Posts Tagged ‘Distressed Debt’
Seth Klarman (Baupost Group) Speaks to Ivey School of Business
Sunday, May 3rd, 2009
Seth Klarman, Legendary investor, founder of Baupost Group, and author of the $1,200, much sought after, and out of print, now classic investing book, Margin of Safety, recently spoke to the Ivey School of Business sharing his thoughts and wisdom on investing as well as his methodology. This is a rare and valuable lecture, a must listen, and contextually relevant as it is very recent, recorded on March 17th, 2009.
You may view the video courtesy of Ivey School of Business’ Ben Graham Centre for Value Investing.
Bio (Wikipedia):
Seth Klarman is the founder and president of The Baupost Group, a Boston-based private investment partnership, and the author of a book on value investing. Klarman is notable for his willingness to hold significant amounts of cash in his investment portfolios, sometimes in excess of 50% of the total[1]. In 1991, Klarman authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000.[2] Before founding Baupost, Klarman worked for Max Heine and Michael Price of the Mutual Shares fund (now a part of Franklin Templeton Investments).
Klarman is a graduate of Cornell University and Harvard Business School. [3]
Tags: Amazon, Array, Bachelor Of Arts, Baker Scholar, Baupost Group, Book Margin, Chestnut Hill, Cornell University, Distressed Debt, Ebay, Franklin Templeton Investments, Global Opportunities, Harvard Business School, Individual Investors, Investing, Investment Portfolios, Investor Group, Ivey School Of Business, Magna Cum Laude, Margin Of Safety, Max Heine, Mba Graduate, Methodology, Mutual Shares Fund, Private Equities, Private Investment Partnership, Safety Risk, School Of Business, School Of Management, Seth Klarman, Seth Speaks, Wikipedia, Willingness, wisdom, Worrier
Posted in Markets | No Comments »
Howard Marks: Will it Work?
Thursday, March 26th, 2009
Howard Marks’ letters to Oaktree Capital investors have become as highly renown and anticipated by the investment community as those of Warren Buffett, particularly to denizens of the debt market. Oaktree runs about $50-billion in assets including high yield debt, convertible bonds, distressed debt, private equity, real estate, and about 1.2-billion in equities.
Marks’ March letter is now available; in it Marks discusses the Fed and the government’s plans to get the economy and the credit market functioning normally again, and what the likelihoods are in his highly-esteemed view.
Here are some excerpts:
The other day, my son Andrew - college senior and credit-analyst-to-be - asked whether I think Treasury Secretary Geithner is doing the right things. As has happened before, his question elicited a fatherly response that grew into this memo.
Solutions in economics aren’t nearly as dependable as engineers’ calculations, and there may not be a tool that’s just right for fixing an economy. Of course, the toolbox offers lots of possibilities, including interest rate reductions; quantitative easing; tax cuts, rebates and credits; stimulus checks; infrastructure spending; capital injections; loans, rescues and takeovers; regulatory forebearances and on and on. But no one should think there’s a “golden tool,” such that solving the problem is just a matter of figuring out which one it is and applying it. Anyone who holds the problem solvers to that standard is being unfair and unrealistic. There are a number of reasons why, including these:
· Every situation is different, and none is exactly like any that has come before. That means fixed recipes can’t work. Certainly this one has never been seen before.
· Most policy actions aren’t all good or all bad. They merely represent imperfect compromises as to ideology, goals, problem solving and resource allocation.
· Economic problems are multi-faceted, meaning the solution for one aspect might not work on - and in fact might exacerbate - another aspect.
· Economies are dynamic, and the problems are moving targets. The environment changes constantly, rather than sitting still and waiting for a solution to work.
· The main ingredient in economics is psychology, and the workings of psychology clearly can’t be fully known, controlled or fixed.
. . .The Bottom Line
There are so many moving parts to the current situation - and to its causes and what we hope will be its solution - that I’ve tried to boil things down to the essentials. In order to right the system and get the economy moving forward again, I think three main things have to be accomplished:
· Our economy and its component parts have to be delevered;
· The vast destruction of capital has to be dealt with; and
· Confidence has to be restored.
. . .Debt has to be reduced, and it’s happening (other than at the federal level, of course). But the way it happens is usually unpleasant: bankruptcies, foreclosures and debt restructurings. “Debt reduction” sounds like a good thing, but it’s likely to be accompanied by the painful loss of the assets that had been bought with borrowed money.
