The redesign of the Distressed Debt Investors Club was launched today with many improvements to the user interface and functionality. And we are just getting started. Over the next few months, more and more features will be added to the site to make members' experience better than it has ever been.
As always, Glenview Capital, is out with another remarkable annual letter highlighting their diligent investment process and spectacular returns. I have linked to the letter below for your review. In this post, as credit and distressed debt are of the utmost import, I will highlight some takeaways from the letter that revolve around Larry Robbins' discussion of Glenview's participation in the credit markets (with that said, everyone should read the entire letter as it is gold)
- The firm continues "to withdraw capital from long fixed income strategies and redeploying capital in long equity strategies with superior risk/reward characteristics." Very similar line of thinking that I have employed in the past 6 months. The upside / downside trade in on-the run credit is just not there right now outside of a few sparse situations, whereas in equities, a number of sectors/classifications look attractive
- Corporate fixed income portfolio winning names: Cengage, MWA, MBIA, TSTR, Fox Acquisition Sub, Local TV and Ceridian. MBIA was such a huge winner for a number of funds last year. The AA CDS year tightened 1200 bps from the peak in June and the AAA CDS tightened nearly 2000 bps from June to year end.
- Discuss the shape of the treasury curve and how the roll down effects will affect REIT valuations going forward
- Glenview goes on to discuss how "healthy" the credit markets are by referencing that issuers are marketing holdco PIK toggle bonds inside 11% - frothy = healthy here IMO
Earlier today, the headline number for AMG's fund flow for high yield mutual funds was reported at -$2.8 BILLION. Immediately, I knew something was wrong with that number. Despite having a number of high yield and leveraged loan deals (and repricing) been pulled from the market, the market didn't feel THAT bad. My Bloomberg lit up with traders also questioning the number.
- UBS says there was a calculation issue and hears the consensus HY outflow was 830-850M
- JPM says they estimate outflow at 830M with the glitch arising from reallocation of funds from liquidated to new/existing fund
- And I am sure tomorrow morning, all the desks will put out something correcting the headline number
Wanted to alert my readers that another OUTSTANDING distressed conference is around the corner. The 13th Annual HBS Turnaround Conference is coming up in a little over a week and looks to be full of great speakers and panelists. The keynotes this year are Harvey Miller and Jeff Aronson who are two of the smartest gentleman in the distressed world these days. And at the price, anyone in the area would be foolish not to go.
Before I begin, I would like to express my sympathies for all those affected by the terrible natural disasters that have affected Japan in the past week. My prayers go out to all those who have been directly affected or who have friends and family in the area. For those interested in helping, you can donate directly on the Red Cross site here: Japan Earthquake and Pacific Tsunami Relief
- HY has a 0-15% equity tranche, a 15-25% mezzanine tranche, and a 25-35%, and 35-100% tranche
- IG has 0-3% equity tranche, a 3-7% mezzanine tranche, and a a 7-15% and 15-100% tranche
- Download all companies in the TOPIX (a capitalization weighted index of all companies listed on the Tokyo Stock exchange)
- Remove all companies trading at Price to Book above 1.2x
- Remove all companies that do not have an operating history going back 10 years
- Remove all companies that have a Debt to Capital above 20%
- Start with A...
Before I get to the meat of this post, I would like to highlight to readers a very interesting quote from Jeffrey Gundlach, legendary bond investor and founder of DoubleLine Capital, in an interview with Barrons:
"Gundlach's cautious take on high-yield is the result of an aperçu or intuitive flash he had several weeks ago, that the yield spread between high-yield and government bonds should be calculated using the 20-year government bond, rather than the entire Treasury yield curve. That's because high-yield paper, though maturing sooner than 20-year bonds, shares similar price volatility. The current 300 basis-point, or three percentage-point, spread between yields in the high-yield market and on 20-year bonds is as narrow as it has been at any time in the latest credit cycle, he notes."
Today, Bloomberg posted an article on Oaktree Capital's intent to purchased distressed debt investments in the EU as opportunities for distressed debt in the United States are slim to nil"
"March 3 (Bloomberg) -- Oaktree Capital Management LLC, an $82 billion investment firm, plans to purchase more distressed assets in Europe as a price rally eroded the return outlook for U.S. corporate debt, according to Chairman Howard Marks.'The better opportunities lie in Europe because banks have some purification job to do on their portfolios, and in mid-cap deals and also in debt related to commercial real estate,' Marks said in an interview in Berlin yesterday. 'We indicated to our investors in 2008 that a return before fees of more than 25 percent is possible. Today, you can’t get that level of returns from traditional U.S. distressed debt.'"
- Research analysts estimate that banks in the EU will have to shed more assets than US banks: Typically, and as played out by this cycle, public distressed securities rally over the course of a few years then banks and other financial institutions begin to shed assets that will probably sell at a more reasonable valuation. Banks can get away with this because historically they marked to model and did not have to take capital charges for unrealized losses on the balance sheet. Domestically, banks will begin to sell off their CRE loan portfolio (and equity positions) - This morning Sam Zell noted, regarding CRE: "...because of zero interest rates, there is an awful lot of assets that in another arena would have already been REO. And so the result is, there is very little supply. The banks are feeding their distressed assets into the market very slowly, so the supply of new stuff is low." But then Zell went on to say that capital domestically is sky high and that prices probably will not drop to make real juicy returns (here's the video: http://www.cnbc.com/id/15840232?video=3000008432&play=1). In Europe though, banks are under significantly more pressure due to a variety of issues (cross ownership of sovereign bonds for instance). Net / Net more "forced" sellers in Europe, especially considering Basel III implementation
- The amount of capital chasing distressed debt in Europe is less than that in the United States: I do not have figured in front of me, so you will have to take my word for it. The list of dedicated distressed debt funds in Europe numbers about 40, whereas in the United States its a little less than 300.
- Complexity. In the EU, bankruptcy leads itself more to liquidation than restructuring. Furthermore, while cross-nation rehabilitation rules have been somewhat standardized, the fact remains that many of these rules have not been tested in an actual restructuring proceeding. In my opinion, complexity leads to more opportunity