Comments on Distressed Debt Investing: Wisdom from Seth Klarman - Part 6

What are your thoughts on General Growth? I am rea...

2009-12-04T11:40:01.288-05:00

What are your thoughts on General Growth? I am really new to distressed assets, but have been reading your blog to learn more about the topic. How would one go about valuing the GGP's equity when its unclear how much of the equity will go to the bondholders?
THanks

The lesson from the VOW / PAH3 stub trade is to no...

2009-12-03T13:46:24.733-05:00

The lesson from the VOW / PAH3 stub trade is to not short stub equities, not to give up short selling altogether. For small and mid cap companies, you might have a compelling view that the stock price is too high but the option contracts might be too expensive. Take Palm and GE. A little more than a month ago, both stocks were trading around $16 but the Jan 2011 Put options at a $10 strike price for Palm were more than twice as much as they were for GE. Granted Palm is a smaller cap company with growth on the come but no current cash flow, the risk profile for GE is also high. The stock price for both companies has been very volatile with Palm bottoming at $1.30 and GE at $5.87. If you think a company is overvalued but that the premium for out of the money put options is too high, it may make sense to take a short position instead.

WAL for a 5 year CDS should be 5. And my point wa...

2009-12-03T11:04:52.135-05:00

WAL for a 5 year CDS should be 5. And my point was OUTSIDE of mark-market tightening. I agree you exposure yourself to market gyrations on tightening.

It is correct - outside of mark-market tightening ...

2009-12-03T11:02:44.551-05:00

It is correct - outside of mark-market tightening like I noted. You are also correct if you are worried about tightening to 0.

"If you wanted to limit your total portfolio ...

2009-12-03T10:36:14.890-05:00

"If you wanted to limit your total portfolio loss to 1.00% and had to pay 300bps on the contract, you could of effectively bet 33% of your total portfolio in notional value in these contracts...and the most you could lose (outside of mark-market tightening) was 1% in return".

This is actually inaccurate - 300bps running on a 5-year contract will cost you around 4% for every 100bps of tightening because you have to multiply your annual loss by the WAL of the contract (assuming a 5-year contract has a 4-year WAL at 300bps running). Thus, the max loss on a 300bps running CDS contract is actually 12pts if it were to go to zero overnight and you had to mark it to market that day.

If anyone hasn't seen the WaMu opinion and ord...

2009-12-03T08:48:34.878-05:00

If anyone hasn't seen the WaMu opinion and order from last night, it's worth checking out. Distressed funds were ordered to divulge thier positions, similar to the Northwest case in SDNY. First time it's happened in Delaware.

I appreciate your point at the end of this post - ...

2009-12-03T01:09:11.997-05:00

I appreciate your point at the end of this post - expectations have to be lowered by everyone. In some ways what we have seen happen is merely a correction to where things should be relative to the risk vs. reward scenario. Great insights!