Many assets are worth far less than they used to be - that’s one of the main reasons why the debt load has become unbearable and has to be reduced. Investors, consumers, homeowners and financial institutions will have to rebuild their capital as they - and the economy - attempt to again move ahead.
And confidence has to be rebuilt, too. The willingness to borrow, spend and invest will rebound only when people believe incomes and asset values will resume their growth.
To read the complete letter, click here.
Source: Howard Marks, Oaktree Capital
About Oaktree:
Oaktree was founded in April 1995 by Howard Marks, Bruce Karsh, Steve Kaplan, Larry Keele, Richard Masson and Sheldon Stone. These Oaktree principals joined together beginning in the mid-1980s to manage high yield bonds, convertible securities, distressed debt and principal investments.
Today, Oaktree is comprised of nine principals and over 530 staff members in Los Angeles (headquarters), New York, Stamford (Connecticut), Amsterdam*, Frankfurt, London, Luxembourg*, Paris, Beijing, Hong Kong, Seoul, Shanghai, Singapore and Tokyo.
About Howard Marks
From the rise of junk bonds to the dot-com collapse to today’s economic crisis, Howard Marks has ridden the ups and downs of the financial markets.
From the day he began his professional career in 1969, Marks has been deeply immersed in sophisticated financial instruments. As the high-yield bond manager for Citibank starting in the late 1970s, he was one of Michael Milken’s first customers. In 1985, he became chief investment officer of investment titan TCW Group Inc., based in downtown Los Angeles. And with several decades of experience under his belt, Marks set out on his own in 1995 and founded Oaktree Capital Management LLC with a handful of TCW executives.
The firm, which now boasts a $55 billion investment portfolio, has become one of the elite investment firms in the Western United States. In building Oaktree into an investment powerhouse, Marks has amassed his own fortune. On the Business Journal’s annual list of the wealthiest Angelenos, Marks ranked No. 29 with an estimated net worth of $1.5 billion, though he acknowledges he’s taken a major hit as a result of the financial crisis.
These days, the 62-year-old Marks is more interested in dispensing his wisdom on the markets than in actively managing portfolios. He oversees the direction of the firm, but spends a good deal of his time penning closely watched memos on the state of the financial industry. Marks recently met with the Business Journal in the firm’s downtown offices to discuss his life, career and the chaos in the markets.
Read more: “Interview with Oaktree Co-Founder Howard Marks - Stephen’s Posterous” - http://stephenlaughlin.posterous.com/interview-with-oaktree-co-foun#ixzz0AvAbB9aP
Tags: Andrew College, Array, Capital Injections, Capital Investors, Compromises, Convertible Bonds, Credit Analyst, Debt Market, Denizens, Distressed Debt, Economic Problems, Geithner, Interest Rate Reductions, Investment Community, Main Ingredient, Moving Targets, Policy Actions, Private Equity, Problem Solvers, Renown, Resource Allocation, Son Andrew, Takeovers, Treasury Secretary, Warren Buffett
Posted in Bonds, Credit Markets, Economy, Gold, Markets, Outlook | No Comments »
The John Paulson Way to Profits
Tuesday, February 3rd, 2009
John Paulson (unrelated to Hank, ex-US Treasury Secretary), US hedge fund manager, shot to fame last year by capitalizing in spectacular fashion on the credit crisis by, amongst others, betting against a number of financial institutions.
The scoreboard shows his flagship Paulson Advantage Fund returning 36.7% net of fees for 2008. Total assets jumped from $12.5 billion at June 1, 2007 to $28.8 billion by the beginning of 2009.
A fascinating peep behind the curtain of the investment actions of the 78th wealthiest American on the Forbes 400 list comes to us courtesy of The New York Times’s DealBook, having obtained Paulson’s 28-page year-end report to his investors.
Paulson’s outlook for this year is summarized as follows:
“We remain bearish on the outlook for the US economy and believe that the recession will extend into late 2009 and likely into 2010. The sharp contraction in the global economy, the instability of the global financial system and the ongoing credit contraction are unlikely to be resolved in the first half of 2009. While the US stimulus package will likely cushion the decline, we don’t think it can halt the downturn and will likely have longer-term negative consequences.
“Although we are bearish on the economy, we are bullish on investment opportunities for our funds over the next year in the following areas:
• Long Distressed Mortgages
• Long Distressed Debt
• Debt Restructurings
• Bankruptcies
• Strategic Mergers
• Event Arbitrage
• Financial Recovery
“We see attractive opportunities in all of these areas. Given our favorable liquidity position and expertise in these areas, we believe we are uniquely positioned to take advantage of these opportunities in 2009 and beyond.”
