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Comments (51)

  • Research Associate in HF - Event
Oct 12, 2020 - 9:51am

It's funny how Lionsgate trades at $8, down from $40 when merger talks were the bee knees a few years ago, meanwhile MGM EBITDA has gone from $420mm in 2017 to $200mm in 2019 and a sale hasn't happened for more than 7+ years since the original equity was expecting to cash out.

I wouldn't be surprised if Ulrich feels the pressure to step down or sell quick given how much shareholder value has been destroyed and the potential flop of all 2020 movies coming out in a packed 2021 calendar. Waiting for someone else to bid $9 billion meanwhile every buyer knows they have a potentially liquidating forced seller HF on the other side is a bad recipe for driving up M&A value.

Having such a huge piece of NAV tied up in a single private equity investment in a HF vehicle means once that sale does happen, clients will be redeeming out at least that portion of proceeds if not, likely more (no one wants that sloshed back into a HF for them to mismanage in crap return product over last 1/3/5 years).

Oct 12, 2020 - 1:17pm

I'm curious as to how this has changed the experience for junior analysts at Anchorage. It obviously used to be viewed as a top tier exit opp from RX (and may still be viewed this way) but given that they've lost over 50% of opportunistic/hedge fund AUM and replaced it with CLOs, it seems as though the learning experience for junior analysts (who I'm assuming are more likely to work on performing credits) must have drastically changed? There are also other factors like comp, prestige, etc. Would be interesting to hear from someone who has insight.

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Most Helpful
Oct 16, 2020 - 1:46pm

The source of the figures above is from an actual institutional investor who has been invested in Silver Point's flagship offshore fund for the past decade. Also, the majority of the assets in Silver Point's flagship fund is in their offshore fund, so these are the returns that most investors in their flagship fund will see. 

I don't doubt that you saw a "positive" number for 2015. The reason is that Silver Point (like most funds, such as mine) probably cites their onshore returns in their marketing materials. Their onshore returns will be slightly higher because of discrepancies in tax withholdings between onshore vs. offshore. That discrepancy could be enough to push the returns in 2015 to positive territory. But even so, the point is that returns were flattish in 2015. They were not +15%. 

Other factors that could account for discrepancies could be related to different share classes in which an investor is in. If Silver Point really wanted to, they could report the returns from their most investor-friendly share class because those would be the highest and look the best for marketing purposes. There are a lot of things that funds can do on the margin to present their returns in the best possible light. But those are *not* the returns that the majority of their investors receive. 

I stand behind the numbers that I cited. Again, if you have their marketing materials or if you have a friend at Silver Point, then please post their returns for 2015-2019 for comparison. I'm sure you know someone there. But please do not assume my numbers are wrong off the bat when you do not understand nor have given any thought as to what might be driving the differences. 

Funniest
  • Research Associate in HF - Event
Oct 13, 2020 - 7:20pm

laka

Barely hear about Anchorage nowadays. Silver Point is all the buzz

Why is a kid, who a few weeks ago was asking about if capex should be high or low for an LBO target, opining on who he recently searched on LinkedIn?

  • Research Associate in HF - Event
Oct 12, 2020 - 6:14pm

Yikes. Don't forget the wonder of an anomalous 8% return driven by marking 14% of your book +30% on a deal "in its late stages". Pretty sure Anchorage has also had a hefty equity book historically even outside the reorg equities (which themselves should technically benchmark to equity indices), which makes their return profile comical when you overlay any mix of a credit/equity benchmark. They supposedly had a huge CMBX short for a long-time that hasn't saved them from negative returns this year while others with the same trade are up nearly 20% this year (Apollo's internal HF; Mudrick also is up on some well-timed shorts). It somewhat doesn't make sense when you pull it all together as they also are a large investor in structured credit which has been a bonkers asset class pre-2020 so something in their portfolio must have huge negative attribution to get to their final #s (poor hedges? terrible distressed bets that go to zero? high concentration outside of MGM with poor performance?)

