:
  • “Economic Death as a Special Situation” was the title of the presentation. Economic death is broader than you think. General theme was that in dealing with situations that seem to have a binary outcome small changes in probabilities can mean large changes in expected value. Cited 3 Examples
  • MBIA – Thinks rumors of its demise are greatly exaggerated. Advocates going long equity, selling 2 year subsidiary CDS and selling 5 year parent CDS. Think challenges to separation (good co/bad co) will fail, and in reality no one incentivized to force MBIA into receivership due to the second order effects it would cause. Further, market not giving them credit for $49bn in commutations. Erez noted Ackman’s open source model is dated, and was flawed because it didn’t take into account the present value of the CF streams. In the "Good bank", muni risk is not that bad. At today’s price, market is pricing the Company at 1/3rd of Adjusted BV. Depending on the outcomes, book value is $5-$20/share. Think upside is 100-200% and downside 30%, and the Company has the right leadership under Jay Brown. Given the possibility of being wrong, however, size your position accordingly
  • Argentina. Sabretooth is involved in Argentina's E&P sector. Argentina, on the whole, suffers from the biggest sovreign default in 2002. Has a history of politicians making the wrong bets, using the wrong models. CDS spreads sill twice as wide as rest of LatAm ex Venezuela and in Erez’s opinion way too high. The reason for the tilt to the Argentinian E&P sector: Argentina has proven resources and a very robust energy infrastructure. In addition, Argentina has become a net importer of energy for the first time requiring significant energy investment for self reliance. The stocks he advocates are CWV CN, BOE CN, MVN CN, RPT CN and YPF
  • Hedging Economic Death as it relates to the US Financial System. When countries's GDP falls below interest rates, the term "Doom Loop" should be thrown around. Thinks owning gold is flawed as risk of confiscation is high. Has actually happened in the US before, and don’t think that storing it in Switzerland is a panacea, as US Gov’t sought out foreign gold for confiscation back then as well (He noted rumors Paulson has done this). Thinks shorting Tsys (as his mentor, Julian Robertson is doing) is flawed as well – just a legal construct, the Fed can pin the long bond @ a certain yield. Thinks Buffets strategy of buying high quality stocks of dominant franchises with pricing power (e.g J&J, Coke, Amex) also flawed - in hyper inflation everything gets crushed. Advocated for owning farm-land outside of the US because its a "replenishing asset" that wins in a secular growth theme as well.
Dinakar Singh, TPG-Axon
  • Dinakar Singh formerly ran the Principal Strategies Department at Goldman Sachs before starting TPG-Axon. His letters to investors are some of the best out there. I remember one he wrote in late 2008 that was absolutely remarkable. From speaking to a number of people there, they do not limit themselves to long-short equity - and will play in a variety of asset classes.
  • "Beta trade is over." We are in a stock-picker’s market. Valuations and margins recovering, but when the stimuli is pulled away we get to see what the real economy looks like. Look for companies with structural growth and separately, companies that are undergoing internal restructuring. He wants to buy stocks when margins and valuations are already at cyclical/secular peaks (i.e. truly improving stories)
  • ORKLA (ORK NO). Norwegian conglomerate. Thinks upside is 65-80 (30-60%). Overcapitalized. Change is underway. 3 Key segments: premier consumer staples biz, legacy alumni-related biz, and high quality investment portfolio. “Bell has rung” – separation of businesses is on the horizon, will look to return money to shareholders. Major shareholder Canica. Trading at 9/10 PE; 1x Book, 5% yield, and has a good balance sheet. In general, Europe was slower to cut costs in this most recent downturn, so more upside from here. In addition, 22% shareholder is fed up with performance and is now on the board.
