Randy Smith of Alden Global

Last week, DeMatteo Monness invited clients to hear Randy Smith of Alden Global Capital talk about his current views on the distressed debt and broader market. Moderated by Jim Grant of Grant's Interest Rate Observer, Randy touched on a number of issues pertinent to the current investing landscape. For those not aware, Randy Smith is a legend in the distressed debt world. He, and Alden Global, have participated in a number of prominent restructuring in the past few years including Tribune, Visteon, Reader's Digest, Journal Register, Freedom Communications, Lehman Brothers, and Philadelphia News. This is the first time that I have heard him speak and it was an absolute pleasure. Simply amazing. Here are some notes I took during the evening:

Randy Smith of Alden Global Capital
  • When comparing the current marketplace versus 2009 and 2007, Randy believes this market has "uncomfortable similarities" to 2007 with shades of 2008. A key, and ominousness factor in that pronouncement is the largess of undifferentiated risk in the market. In essence there is no different between good and bad securities - everything goes up and down with very high correlations. This reminds him of 1987. During that entire year, it was very similar leading up to the market crash in October. This sort of situation can only go on for so long.
  • Today, there is a kind of shutting down of some parts of access to capital for certain troubled companies. In contrast, in 2007, anyone could access the equity or debt markets to alleviate troubles. Right now, if you are in good shape, you can borrow at very good rates. If you are in mediocre shapes, you can still borrow, but at high rates. If you are in bad shape, you can't borrow. You're shut out. If this lasts for much longer, we'll begin to get a big upsurge in distress.
  • Looking at trailing default rates is not the thing to do. What you should do is figure out what are the conditions that will prevail in the coming period. If a maturity is coming up, and the window is shut, that provides real opportunities for rescue financing and distressed investing.
  • Some situations they are involved in today: Gannett, Lehman, Delphi, Tribune. All these are "really, really good."
  • The long thesis for Gannett ($GCI): GCI is the most undervalued security that Randy knows of. It's trading at a stable 30% free cash flow yield. Only $2 billion of debt. It has a newspaper operation, for which it is unfortunately known, which attaches a stigma to the company. The newspaper operation has very healthy free cash flow and $700M of EBITDA. $4 billion valuation for the newspaper. It has probably the best collection of network stations in the country (20 stations). EBITDA going to $430M next year driven by the good political year (big source of advertising). Recent trade at 10x EBITDA, implies $4 billion value for the stations. Then they have $2 billion of digital assets (Career Builder, Classified Ventures). Aggregated value of $10 billion, less $2 billion of debt or $8 billion of value versus a $2.5 billion market cap. If you look at it that way, very cheap.
  • What should Gannett being doing? Paying a big dividend perhaps. They could literally buy back a 1/3 of their shares each year. One thing that Randy thinks they should do is spin off their TV operations b/c it's being valued like a newspaper. They could also sell USA Today to someone who wants a national newspaper. There is an awful lot they can do. So far management has only made small moves in these directions. They just had a management change so maybe new leadership brings real change to the company.
  • Question: Is distressed debt investing facing too much competition from very cheap blue chip stocks? In a way that is true, but in most things we do there is some sort of catalyst (Delphi = IPO, Lehman and Tribune = processing through bankruptcies). Though in 1974, things like Royal Dutch was trading at 2x. But back then it was a fruitful times for both distressed and value investing in general.
  • Question: Thesis on Visteon? Alden didn't have the cards to sustain a serious fight to unlock shareholder value. The board coming out of bankruptcy was not fighting for shareholder value. Alden was able to nominate 2 additional directors to the board. The values are huge at Visteon. It has a European and US automotive business that are low margin, but has a great business in Korea and an even better business in China. Management has been Detroit-centric though - they should be operating in Asia. There are simple things they could do to unlock value, and Randy is opening to do that.
  • Question: View on macro environment and the how it affects Alden's investment process: Randy Smith ideally tries to look at distressed from a micro basis. Their expertise is looking at a particular credit or company and assessing the risk and if that risk differs from the current perception as expressed by the price. With that said, you can't divorce yourself from the macro environment. Even if Gannett is very, very cheap, if there are significant defaults in Europe, and if that spills over to the U.S. it will adversely affect Gannett.
  • Question: Are you looking in Europe? Alden does not have a lot of the long side in Europe; more on the short side. They are long sub debt in Lloyds and Commerzbank bank. It seems to Randy that we have a ways to go before the Europe situation is corrected and they have a real chance to do something. European banks are going to be selling assets and those will be an opportunity.
  • Question: Are you looking in Asia? Like in Europe, they are short a "fraud bucket" and "property bucket" in China (stocks and bonds). Alden thinks they have differentiated between them and really found ones that have accounting problems. They first started with the reverse mergers and then began to realize the companies in Hong Kong have the same problems. A lot of the successful enterprises in China have been private or state-owned. Right now, we are seeing an undifferentiated BUYING of those companies, albeit from a low basis. They are buying the good and bad - similar to the high correlation that he discussed earlier.
  • Question: Thoughts on U.S. Banks? Alden has been in and out of banks. They are currently out, not because they are expensive (he thinks they are VERY cheap). On their basis business they are very cheap. Even understanding, the business model has been adversely affected by regulation, they are still very cheap. With that said, its pretty tough. Banc of America is being attacked by the government on all fronts. AIG, Freddie and Fannie (all three U.S. owned companies), and state's attorney generals are suing them. That is hard to fight against. That will wane shortly. Randy was expecting a selling climax in October or maybe as late as November, and that would provide them an opportunity to get into the banks at the end of the year at an even better price than today. The internal debate is to buy them now or wait for a washout. He is betting on a washout now.
  • More questions on European banks: Long the Lloyds must pay bonds. Lloyds is in pretty good shape. Though people are worried that the sub bonds, like Allied Irish, will be forced into equity but Randy thinks that is unlikely in the case of Lloyds. Conversely, they are short banks in Spain, Greece, Portugal - particularly in those countries, the solution there is going to be nationalization or some kind of national contribution to equity that will be massive dilutions to the current stockholders.
  • Europe has the wherewithal to solve their problems. The solution is on the way with the under-capitalization of the banks, THEN they can deal with Greece and maybe Portugal. Ireland is not even on the table. They have to then defend Spain and Italy. It will require a lot of money - maybe even a trillion dollars. He thinks though they've shown a hesitancy to act aggressively. It will not be a neat solution - it will be a bumpy road that at times will be scary. He thinks their hand may be forced by some untoward event like Dexia. Something that is off the radar screen that could force the timetable. It's solvable, but fraught with possibilities of shocks in between.
  • Question: Can you summarize your bullish views on newspapers? The first thing you need to accept is that print is declining. What's good though is the digital migration. The decline in print revenues is being offset by the increase in digital. In addition, newspaper companies have a lot of assets that probably aren't being fully utilized and could be sold off. Across the board, newspapers are cutting costs very rapidly and most have positive free cash flow due to the low capex requirement of the business.
  • Question: What worries you the most? Randy is worried about a washout coming from left field. Something off the table that no one is talking about now. Maybe the Mideast which has somewhat died down in the news as of late? Or a bank or major fund blowing up. He doesn't know, but he expects the shock to come from something that no one is reporting on today.


Tsachy Mishal 10/18/2011  

Thanks. Great post.


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.