ICE BofA HY Index

2015: -4.6%

2016: 17.5%

2017: 7.5%

2018: -2.3%

2019: 14.4%

2020 YTD: -0.3%

SPX TR

2015: 1.4%

2016: 12.0%

2017: 21.8%

2018: -4.4%

2019: 31.5%

2020 YTD: 11.0%

  • Intern in IB - Gen
Oct 14, 2020 - 11:52am

Not to hijack, but do people in the industry see this as indicative of the future return profile for distressed debt / Reorg equity type strategies? Or is it more a function of Anchorage making poor investments for whatever reason (MGM seems like it had ulterior motives as an example). See names like Mudrick get tossed around when it comes to better performance

  • Research Associate in HF - Event
Oct 14, 2020 - 12:36pm

For most part, yes (for your typical set of 20-30 large credit funds that play in distressed). You can't buy in huge size when the price finally craters (meaning you buy much higher and the average down effect is less pronounced) and a few concentrated large bets gone wrong in most distressed portfolios drags down the return profile significantly. There will always be great one-off investments (many made this year) but at portfolio level broadly across various industries has been difficult. Someone, somewhere in a firm always gets ultra-bullish on a shit company that ends up losing a ton of money and you can't make up for the loss with a half a dozen positions that trade up 20 pts.

There are a few cases advancing through NY court that show how basically all covenants are fleeting when any set of majority lenders can amend and prime at will to the detriment of any set of 49.9% minority lenders. It isn't as simple as the old mantra of "hedge funds can write equity checks so let's stuff the CLOs through a forced cash-out since they can't participate in rights offerings" (note - now a lot of new CLOs are now gaining flexibility especially CLOs managed by traditional large investors in distressed like Anchorage). You're seeing mutual funds get more aggressive (see the spectacular fuck-up of Apollo and Angelo Gordon in Serta Simmons). The cov-lite nature of first lien loans has come to roost combined with excess capital and bad (not good) companies with bad capital structures, which all has served to lower excess return potential across the space.

  • Analyst 1 in IB - Restr
Oct 14, 2020 - 1:40pm

That articulates what I've been hearing about the space very well. So do you think it is all doom and gloom going forward for distressed (particularly the larger firms like Anchorage)? The "good company with a bad balance sheet" seems to be very elusive in the economic environment of the past decade and there doesn't seem to be any indication of that changing in the next few years. Paired with the fleeting covenants and cases like Serta that you mentioned, I find it hard to see if this trend can invert at all. I guess what I'm curious about is if you were to know what you know now then would you still choose to work in distressed going forward from today? The return profile doesn't exactly seem attractive at the LP level and that does hurt career prospects for analysts fresh out of banking/undergrad regardless of how interesting the space may be.

  • Research Associate in HF - Event
Oct 14, 2020 - 1:03pm

Mudrick has also hugely been driven by returns of their own version of MGMB (NJOY, which grew from like a 50mm post-reorg to valuations floated as high as 5bn+). Mudrick has also generated a lot of returns actually being short what others were long but their standalone distressed long book hasn't been awfully spectacular (but who cares to parse that level of detail when your headline +20-30% gets a Bloomberg interview).

Not to say they aren't good, they certainly are outperforming the standard credit/distressed fund but a bit exaggerated by NJOY which rode the coattails of at one point JUUL being the highest valued private company in the US (and clearly not anymore).

Nov 24, 2020 - 1:40pm

Recently saw an interview with Mudrick where they mentioned smaller fund size (allowing them to play more in mid-market) and ability to take an active role as drivers behind their relatively stronger performance. How difficult is it to get an analyst seat at a fund more structured like this in relation to the bigger names?

  • Research Associate in HF - Event
Nov 24, 2020 - 2:16pm

They had opportunistic short heading into March and then majority of performance driven by a small e-cig investment probably worth many many hundreds of millions marked on their book. Their long-distressed book excluding such PE-type marks is probably not that far apart from other long-distressed books but they've made better money short side.

Their point is just that middle market distress has been a better opportunity where meaningful appreciation in bonds like 20-30-40 points drives much larger return % to their funds vs. Angelo buying those same bonds is just not going to be meaningful (and maybe Angelo thus doesn't buy that leaving the buyer universe a little bit more limited), and large cap distressed situations often involves many constituents losing money in recent years.

Mudrick is approaching the size now where it will be very hard to manage such a book in extreme low interest rate environment and Fed pumping every asset except for shitty distressed assets up. Like any other business, you have a cycle of growth, maturity then decline. Distressed hedge funds as an entire industry are in in the decline phase which is funny because if you think about the most "distressed businesses", you think of retail or oil & gas etc., not the management companies of distressed hedge funds themselves.