  • Zhongpin (HOGS); US-listed, Chinese pork processor. In the last 6 months there has been significant underperformance of Asia stock versus US. Chinese P/Es are below that of the S&P. HOGS is a good example. Basically now the growth-in-Asia stories are on the clearance aisle. The industry in which HOGS participates is consolidating (50-80% of capacity is coming out of the market by 2015). HOGS has inflation risk to it, but has the ability to pass that on to the Chinese consumers. Margins will be sustainable, as the Chinese government, which is sensitive to price increases to the end consumer, is even more sensitive to rural Chinese, and will always choose farmer over urban dweller. Buying it today 7-8x earnings and will be 4-5x in a couple of years
  • Spring Nextel. Basically thinks it is super-cheap. The company has both low margins and a low valuation which will make returns explosive to the upside if things turn around. US cell market is attractive and being #3 in tri-opolgy ain’t bad. Will get chance to buy cheap assets because of forced divestitures on ATT/Tmobile (also T Mobile is their weakest competitor). Also they are fixing their networks and will have the opportunity to pursue a number of good JV deals due to consolidation in the market. There is upside here as Sprint's strong network is an attractive acquisition candidate for CTL, AMX or CMCSK. Stock currently trades at 5x EBITDA. Should trade at 6.0x-7.5x implying a value of ~$8.50 to ~$14.00/share.
Jeff Aronson, Centerbridge Partners - "CIT Group: An Event Waiting to Happen"
  • Jeff Aronson is the Managing Partner of Centerbridge Partners. Centerbridge will be family to regular Distressed Debt Investing readers as they are quite active in the distressed space. They have played in cases such as Champion Enterprises, BKUNA, Wamu, Istar, Extended Stay, Dana, and many others. Before Centerbridge, Aronson was a Partner at Angelo Gordon.
  • Centerbridge manages $14bn. Aronson noted they are not traditional stockpickers. With that said, they have been buying CIT, a post-reorg equity, of late. They started buying the pre-Chapter 11 bonds and have been buying since.
  • Think stock’s intrinsic value today is $59; $45 3/31/11 BV plus $7 in future accretion from fresh start accounting (FSA) write-down, plus $7 in NPV of $2.1bn of DTA which they have taken a valuation allowance on gets them to $59. Will reverse the VA after they lower their cost of funding and start making more money. Using a 10% discount rate assumption in PV calc. So, cheap on an as is basis versus $41 share price.
  • Thinks value if they acquire a deposit-funded institution, or vice-versa is ~$64-65. Value creation comes from marrying higher yield assets at CIT (8% vs, 4.6% for commercial banks) with cheap funding (7.2% cost for CIT versus 1.0% for banks). Thinks stand-along 2012 EPS is $1.76, can pick up another $3.03 by putting the 60% of their assets that are bank eligible (Corp, Vendor, Trade) in a bank, plus $1.04 in operating synergies gets you to Adj. 2012 EPS of $5.83. At 10x comp multiple get $58 stock plus $7 in NPV of DTA = $65 stock. If instead is the acquirer, thinks they could pay up 15% for VLY, combine the two, and at 1.1x BV = $64 stock.
  • Listed US Bankcorp, WF, HSBC, and TD Bank as potential acquirors of CIT.
  • His concluding comments were short and to the point: At 0.7x book value, and a normalizing funding environment, CIT is completely misunderstood by the market.
Robert Howard, KKR Equity Strategies
  • In 2011, Robert Howard joined KKR to build out its public market equity initiative. Most recently he was Global Chief Operating Officer of Goldman Sachs and head of Principal Strategies Americas equities / credit division.
  • KKR Equity Strategies looks for situations that are not well understood by the market (he cited lack of history as a main culprit) that "fly under the radar"
  • Pitched WABCO (WBC), a global supplier of electronic and mechanical components to the commercial vehicle industry. Spin-off with a long history (invented ABS brakes). Play on cyclical recovery in Europe and US truck production, tightening safety and emission requirements and EM growth. The company also has a dominant market share in China and India. $100 share PT. The CEO is eating his own cooking, owning $200M of economic exposure
  • Second pitch was HSNI. Howard sees 40% of upside here. The company trades a little less than 6.0x, which is well below the retail universe that the street usually compares the company to. The company is under levered AND overcapitalized and could pay a $950M dividend. Margins here are well below HSNI's larger competitor QVC and a consolidation makes sense. In fact QVC's parent, Liberty Media Interactive, owns 32% of HSNI. 65-90% upside in a merger.
