Last week, Citi held their annual credit conference, an event I have attended for many years and always have thoroughly enjoyed. I would love to spend time writing a post on keynote speaker Michael Milken's fantastic keynote speech at lunch but thought it would make sense to spend time on some takeaways from commentary by Citi's distressed desk.
Scott Balkan, the head of the desk, kicked off with some insightful comments about the current positioning and state of the market. He noted that distressed funds across the board had a specific predisposition to safer trades. He used the analogy of two distinct trades (I'm paraphrasing the numbers below):
- Trade A: Security trades at 10. Three outcomes: 12, 15, 18
- Trade B: Security trades at 10. Three outcomes: 5, 12, 100
Citi conducted a survey with their clients earlier in the year regarding positioning, cash balances, etc. On of the more interesting takeaways from the survey was very fund funds think their cash position is below average. But at the same time very fund funds think the current opportunity set is above average. No respondent said the opportunity set was very high. For me this is somewhat hard to reconcile.
One of Scott's final points was that most investors are fine being late. This corresponds with investors being predisposed to safer trades. The hardest investment to put on in any market is the falling knife. And because, across the board, funds are ultra focused on short term performance, funds are avoiding that falling knife. Another opportunity for diligent investors.
Citi's desk analysts then presented a number of ideas in the current market place. I will say the presentations across the board were fantastic. While I will not relay what securities the analysts discussed or which way they were positioned (ask your Citi sales coverage), the situations discussed included (but not limited to):
- OSG (OSG had filed that morning! Everyone perked up started talking notes when they analyst began speaking)