  • Research Associate in HF - Event
Nov 24, 2020 - 3:37pm

I seriously worry what the next 5-years will bring for asset class absent a correction in HY spreads / equity markets, especially as all these asset classes become way more correlated than historically. My fund is mostly drawdown capital now and raised money earlier in the year that "bought at the bottom", but the forward opportunity set feels extremely dry and I can't find much stuff today (maybe I'm just lazy or too inflexible in how I think about total return opportunities).

Basically the only guys who feel there is a bunch of excess return to go are 2-3 personalities that do their marketing run on Bloomberg video every few months: Avenue's Lasry, Marathon's Richards and SVP's Khosla. Everybody else is concerned.

  • Analyst 1 in HF - EquityHedge
Nov 24, 2020 - 4:19pm

Can a bull case even be made for distressed over the next few years given the macroeconomic environment? Fed has basically pledged to keep rates at zero till 2023 earliest and has now set precedent during March to support corporate credit directly through ETF/fallen angel bond buying. They've even spoken of allowing an overshoot in inflation as long as the rolling avg stays below the target so an immediate hike post any >2% inflation is unlikely. Now Yellen is treasury secretary and has previously floated the idea of enabling the Fed to buy equities directly. Everything points towards Fed ensuring that financial/credit markets are adequately supported going forward for the near future. I don't really see a clear catalyst for a correction in spreads/equity markets (could just be me missing something). As you said people like Richards and Lasry show up on Bloomberg/Salt talks to do a marketing run where they often state that Fed solved for liquidity not solvency, but that just signals that the only opportunities left are industries in secular decline anyway. Even Josh from Canyon was on Salt talking about how a lot of the headline opportunities you hear about (Oaktree or any major group of funds priming other lenders) are for funds that already rode the loan down and are just trying to minimize the mark to market loss on the entire investment as a whole. 

Nov 24, 2020 - 6:08pm

I saved this down on 9/3:

MEMBER 70907

09:03:19 Its hilarious how much harder it is to make money in distressed (what we choose to look at) than it is to just blindly buy SPY and QQQ

MEMBER 36633

09:03:55 Just go to pivot and buy long-dated IG bonds

09:04:03 *got to

09:04:24 And short anything that can actually default like retail, energy, etc

MEMBER 57778

09:04:26 All you have to do is blindly buy QQQ or any FAANMG and you will have outperformed probably any HF

09:04:40 Don't even bother shorting, your max profit is only 100%

MEMBER 74980

09:05:16 TQQQ hedged with TMF was the trade

MEMBER 6241

09:05:26 Just say long TQQQ

09:05:29 stay

MEMBER 20533

09:05:31 27% tQQQ 27% upro 46% tmf

09:05:56 Couple of old retirees literally ran circles around the smartest quants, fundamental L/S equity and event-driven hedge funds for last decade

MEMBER 6241

09:06:02 Over the LT you'll get 40%+ per annum

MEMBER 2667

09:06:12 we're supposed to be generating "alpha" but practically speaking i think a big reason HFs "underperform" almost always is b/c the set of parameters that define "quality" return in "public" vehicles is just a bit stupid

MEMBER 90952

09:06:21 36633 - we should be shorting LQD here. Have you seen how the 10yr is moving. TLT and LQD are shorts here. Long HYG vs TLT makes sense here

MEMBER 2667

09:07:03 no one should prefer an 8% return with a sharpe of 2 vs. a 20% return with a sharpe of 1 if the market is doing 10%

MEMBER 20533

09:07:23 The biggest issue is we all fish out of a rotten pond. Instead of looking for actual good investments in other asset classes we are forced to decide "what level are we a buyer and seller at" on some crap that we don't know enough about but that we pretend we do

MEMBER 57778

09:07:39 +1

MEMBER 2667

09:08:43 somewhere along the line volatility became the definition of risk

09:08:52 instead of just being volatility

09:10:12 my point being buying the nasdaq under the current return "quality" parameters doesn't work, so investors go to other asset classes, but then compare them to the return on the nasdaq and ask why everyone is underperforming

09:10:22 its pretty stupid if you think abou tit

09:11:05 then they put money in PE to just hide the volatility

MEMBER 20533

09:11:10 What should the spread be between other asset classes (distressed, IG, real estate, PE) <-> "high quality public companies"

MEMBER 2667

09:11:19 and make the same return as an SPX fund

09:11:27 hahaha

09:11:38 on some level it is also very funny

MEMBER 20533

09:12:45 If that spread is now 1700bps to distressed, 500bps to PE etc, something is clearly going wrong in the other asset classes even if you decide its not appropriate to benchmark a 20% tech return to others

MEMBER 2667

09:13:37 1700 is what? spx? or nasdaq?

