GoldenTree

Patently false.

I’ve personally found the largest difference between my job and my friends at the much larger shops is they typically look at many more names than me and have a better sense of relative value credit ie pricing risk at different spectrums. For a quick example, some of the best high IRR quick money trades this year have been the flurry of non call new issues high yield bonds that flooded the market at 8-12% that now trade at 110-130. That’s something my CIO doesn’t focus on, because it’s not our mandate, but the more I think about it, the more I wish it was part of our mandate or our firm became more flexible capital like Diameter or Nut Tree. More recently, which feels like pre-COVID, I just get tired of running the same screeners where it’s about 20-30 credits trading above 10% yield and I already know 25 of them are absolute shit while the other 5 we either already own or have done work on and just didn’t get there the first time with our founder and nothing has changed besides the opportunity list drying up for me.

Diameter is an interesting case study because they fundamentally follow the “Anchorage credit specialist” theme and know when to stretch themselves into high yield vs. into distressed land. They are currently hiring and from what my friend tells me who recently joined, it’s a pretty good setup. Given the ambitions of the founder and heritage of the fund, I wouldn’t at all be surprised if you see them as $20-30 billion manager 5-10 years out (they’ve been raising quite a few CDOs recently). Many of the biggest credit funds today followed a similar strategy of initially raising a single hedge fund that grows to $5-20 billion and then layering in new credit products (Drawdown/PE lock up vehicles, CDOs/CLOs, asset-backed/structured credit, private credit, illiquid credit, SMAs focused on specific asset class etc).

Regarding other large funds, Canyon also follows the look at all flavors of credit approach; will always be a lead steering committee member if/when they are involved like Oak Hill, Brigade and Goldentree would. DDJ is mostly a HY bond shop. Beach Point is interesting, I haven’t run into them or seen them come up in steering committees as much as the others so not too sure (maybe a good thing that they avoided bad investments on purpose? who knows). You’d be surprised how flexible the Sixth Street mandate is when you run $50 billion and raised much of that through locked up PE-fee style funds (TAO flagship is good example) that can invest freely between private and public credit, it avails them a lot of flexibility. Think they were one of the largest holder driving Neiman though that turned out to be a turd. I also didn’t think much of the platform until I realized their return profile, fee structure and how big they’ve become.

Spot on. I would even say 10-20% IRR type trades are preferable (and would still be a successful outcome given averaging high single digit returns is considered very good these days). Investors generally prefer this type of trade because downside protection is much better. People need to realize that a bond at 15c that can potentially 2x or 3x is almost always an instrument that is generally an out of the money subordinated claim (or whose value is purely litigation driven) whose base case is probably zero or something de minimis - basically it’s a call option. It just doesn’t fit with most funds’ mandate of downside protection and therefore will only comprise a small part of the portfolio. Also, these tend to be illiquid or with very small market value outstanding, so even if you did think it was very attractive, you couldn’t actually invest much $ into the situation as a large fund.

Also, a bond trading at 50c that could go to par is fundamentally just an equity bet, and often a levered equity at that (if it’s a 2L or unsecured bond and you have a lot debt ahead of you). I’m generalizing here, but if it’s trading at that level, the market is already trading it on equity / recovery value, or saying downside is extremely bad if it isn’t refinanced. Yield is usually irrelevant in this context. It’s really no different than trying to catch a falling knife in actual levered equities in most cases. Sometimes it works, usually it doesn’t. The important thing to realize is that the market in distressed is very efficient, and if it’s trading at 50c it usually should be. 

Something at 70-80c that can go to par is typically a sweeter spot for actual dislocations and mispricings because many times these investments  can be underwritten  as being credit risk rather than equity risk, with a margin of safety on business risk and value beneath you, as well as other credit elements such as capital structure related catalysts. Obviously many of these trades fail too, but it has tended to produce the more interesting opportunities in recent years.