Worst Distressed Trades of the Decade
In the spirit of most event/credit funds losing a lot of money in big positions, instead of the best trades of the decade...post the worst trades distressed funds entered and got significantly wiped. Can't be a trade where bonds were shorted at par with a mostly parholder base at the time. Think more like WIN 2L/Uns (Elliott), DF (Knighthead), PCG Equity (pre-Dec '18: Baupost, BlueMountain) etc.
Bonus points for listing the funds involved, rationale on long-side and where they went wrong.
Carl Icahn with OXY. Carl Icahn with Hertz.
$1.6bn+ lost in HTZ - whoops. Bondholders also got majorly screwed by VFN margin call
Bill ackman rubbing his hands rn
HTZ bonds were a +50% TR in 2019 to be fair. Noteworthy worst trade is that November 2019 deal.
Fair point but Icahn was in the equity :/
Jnr. PM on a performing / stressed / CCC portfolio - i pitched and added PRTY 6.125% 2023s in late Jan at ~$87.50.... We got out in the $50s....now trading around ~$5.50.
Didn't know Knighthead got egg in DF haha. mmmm Oi (York/Goldentree/Brookfield/BSP and others), Frontier another widowmaker.
Architect of FTR and WIN at Elliott has surely gotten fired. What a massive whiff on two huge cap structures.
Add Acosta to Elliott's list of gigantic failures
yeah I always think that there’s more to Elliott’s trades that meets the eye (like having shorted a bunch of another tranche/equity or had massive CDS) but sometimes it seems like no they just lost a bunch of money.
EP Energy 1.125/1.25 liens...”what could possibly happen to a 1.125 lien!?”
& then to add insult to injury, the debtors getting a plan confirmed (even if it wasn't ultimately consummated) that would reinstate the 1.125Ls and testifying that the plan was feasible & should be approved in part because they'd have the ability to prime the reinstated 1.125L in the future. And the court held the 1.125Ls weren't entitled to their specially-negotiated 'not a makewhole' makewhole. Brutal on all fronts.
Pretty much anything in energy in the last 5 years. Probably 5% of distressed energy fulcrum trades have ended up making money. Lots of “double zeros” which are the most painful - both the original credit investment and then post reorg, the new money equity / rights offering $ that you paid to double down ends up wiped out as well. Dozens of examples of this and tens of billions of value destroyed.
Speaking of Elliott - Peabody a well known example of one that went from a huge winner to a huge loser. Turned something like 500m into a billion+ in 2017 through a clever rights offering they structured, plus a rebound in coal prices. Held onto their position which is now headed to zero (look at BTU’s price chart).
How do you view the opportunity set in energy now?
Baupost is a bad example. They lost a ton on their equity position but it was always sort of a hedge to their subro position which will make way more (over a billion) than what they lost. It’s true for Blue mountain though. It was basically the straw that broke the camels back for their funds shutting down. They bought at the very top once this became an event trade, and sold out at basically the bottom last year.
yeah Baupost is just too too good. how did the equity hedge the subro position though. was it just generally if the subro claims get paid out less than there’s more value in the equity remaining essentially?
You have it reversed - Baupost entered the equity (they bought almost 20mm shares above $40, no different than BlueMountain's bet) lost a shit-ton then made a lot on the independent subro trade as market blew up / filing became a certainty.
They doubled down on the equity during the Jan-19 dislocation but there wasn't really an active-equity vs. claim hedge entered into at the same time per se (if you can even call it a hedge - it was always an allocation issue to begin with when thinking about what would accrue to prepetition equity vs. bonds vs. subros and who would be lead horse in recapitalizing). While I agree they did offset a large amount of losses in their equity, they should really be viewed as two separate trades within the same complex.
Everyone who was pitched the subro trade by the dealers in 2018 was explicitly described the hedge aspect. Only Baupost was smart enough to find it and put it on early, and they ultimately grew it to one of if not the biggest position in their fund. Lower subro settlement = good for the equity, and vice versa. Obviously not as clean as a straight up bonds vs equity hedge or whatever, but a bit of process hedge nonetheless, even if they intended to win on both sides. And Baupost started buying up subros well before bankruptcy was on the radar (post the 2017 north bay fires, but before the camp fire).
In any event, the point was just that it’s misleading to look at what they lost in the equity and say it was one of the worst trades of the decade. Net, PCG will likely end up a big winner for them and this was a highly interrelated trade. They also will make a lot of money from backstopping 1.5B of the rights offering in fees alone.
For the European guys you may recall Portuguese bank Banco Espirito Santo (literally means Holy Spirit Bank). Quite a few of us bought the tier 2 bonds in the 70's back in 2014 and saw them get wiped out when they got left at the bad bank that was carved out during the recapitalization process. I recall Baupost had gone long the equity earlier but no idea if they were also in the bonds.
I'll add one - Anchorage ended up (or until plan is confirmed) totally screwing the IP-co only noteholders in J.Crew that didn't get cut into the DIP (which I'm sure got over allocated to those DIP parties getting screwed on account of higher weighted position in IPco vs TL; I know GSO and Angelo had always played for the IPco angle). Those notes went from 100-120c pre-bankruptcy because of control of the IP to basically pari treatment with the loan in the 30-40s because of Anchorage's outsized influence in the case (though they themselves still lost a whole boatload of money holding onto 800mm+ of the TL/ipco notes)
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