MEMBER 20533

09:13:43 N100

MEMBER 2667

09:14:13 yeah ... so that's growth equity these days, or what may have been defined as growth equity 10 years ago

MEMBER 97326

09:14:39 Oh nice, someone else running TQQQ/TMF?

MEMBER 20533

09:14:46 Growth and value are just labels, its just "good stock picking"

09:15:03 If you are a value guy who doesn't own growth you don't exist

MEMBER 2667

09:15:47 well my point being "high quality public companies" by that definition doesn't include most of the economic output of the country

09:16:01 nasdaq is basically tech

MEMBER 58645

09:16:16 Distressed cos decline while tech cos grow

MEMBER 2667

09:16:23 and i would expect tech to generally do a lot better

09:16:27 because of ^

MEMBER 58645

09:16:34 Using linear ev/ebitda mults doesn't work very well for growing or declining bizs

MEMBER 2667

09:16:36 distressed declines, tech grows

09:17:05 and the "good" businesses that used to go distressed don't really do so anymore because credit docs are so thin

MEMBER 20533

09:17:17 Exactly, its way more value to own FB when it IPO'd at "30x ebitda" even though some value guy screened it out because "i only buy under 10x"

MEMBER 2667

09:17:19 PE guys can keep their equity and ride through a cycle

09:18:06 we've had the worst year for travel ... ever? how many travel companies have filed?

MEMBER 25319

09:18:26 Thomas cooke?

MEMBER 97326

09:18:32 Nearly unlimited capital available for a secular growth story

MEMBER 2667

09:18:35 there are a ton of them that are PE owed and leverage on LTM in the high double digits

MEMBER 97326

09:18:51 Cruises fall under the secular growth umbrella

MEMBER 25319

09:18:53 There was a spanish cruise line

MEMBER 2667

09:18:54 thomas cooke was always going to file

MEMBER 45635

09:19:26 hah

09:20:10 Tui has had its flirtations

09:20:16 Hurtigruten

MEMBER 2667

09:21:41 yet neither has and tui bonds are trading in the 80s

MEMBER 45635

09:21:54 yet

09:21:59 Tui is a special case

MEMBER 2667

09:21:59 point is that you can count them on one hand

09:22:03 yes i agree tui

09:22:08 spent time onit

09:23:34 so where's the distressed return coming from if all the good companies don't file, and the only ones that do file are the ones the PE firms literally don't want anymore, not to mention they've usually filed after the sponsors have pulled some stunt to either leak a ton of value to themselves or add a bunch of additional leverage to extend a worthless option

MEMBER 97326

09:25:07 Meanwhile the real bubble is in the credit markets... HY bonds yielding under 3% is ridiculous

MEMBER 36633

09:25:20 There are no distressed returns. That's why the distressed model has to move towards a "stressed" or private lending model.

MEMBER 25765

09:25:32 the return coming from creditor on creditor violence

MEMBER 20533

09:25:52 Ah yes like when angelo primed some others on one deal then got primed on the next

MEMBER 45635

09:26:41 Or company on creditor violence with $55mm damages a la NMG?

