The best quotes from Oaktree's first conference call

Today, Howard Marks and other executives from Oak Capital held their first conference call since going public a few weeks ago. Much has been talked about the company since its IPO including a number of prominent funds disclosing ownership in the name including the Davis Funds, Maverick Capital, Scoggin, and Greenlight Capital just to name a few  (some owning the equity when it traded on Goldman Sach's private exchange). The call was quite comprehensive, kicked off by Howard Marks discussing Oaktree's strategy and his thoughts on the market (my emphasis added):

In terms of the investing environment, I would characterize this as a relatively normal period. Having said that, I must say it makes me think of the guy who has his head in the freezer and his feet in the oven and, on average, feels okay. Today, the good news consist of the gradual recovery of the U.S. economy, as well as generally moderate asset prices and moderate investor psychology. 
On the other hand, there are plenty of things to worry about in the macro and secular sense, including the outlook for the competitiveness of the developed world, economic growth, political leadership, deficits in debt, most immediately in Europe; and China's ability to hopefully slow its growth. 
At Oaktree, we think of the market in terms of a pendulum that swings back and forth over time between unbounded optimism and limitless pessimism, and that's between prices which are too high and prices which are too low. Today we think we're in the middle of that range. We see good opportunities for most of our strategies, particularly in real estate and European distress for control. But on the other hand, distressed opportunities in the U.S. are less abundant. 
As is normal for this point in the cycle, we're focused on the areas of the economy that are showing weakness. But we also are taking advantage of the more generous capital markets to exit investments and realize profits, particularly in the area of distress debt, where as of tomorrow we will have already distributed 94% of the drawn capital of Opps VIIb, our height of the crisis fund that only entered its liquidation period a year ago. But in our control funds, most of our portfolio companies are performing well and we see no need to rush realizations at anything less than full prices.
So, net/net:
  • Fairly valued market (pendulum in the 'neutral' state)
  • Cheap assets: Real estate & European distress for control
  • Overvalued asset: Distressed opportunities in the U.S.
I think this is a consensus among those on the buy side focused on domestic opportunities in credit and distressed. At the end of the day there's really not a ton to look at here in the United States, but valuations aren't WILDLY stretched to get ultimately bearish. Professional, I do not have a mandate to invest outside the U.S.  One thing I've wanted to do for over a year now is get two writers that focus on international distressed opportunities to fill in that gap. If you are interested, contact me.

Next, CFO David Kirchheimer laid out some of the more technical aspects of Oaktree's disclosures.  An interesting point that was made here is that they account for their 22% stake in Jeffrey Gundlach's DoubleLine Capital at only $19 million (assuming that's what they gave him for working capital). Obviously that is worth far more than that today.

John Frank, Managing Principal, then discussed current opportunities and fund raising efforts.  On speaking about the strength of the market for SELLING their portfolio investments, this was a fantastic quote:

"Generally we seek to avoid buying in auctions, but we're delighted to sell through them."

Pin that one on your desk. In terms of real estate, it looks like Oaktree is doing many different things including things like commercial and land construction loans from banks in the FDIC at an average of 39 cents on the dollar. He also said that they are buying the equity of North America's larges private home builder (not sure the name).  Outside of real estate, they are also launching a senior loan product that looks to be levered (TRS?).

Moving to the Q/A, some interesting takeaways:
  • They have a little of $12 billion of dry powder ready to invest if markets get shaky
  • They were buying positions coming out of some of the European banks and are involved with the Fitness First restructuring
  • Great quote from Marks: "We don't believe in predicting the future and we especially have – if we have an inkling of what's going to happen, we never know when. So, as we sit here today, we continue to believe that real estate will provide opportunities. And we believe that one of these days, Europe and U.S. corporate distress will provide the opportunities that we've been raising money for. But none – nobody at Oaktree is going to predict that it's going to happen at any given point in time, or is going to assert unqualifiedly that it's going to happen."
  • John Frank on their European operation: 
"And a lot of what you read in the press is that the European banks, we all know the European banks have huge issues. And the, sort of, word on the street seems to be that the banks are going to become, to spew out this distress debt. In fact, we've not seen that to a huge degree. We've seen some of it. We haven't seen a lot of it.  
So what our group in Europe is doing is working, really on a company level. There are particular companies that they follow. They have a war room where they have track a large number of companies quarter-to-quarter. And what they, the opportunity that they see is that the European banks, while they may not be willing to divest their bad loans at a low rate, what they aren't willing to do, and don't have an ability to do, is to put new money into situations.  
So what our group is focused on are situations where companies have actual cash needs, have actual maturities that they have to meet or actual cash flow demands that they have to satisfy, and are in need of new capital. And our group works actively with the existing managements, with unions as necessary, with other community groups, to craft an overall solution."
  • And one final quote from Marks, that I think sums up his thoughts on the credit markets: "I think that I would say that the secondary markets are healthy but not gaga. You can get deals done, it's not land office business, but it's very healthy I think. And when I talked about moderate psychology, I mean there's a desire to put money to work, but there's also some skepticism, which – and I think that, that balance is healthy. So I would describe the credit markets as healthy."
Fantastic call. As always, its amazing to hear from the one of the world's greatest investors and a legend in the distressed community.


Anonymous,  5/10/2012  

Taylor Morrison is the largest private homebuilder. They completed a HY deal a couple months back.

Anonymous,  5/10/2012  

Oaktree, along with TPG, bought the North American homebuilder business of Taylor Wimpey, also known as Taylor Morrison.


The homebuilder stocks are an interesting play. All of the debt of these names -- Hovnanian, etc -- has really bounced back recently.

Taylor Morrison recently did $500m of senior unsecured notes. A year or two ago that kind of deal would've needed to be secured.


The homebuilder ETF, XHB (which has a bunch of other stuff in it, to be fair) has nearly doubled since last November, so I wonder how much farther that sector has to run. Curious too if Oaktree is looking at their real estate/homebuilder investment as name specific or more of a sector idea.

In any event, good stuff.

Anonymous,  5/11/2012  

Going to guess their equity investment in TAYMON is unique to that builder. It is different than all of the other builders becase it was spun out and has no legacy debt from before the downturn. That is, it did not issue debt to buy land that dropped in value. It also has the lowest SGA as a percent of sales among the high yield builders and should delever unless the company goes on a land buying spree. Most of the higher yielding builders will need to issue more debt to fund working cap if we see continued strength in new home orders. TAYMON notes have a couple of funky RP carveouts.

Anonymous,  5/11/2012  

For god's sake it is spelled Goldman Sachs. The name of the 2nd founding partner was Sachs, not Sach. At least try to get the name right as a fin'l blogger.

Anonymous,  5/11/2012  

How dare you ever make a mistake Hunter. This one mistake proves your stupidity despite hundreds of meaningful and concise articles that have helped thousands of individual investors.

Anonymous,  5/11/2012  

Only muppets make typos


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.