People often ask me what books I am currently reading. While you can always see some of the books I am working through in the right sidebar, I thought this recommendation in particular deserved its own post.
Here at Distressed Debt Investing, we love everything and all of Howard Marks. Today, the Inoculated Investor has put up notes from a recent speech Howard Marks gave to the UCLA Student Investment Fund. Enjoy!
About a year ago, we did one of our first emerging manager interviews with the team at Greenstone Value Opportunity Fund. Notably, one of their largest positions at the time was Tronox, which was a moonshot (both the debt and equity) in the last few months of the year:
- "The valuation criteria we are primarily concerned with have not changed: low multiples of free cash flow and/or EBITDA across the business cycle. When we say low multiples, we are looking for companies trading at less than 3-5x these multiples. In elevated markets we find that we have to search harder to find the multiples we are comfortable with, or we have to be more patient in letting the market come to us"
- "Within the fund, we have been consistently trimming back our winners on the long side, while adding to our short exposure in an effort to lower the overall net long exposure as the markets have trudged higher. We are also sitting on a fairly healthy cash position. However, we’re very conscious of the fact that we can’t sit still praying for any particular bearish or bullish move to play out just because our portfolio is positioned to such a thesis. It is our job to continue to search for value no matter where the indices are trading, and to decide how much we wish to expose ourselves to an elevated market. We will continue to selectively add to our long book as we uncover mispriced opportunities, but it’s not our game to be climbing into bed just because everyone else is piling in." - (Editor's Note: My emphasis added. And stealing that one for when MBA students around the globe come to visit to hear my wit and wisdom)
- "We currently have no credits, distressed or otherwise in the portfolio. As of mid January we are looking at one post emerging equity. While the valuation fits our criteria, finding a seller is proving difficult. We are always looking at the opportunity to invest higher in the cap structure when the upside/downside opportunity is compelling, and when we can emulate the same deep value focus on low multiples of free cash flow and tangible assets that we use in selecting long equities." - (Editor's Note: I've begged them to tell me the name, but their lips are sealed until they establish a full position. Here's hoping we can report on it when we get next quarter's letter. Nonetheless, like a lot of smart people, the team does not see much value in credit)
Two quite significant events happened today in the distressed debt world: One widely expected and the other less so. First, as widely expected, Borders Group filed for bankruptcy. The only tradeable security (I've never seen the Term Loan trade) that I can see in the structure as of now is the revolver which is pegged at 96-97. I believe it at least RARELY trades and was quoted in the low 90s in the beginning of January. With that said, given the lumpiness of trade creditors here, I have to think a fairly active trade claims market will develop.
It gives me great pleasure to bring you a new edition of our emerging manager series. Today, we will be sitting down with the team from the Aegis Funds. I first heard about the Aegis Funds when I did a mutual fund search sorting all "value funds" for the lowest portfolio price to book. The Aegis Value Fund had the lowest price to book of ALL domestic value funds out there. Furthermore, the team at Aegis also manages the Aegis High Yield Fund, one with remarkable performance. One thing I absolutely love about the fund is how different it looks from the standard high yield mutual fund filled with First Data, Clear Channel, MGM, etc. Enjoy the interview!
A few months ago, I introduced readers to a new author at Distressed Debt Investing, Joshua Nahas, principal of Wolf Capital Advisors. Wolf Capital is a Philadelphia based advisory firm focused on distressed debt, corporate restructuring, corporate finance advisory and capital raising services. Wolf provides advisory services to hedge funds and private equity funds on distressed investing and provides restructuring services to debtors as well as creditor committees. He wrote an incredible piece on investing in trade claims.
- the secured lenders retain their liens to the extent of the allowed claims and receive deferred cash payments equal to the allowed amount of their claim;
- the property is sold free and clear of liens and the secured lenders attach their liens to the proceeds of a Section 363(k) sale (which specifically incorporates credit bidding);
- OR the secured lenders realize the Indubitable Equivalent of their claims (does not mention credit bidding)(5)
A little less than a year ago, I came up with an interesting paradigm as it relates to risk, or the absence thereof, in the leveraged finance market:
"When investor demand is so strong in the leveraged loan and high yield market that second lien dividend deals are being oversubscribed, it is time to start selling"Looking through my inbox the last couple of days, a number of truly fascinating email subjects have scrolled across my screen:
- "Florida East Coast Railway completes PIK toggle dividend" - LCD, 2/9/11
- "Credit Suisse High Yield Index at All-Time Lowest Yield: - CSFB, 2/9/11
- "Pricing bloodbath unfolds in February amid repricings, recaps, refis" - LCD, 2/9/11
- "Datatel sets launch tomorrow of $430M recap loan" (Discusses DataTel's first and second lien dividend recap) - LCD, 2/2/11
- "Jan '11: Reasons to Be Skeptical About HY Bubble Talk" - Banc of America, 2/1/11
- "Yankee Candle notes price at 98 to yield 10.8%" (Discusses Yankee Candle's dividend deal to sponsors issued at its holding company) - LCD, 2/4/11
- "Distressed Buyers Seek Stocks as Debt Bubble Looms, Survey Says" - LCD, 1/26/11
- Etc / Etc / Etc
A few months ago we highlighted some of the hedge fund ownership of Smurfit-Stone's post re org equity as determined from the HD function on Bloomberg. With that, I am sure all my readers know that Smurfit-Stone has agreed to be acquired by Rock-Tenn. Yesterday, three prominent distressed / event-driven funds sent a letter to SSCC's Board of Directors calling the acquisition price essentially a sham.
"Just last week, the company filed an 8-K with updated information about the Dec. 31, 2010 resignation of Steven J. Klinger from his roles as President, Chief Operating Officer, and director. The resignation was surprising at first, given the fact that the company had just inked an amended employment agreement with Klinger last summer following its emergence from bankruptcy. But when we dug deeper, we learned that Klinger and the company had previously agreed that within 30 days after Smurfit-Stone got notice that its CEO-at-the-time intended to leave, the company would consider promoting Klinger to the roles of President, CEO, and (potentially) Chairman of the Board. We know that Moore is expected to retire sometime in the next few months, and yet the board did not tap Klinger for the CEO post.Although Klinger officially resigned, he will be sticking around a bit longer because of an agreement that he and Smurfit-Stone made on New Year's Eve. Per that arrangement, Klinger agreed to work as a consultant from New Year's Day through March 31, 2011 in exchange for the tidy sum of $150,000 per month. He's to perform whatever consulting services the CEO and the Board "reasonably request" him to render; the document doesn't offer any further details. But the agreement appears to be about more than just the money. It also states that when the Consultancy Agreement expires on March 31, 2011, Klinger's unvested options and RSUs will remain outstanding for six more months. If a change in control occurs during that window of time, Klinger's awards will immediately vest.Given the short-term of the consulting agreement and the specific conditions which benefit Klinger if a change in control occurs by the end of September, we think it's possible that negotiations for a sale are occurring."