MEMBER 56093

11:04:11 Well lets see what happens when rates sell off, lest see how long that 3% HY lasts

MEMBER 58645

11:05:09 If you got a problem with 3% hy let me introduce you to 150 over bbbs

MEMBER 20533

11:05:29 What's wrong with 3% hy

MEMBER 56093

11:05:43 Well there is no reason that AAPL or MSFT don't trade negative spread to treasuries

MEMBER 20533

11:05:49 Should I just go buy qqq instead

MEMBER 58645

11:05:51 3% hy is a spread game and you're clippin a heck of alot more duration adj than ig

MEMBER 56093

11:06:01 I'd rather own their bonds than govt bonds

MEMBER 37319

11:06:41 why is that

MEMBER 82303

11:07:15 disagree re: bubble in credit markets. spreads are not that tight by historical standards

MEMBER 56093

11:07:18 Well they make money haha

MEMBER 82303

11:07:47 could say there's a bubble in fixed income in general, but i don't think it's specific to credit

MEMBER 61346

11:08:10 In everything

MEMBER 56093

11:08:12 Spreads are pretty darn tight, but definitely if you compare to economic metrics like unemployment/gdp etc

11:08:15 Then they gotta be all time tights

11:08:37 Yeah it's all fixed income but we've had negative rates in other countries for a while now

MEMBER 13758

11:08:43 Spreads aren't that tight by any ratio to underlying treasury

MEMBER 82303

11:08:46 shared BloombergGRIB_2020082750921.gif41.94 KBShow Image

MEMBER 13758

11:08:51 In fact they look wide

MEMBER 58645

11:08:53 You know we look forward right?

11:09:00 I know credit loves its ltm leverage regressions

MEMBER 13758

11:09:47 Remember we have a -1.0% real rate and 170 inflation expections on 10 year

MEMBER 7336

11:09:50 Index composition has changed significantly tho

MEMBER 13758

11:09:53 Spreads don't look wide

MEMBER 82303

11:10:41 yeah in fact the index is higher quality than vs. historicals, and spreads still don't look tight

MEMBER 7336

11:10:51 Wat

MEMBER 20533

11:10:56 ??

MEMBER 7336

11:11:05 Index today not higher qual than a year ago

MEMBER 82303

11:11:17 much higher % BBs and public companies, less LBO debt

11:14:45 also less energy

MEMBER 56093

11:18:04 All the energy companies that were struggling pre covid are now money good

MEMBER 86183

11:20:14 Are you the covid is over guy

MEMBER 56093

11:22:37 Covid stimulates the economy

MEMBER 86183

11:22:58 I remember someone in here crying about SWN going to par

MEMBER 97326

11:23:16 Sure maybe it's not tight on a spread basis, but is there really no chance rates increase over the next 5-10 years?

MEMBER 56093

11:24:12 If the economy recovers at the rate that's priced into risk assets, rates have got to rise pretty dramatically

MEMBER 42128

11:24:39 No they don't

MEMBER 97326

11:25:57 Need inflation for rates to go up, seems unlikely we'll see any inflation (other than inflation in prices of risk assets)

MEMBER 82303

11:26:08 sad permabears

MEMBER 97326

11:26:36 I'm more bearish on credit than equities

11:26:43 Fairly bullish on equities

MEMBER 56093

11:27:01 Yeah same

MEMBER 2743

11:27:04 The party that reports inflation is the same party that needs to fund massive deficits via treasury issuance.  Hence no inflation, low rates and cheaper deficit funding costs

MEMBER 56093

11:27:09 Long stocks short credit I think is the trade

MEMBER 6241

11:27:37 The correlation between those two assets is very high though

MEMBER 97326

11:28:15 CDS on high yield is cheaper than the return from equities though

MEMBER 56093

11:29:04 Yeah, companies will file and recoveries will be low when they do

  • Research Associate in HF - Event
Nov 24, 2020 - 6:18pm

Wow that's so funny. Usually ignore that chat but generally agree with your highlights. Fishing out of a rotten pond.

Nov 24, 2020 - 8:25pm

So if the trajectory is generally seen as pretty poor, are there any suggestions for what type of fund might be able to do well with some of the characteristics that make a distressed fund interesting? What about funds which have the ability to invest "across the capital structure" (with just stressed bonds or even normal undervalued equity) so as to not solely be fishing out of this tough opportunity set?

  • Analyst 1 in HF - Other
Nov 25, 2020 - 2:03pm

Flex mandate seems like the move at this point. Anyone pursuing a distressed-only fund strategy is just not going to have enough quality opportunities to pick from

  • Research Associate in HF - Event
Nov 25, 2020 - 2:46pm

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Aut dolorum asperiores in. Veniam sit eveniet fugit sit. Possimus et omnis quisquam.

Nov 25, 2020 - 3:50pm

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