Phil Falcone, Harbinger Capital Partners
  • As expected, Falcone started off the presentation giving an overview of Lightsquared. While equity investors cannot play it (yet), there is debt out there. The 12% Term Loan trades at 102-103 as of today. Thesis is 50% increase in data form 2009 to 2014, Not enough spectrum in the mkt. He is acquiring spectrum and has a terrestrial network with a satellite overlay. All about "building the pipe"
  • Falcone then went on to discuss one of their larger holdings Crosstex Energy (XTXI)
  • XTXI is one of the only publicly traded General Partner interests in a C Corp structure. Crosstex owns 100% of the GP interest and 32% of a publicly traded entity XTEX (Crosstex Energy LP) and 100% of the distribution rights. There are no corporate level income taxes at the LP.
  • The publicly traded entity is expected to increase its distribution by 30% which, because of leverage, could increased the GP distribution 3x higher than that
  • Falcone sees at least a double to a 2.5x return on this position
Jim Chanos, Kynikos Associates - "Does Solar + Wind = Hot Air?"
  • Before crushing alternative energy, Kynikos founder, Jim Chanos went on about how he was "NOT" going to talk about a particular country in Asia that he is short. The country turned out to be Japan. He is bearish on China as well (of course) and India (didn't want to piss off a billion people like he did last year)
  • Bearish on Alternative Energy; Solar + Wind = Hot Air. Unreliable baseload power, geographically limited sources of power. Intermittent power generation creates significant issues. Not the job growth provider the politicians like Obama want you to believe it is – Installation, not Innovation. Low R&D, putting people to work in the construction industry basically. Environmental benefits are questionable: marginal impact on CO2, NIMBY, noise pollution, wildlife impact.
  • Wind is 50% more expensive than natural gas and solar is even more expensive. In addition, we have a ton of coal.
  • Short Vestas Wind Systems (VWS DC ). Accounting is gimmicky (that's how they first found it), pulling revenues forward and deferring costs. Have changed auditors = red flag. Low ROIC, and increased competition in both US and China. $600M of cash has burned in the last 6 months.
  • Solar mkt fundamentals are deteriorating. Feed-in tariff policy is not sustainable particularly in Spain and Italy. Capacity growth is relentless, driven by easy credit in China (solar cell production capacity increasing 30-50% while installations are down 40-90%).
  • Short First Solar (FSLR) – Uses think film technology instead of next generation poly technology. The company is burning cash this year. Management has been selling stock - Chanos LOVES when management sells stock. New management team is new to the solar business.
Stay tuned tomorrow for the rest of the post!


Anonymous,  5/27/2011  

Dinakar is brilliant. Unfortunately he can't get out of his own way and focus the portfolio. Tried to do way too much to juice returns as the fund grew. Mendelblatt left with the equity team and TPG-Axon will struggle going forward.

Anonymous,  5/27/2011  

Chanos and Japan - it looks like that should have turned out well for him, but did he say anything about his thought process? He must have been shorting into other problems, because the earthquake couldn't have been something he was predicting.

Anonymous,  6/02/2011  

Question from long time reader here. Not directly applicable to the conference but I don't see any other way to contact you.

I'm an LP and I am surprised so many distressed firms are still raising money. Only now, these firms are targeting the "lower middle-market" where there is a dearth of capital. Or so they say.

I'm wondering if you can address the nuances of distressed investing is small, micro-cap companies with like $10m in EBITDA. Seems like because these companies are generally less strategic within their respective value chains that it is more likely your catching a falling knife as suppliers and distributors bail. Not to mention the costs of restructuring or bankruptcy. Any thoughts?

Anonymous,  6/05/2011  

what happened to part two of these notes? your game is slipping sir, slipping badly...


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.