Click here for Paulson’s year-end report.
Source: Zachery Kouwe, The New York Times DealBook, January 30, 2009 (hat tip: Paul Kedrosky).
Tags: Advantage Fund, Attractive Opportunities, Credit Crisis, Distressed Debt, Financial Institutions, Forbes 400 List, Global Economy, Global Financial System, Hat Tip, John Paulson, Liquidity Position, Negative Consequences, New York Times Dealbook, Paul Kedrosky, Report Source, Restructurings, Spectacular Fashion, Stimulus Package, Us Treasury Secretary, Zachery
Posted in Economy, Markets, Outlook | No Comments »
John Paulson Investing in Distressed Debt - 2009 Outlook
Monday, January 5th, 2009
John Paulson, founder of $36-billion hedge fund company, Paulson & Company, (no relation of Secretary Paulson) and now famed for shorting “sub-prime,” is looking to invest in (long) opportunities in the distressed credit market.
John Paulson, who runs the $36 billion hedge fund firm Paulson & Co, is looking to buy distressed mortgages and distressed debt, despite being bearish on the overall economy, Bloomberg reported.
Paulson wrote in a 2009 outlook to investors that he is interested in investing in debt restructurings, bankruptcies, strategic mergers and financial recoveries, the agency said.
His largest fund, the $13 billion Paulson Advantage Plus, has risen about 38 percent through Dec 19, the agency said, citing the undated report.
Creative Capital’s Spencer Ante shares his notes on Paulson’s outlook for 2009:
A big bank invited Paulson on the call with wealth managers to offer his thoughts on the economy and his detailed investment strategy for profiting from today’s financial chaos. With $36 billion under management, Paulson & Co. is one of the 10 largest hedge fund managers in the world, and he recently testified before Congress.
Interestingly, many of the strategies being employed by Paulson’s funds have nothing to do with public equity markets, the focus of most individual investors. Other than shorting financials and doing arbitrage plays on mergers and acquisitions, the focus of Paulson’s funds involve buying arcane financial instruments such as mortgage-backed securities, bonds of distressed companies and defaulted debt securities of bankrupted companies.
This is heavy-duty stuff that most people won’t be able to take advantage of. But given Paulson’s foresight and cojones it’s fascinating to see how some people are finding a way to profit from the losses of others. Crisis = opportunity.
Among the highlights:
- He thinks the housing market won’t bottom until 2010, with housing prices to falling another 10% to 20% from current levels before they bottom.
- The financial sector has only written off half of the toxic assets on its balance sheet, so avoid investing in financials for now.
- He sees no threat of inflation in the short term but it will be hard to contain once the economy rebounds.Here are the notes:
We believe it will be the worst recession since WWII and possibly the Great Depression.
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[!AdServe:bigbox!]Reasons:
1. The decline in housing that shows no signs of stabilization.
We expect housing prices to fall another 10% to 20% from current levels before they bottom.
2. Consumer: the consumer can no longer borrow to the extent they have in the past.
3. Global crunch: pressuring economy. Global stocks down 50%
- We think the headwinds are very strong.
- We don’t believe we are through the crisis in the financial area.
- Total write-downs will approach $ 1.8 trillion.
We are about halfway through the writedown process.
Most investors who invested capital in banks have lost money.
Hence the government increasing its role in recapitalizing the banks.- The terms are going to become increasingly onerous, which will put pressure on the equity of financial institutions.
- We are very bullish on the investment opportunities available.
- The stress in markets have caused many prices to fall.
- The best opportunities for us in 2009 and 2010:
* Distressed mortgages. We’ve been buying the triple AAA tranches of these securities. Quite aggressively buying them at yields in the 20% to 25% range. We like mortgage securities because they self liquidate.
* Distressed debt, both leveraged loans and high yield debt; we’ve started to allocate money to that area. It’s very tricky. Targeting companies that will not go bankrupt. Yields north of 30%. There are thousands of issues out there.
* Bankruptcies: defaulted debt securities of bankrupted companies. i.e. Tribune Co. Those bonds went from 80 cents to 27 cents on dollar for senior secured loans. $110 billion in bankrupt bonds. There is a tremendous amount of supply but limited buyers. We are finding attractive opportunities. 2 to 4 times multiple
* Merger arbitrage: a lot of money has come out of the sector. We focus on the corporate strategic deals for all stock. i.e. Merrill Lynch and BofA. We buy Merrill and short BofA to lock in the spread. 31% return currently. Arbing National City/PMC, Wachovia/Wells Fargo. Returns are in 30% to 60% range. 3-6 month time frame. These are some of the highest spreads we’ve seen. Most successful deal we’ve seen was Budweiser/InBev.
