Wharton Restructuring and Distressed Investing Conference 2018 Notes

Smart Money

Jamie Dinan, York Capital

  • Story of his life: he thought of it like an “option” where the two most relevant factors are volatility and time; did investment banking, then merger arbitrage, then went to law school; seeded York Capital with $5 million he raised from ex-DLJ colleagues
  • Back then, smart college grads went to Goldman and McKinsey, whereas asset management was still a backwater so it was easier to get noticed and climb the ladder if you put your mind to it
  • Building a reputation as a hard worker that said yes to everything as an analyst is what built his reputation and allowed him to raise money for his fund
  • Markets: bullish because global economy is doing extraordinarily well; investor class (pension funds, SWFs) growing richer; there will be a correction but not like before; investment grade bond market is “behind the economy” and yields are going higher; expect volatility and uncertainty in the market over the next few months
  • York runs 0.3-0.5 beta portfolios
  • Likes energy because it’s inefficient and there are lots of technological changes
  • Retail is challenging, brick and mortars are here to stay but valuations are richly-priced, and there is excess gross margin in the industry that will get competed away; malls are overbuilt, but York is long real estate where demographics are growing; very suspicious of administered care industry because of high capex and reliance on government reimbursements; orphan drugs are good
  • Excess supply in the telecom industry will drive down revenue
  • Likes credit because “machines can’t do it,” you have to be active and there’s too much friction and opacity for automation
  • Buying the Milwaukee Bucks was the most fun investment, but since buying them three years ago, they’ve only broken even

Dave Miller, Elliott Management

  • Volatility that we saw in 2018 is due to the market determining what will happen economically
  • Late in the cycle, high likelihood of downturn in the next couple of years (could be preceded by some false starts like we saw in early February)
  • Broker-dealer and bank balance sheets have shrunk since 2008, which could help explain why credit has lagged equity this last decade

Angelo Rufino, Brookfield Asset Management

  • Opportunity is global; international restructurings are more inefficient and thus more profitable
  • Rule of law is key in this process
  • Brought up their participation in the restructuring of Brazilian telecom Oi and how it’s challenging in that equity has disproportionate influence in a bankruptcy

Joe Zinman, Solus Alternative Asset Management

  • Brought up Oi: mentioned subordination issues in Brazil where debt isn’t necessarily made whole before equity gets something; regulator coming and taking over would have been the worst outcome; bought the debt so cheap that any resolution to the bankruptcy would have been profitable; currently, there’s an issue because the judge on the case gave the Oi CEO a lot of sway, and that’s being contested
  • Solus was on the losing end of the Hovnanian CDS trade; didn’t mention the firm by name (it’s Blackstone), but basically said it’s not proper that an investor can extend credit conditional upon a voluntary technical default; Solus is challenging this in court
  • Largely stayed away from retail but just got involved in Toys R Us; brick and mortar is in danger as Amazon currently is prioritizing putting competitors out of business vs. making a profit; brands are important, you can monetize the IP at Toys R Us; real estate is a complicated issue there because Toys R Us stores are under a master lease

Matt Kimble, Avenue Capital

  • Energy is a great industry for distressed debt investing as there’s lots of cycles
  • Invest in upstream because that’s where the bankruptcies are
  • Avenue likes the power sector in particular, which is facing difficulty because of oversupply and low natural gas prices; regulations are a big deal in power

Matthew Bonanno, York Capital

  • Focused on the bankruptcy of Samson and Linn Energy; Linn business model was doomed to failure from the beginning, bought the distressed unsecured bonds at 9 cents, lots of dry powder for energy private equity but the big buyers in Dallas are really only experienced in dealing with clean assets where they can just buy and start drilling
  • Upstream has a G&A problem, need to reduce administrative overhang through consolidation

Marc Lasry, Avenue Capital

  • Bullish on market because economy doing well globally; Trump is getting all the credit for reforms put in motion by Obama; real risk is exogenous events, with the example that you’d want 500bps over treasuries for South Korean sovereign debt for geopolitical risk and etc, but you’d only get 10
  • Bullish on energy, seeing large restructurings in services and power sectors
  • Retail is tough, if investing has to be in senior debt
  • Long healthcare
  • No opinion on telecom, not enough companies in trouble
  • Active investing has underperformed over the last few years because hedging is expensive

Bruce Richards, Marathon Asset Management

  • Never been as much duration related to interest rates as there is today; the three main drivers of rates (Fed, inflation, supply/demand) are all pointing to higher rates
  • Low likelihood of global recessions, expect sub 25% downturn in earnings for a future recession; recessions are hard to predict, and economists have been predicting them happening every year since 2015; one will probably happen in the next couple years but nothing says it has to (Australia hasn’t had one in 30 years)
  • American economy accelerating because of deregulations, tax cuts, lots of capex, predicting 3% GDP growth
  • $54Bn in distressed bonds currently vs. $100Bn in dry powder for distressed assets; managers who raised funds in the last few years anticipating a recession are running out of time to deploy capital
  • Institutional investors are shifting towards private credit, 2011-2013 fund vintages have had ~13% returns whereas last three year vintages have had ~8% returns
  • Banks starting to lend to the upper middle market so there will be more competition for the direct lenders and BDCs; smaller companies are still too cumbersome for banks – and borrowers don’t have to put up with stricter covenants if they can turn to alternative lenders
  • BBB debt issues are exploding, currently half the investment grade market
  • PR is going to be a key issue going forward (referenced the heat on Klarman for buying COFINA bonds)
  • Both his fund and Avenue Capital are raising separate aircraft leasing funds
  • For the first time in a long time, Marathon is favoring southern Europe over northern Europe (Italy, Spain, Portugal but staying away from Greece); mostly corporate loans and CRE loans where they could take over the real estate
  • Beginning to buy Venezuelan debt

Wharton Restructuring and Distressed Investing Conference 2018 Panel Notes – reddit

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