DDIC Version 2.0 Announcement

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.

One of the requests I seem to get often is a listing of all the ideas that have been written up on the site. From now on, you can access a listing of names / tickers of all ideas ever submitted to the site from the main launch page. Or by clicking this link: All DDIC Ideas Ever Submitted.

It is my goal to close membership applications when we get to 250 members on the site. Members have access to all of the historical ideas on the site (including attachments which guests are unable to see) as well as the DDIC forum where I post 3-4x more frequently than I do on the blog.

A number of the largest hedge funds investing in distressed debt are represented (anonymously of course) on the site. And as the distressed market has effectively dried up, more and more actionable event driven ideas have made their way to the site which I absolutely love.

To those that are concerned with privacy, it is our policy to NEVER reveal personal information about the member or the member's affiliation (whether that be on the buy-side or the sell side). No users, outside of myself, can see personal information of other members except for the ideas that user has written up on the site. I oftentimes get background check service providers asking me if a member (who has placed the DDIC membership on their resume) is in fact a member. I fully ferret out these requests and get the member's consent before revealing even this type of information. In the next few weeks, I will have a letter that you can present to your compliance officer if you have concerns about our practices and disclosures.

For those that have questions or concerns about applying, please email me. The community we have built thus far has been remarkable and I only expect it to get better with time.

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Glenview Capital Annual Letter

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

Go here to read more of the 2010 annual letter for Glenview Capital.

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High Yield Fund Flows - The correct number...

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.

With that said, here is what I've heard from the various desks:

• 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

Last week, Goldman Sachs credit strategist Charles Himmelberg, one of my favorites, put out a piece entitled: "Mutual fund flows matter less, but still help track sentiment." I could not put that better. When liquidity is scant in the credit markets, inflows will indeed be very important. But in a market awash in liquidity, effects normalize. According to Goldman Sachs whereas in the wake of the Lehman crisis, $1B of inflows would impact HY returns by 4.5%, today those $1B of inflows would translate into 90 bps of performance.

In my opinion, and maybe I am thinking about this too simply (please correct me if so), fund flows will deteriorate on trailing periods of negative returns for an asset class. The retail investor will inevitably chase returns. And I think after the "Great Recession" they are more than ever chasing "risk-adjusted" returns. Think things like Sharp Ratio here. And compared to alternatives, high yield has done fairly well relative to other asset classes over the recent, and not so recent future.

With that said, unlike equities, high yield bonds have two distinct components of return. Rate and spread. In theory, credit spreads could compress to unheard of tight levels relative to IG or treasuries but that would portend a very robust economic environment which would more than likely be associated with inflationary pressures. Inflations leads to higher rate. And even though the duration of the high yield market is at a historical low and the "date to worst" is the near the shortest of all time, high yield assets will fall if rates increase, especially in the belly / 10 year part of the curve.

If rates rise, flows to credit funds will drop significantly. There is no two ways about it. Market participants will feel that shift before the data is reported. But retail investors will see negative returns because of rate (all else being equal) and pull money from the asset class which feeds on itself until yields hit appropriate levels compensating investors for rate risk.

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Harvard Business School Turnaround Conference

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.

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Pain? Not so much in the liquid credit markets.

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

How has this pullback in the global equity markets affected the domestic HY markets? Not terribly much as measured by the HY15.

For reference: Here's the post: "Credit markets are in a bubble" Now, to me that chart shows a little bit of pain. Some of the equity and mezzanine tranches have been hit harder, and rightly so:

The above chart is the price of the equity tranche of the HY15. For those not aware, nearly all of the Markit indices are tranched to give investors more places to place their bets. The HY indices are tranched slightly differently than the IG indices:

• 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

These percentages are essentially loss buffers protecting the tranche above you. Let's say you are INCREDIBLY bullish on the constituents of the HY15 index and expect no defaults through 2015. Well you would then buy the 0-15% equity tranche at 55 and get par back in 12/20/15. If you were wrong, and there were a number of defaults and low recovery rates, you may get back 0. If depends on the number of defaults and the loss assumptions to figure out what you are going to get back. You can view all these tranches on Bloomberg using the CDOT function.

With that said, yes, there has been some pain in the liquid HY credit markets. Some of the more widely traded names (Charter, CIT, Freescale, Harrah's, HCA, etc) are down a couple of points here and there. But nothing like this:

This is an equity chart of 9501 JP or Tokyo Electric. Obviously that is a unique chart given the nuclear issues going on in Japan, but on the whole, the market that has been hit the most, and consequently, the markets value investors like you and me should be spending our time is Japan.

Yesterday, on the Distressed Debt Investors Club forum, I told readers I was starting to buy a certain Japanese equity. As the day went, and panic increased throughout the day (as measured by the number of Zero Hedge postings and movements in the Yen), I was bought more and more of this one company, taking it to nearly a full position, while nibbling on a number of other companies in Japan.

Some will call me crazy. Some will say I do not have all the facts. It is always uncomfortable to buy things in free fall. Remember RIG during the BP disaster? On the DDIC investor forum I wrote, on June 10, 2010, "I am coming up with a value of $60-$100/share for RIG" when the stock was trading at $45/share and oil was spewing into the Gulf. We know how that turned out.

So for those interested in investing in Japan, here is what I would suggest doing. We are going to do it the Walter Schloss way.

1. Download all companies in the TOPIX (a capitalization weighted index of all companies listed on the Tokyo Stock exchange)
2. Remove all companies trading at Price to Book above 1.2x
3. Remove all companies that do not have an operating history going back 10 years
4. Remove all companies that have a Debt to Capital above 20%
5. Start with A...

Some of these companies are MIRACULOUSLY cheap. And in some cases this is rightly so. Japanese companies are notorious for printing ROEs lower than their cost of capital and hence a large portion of the index will trade below book. But, if you take the next few days, and do the exercise above, and pick 5-10 companies and allocate some capital to each of them, I think in a few years you will look back on this experience joyfully.

Inevitably, I will get emails related to this post saying I am crazy myself. That is fine. I may be wrong. I will not always be right. But if I buy WELL capitalized companies, with little to no debt, trading at a large discount to book, with P/Es in the single digits I feel like my downside is protected in the off chance of events worse than what we've seen in the past few days. Remember, value investing is about focusing on the downside. This exercise accomplishes that in an area where there are many questions, and investors are selling irrationally.

And email me any other interesting ones you find. I'm starting back with the A's again tonight.

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