* Debt restructuring: GMAC, we buy the old bonds and swap them for new bonds.
* As we get further on in the cycle investing in financials that are recapitalizing will be an attractive area. It is premature to make those investments today. After most of the writedowns are done. That will represent a highly attractive long-term investment opp.
Factors driving home prices down:
* high percent of foreclosures; banks must sell homes quickly. Current inventory of homes is 11 months. Banks have to lower prices to sell homes. Takes 12 months to foreclose home. The backlog of homes is enormous.
* Limitations on financing: 40% of mortgages made during boom would not get made today. Need income and down payment. The pool of potential acquirers is more limited.
* We are going into a recession, which reduces the pool of buyers.Why buy these securities?
We factor these declines as much as 25% into our analysis. We then estimate default percentages. Then estimate losses in pools and cash recoveries.I don’t think we’ll hit the bottom until 2010.
How much will the bold moves by Washington help?
There’s a limit to what you can do. You can’t help people who can’t afford their mortgages.How much leverage do your funds use?
Generally our funds don’t use leverage. There’s a thing called Reg T. It calls for 50% margin. That’s the only type of leverage our base funds use.Over last 5 years our base fund equity to capital under management was 90%. Peak was 33%.
Inflation?
The economy is unlikely to see inflation in the short term.But once the economy returns to moderate growth that’s when it becomes an issue.
It will be hard for the government to contain inflation at that point.
Raising interest rates or lowering gov spending could slow the economy.
Source: Reuters, December 31, 2008
Tags: Arbitrage, Bankruptcies, Bloomberg, Creative Capital, Debt Securities, December 31, Distressed Companies, Distressed Debt, Economy, Financial Chaos, Financial Instruments, Financial Recoveries, Finding A Way, Hedge Fund Company, Hedge Fund Managers, Individual Investors, Investing, Investment Strategy, Investors, Mergers, Mergers And Acquisitions, Mortgage Backed Securities, Mortgages, Outlook, Public Equity, Report Source, Restructurings, Reuters, Wealth Managers
Posted in Bonds, Credit Markets, Economy, Markets, Outlook, US Stocks | 1 Comment »
Yale’s Swensen: “Extraordinary Opportunities in Distressed Debt
Monday, January 5th, 2009
Legendary Yale University Endowment investor, David Swensen, says there are extraordinary investment opportunities in the credit world and is “pursuing a recovery” by acquiring distressed debt.
“There are some really extraordinary opportunities in the credit world,” said David Swensen, the school’s investment chief, in a phone interview from his office at the New Haven, Connecticut, university. “Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels.”
Among Swensen’s core principles identified in “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment” (Free Press, 408 pages, $35) is the importance of diversifying holdings while focusing on equities. In a recession, the advantages of diversification get overwhelmed by investors’ selling equities in favor of U.S. Treasury bonds in a “flight to quality,” he said.
“When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors,” he said.
In the current environment, distressed corporate securities can produce “equity-like” returns, Swensen said.
“You want to make sure you’re with companies that have the ability to survive in a really tough economic environment” he said, declining to name any of the companies.
Until financial institutions resume lending, the economy will remain stagnant, Swensen said.
“I don’t think the Fed or the administration has figured out how to fix credit markets,” he said. “We are going to experience economic and financial stress as long as the credit markets are broken and it’s not until we start seeing the credit markets functioning properly will we be able to see a path to economic recovery.”
Swensen advocates federal guarantees for deposits in money- market funds as a way to encourage investment in the vehicles that buy corporate debt.
Source: Bloomberg.com, January 2, 2009
Tags: Advantages Of Diversification, Bank Loans, Connecticut University, Corporate Securities, Credit Markets, David Swensen, Distressed Debt, Equity Exposure, ETF, Federal Guarantees, Financial Stress, Institutional Investment, Investment Grade Bonds, Money Market Funds, New Haven Connecticut, Term Investors, U S Treasury, U S Treasury Bonds, Unconventional Approach, University Endowment, Yale Endowment, Yale University
Posted in Bonds, Credit Markets, Economy, Markets | No Comments »
