Accuride and Rule 2019

Last week, the Wall Street Journal ran an article entitled: "For Accuride Investors, a Big Payday: Big Bondholders Parlayed Position at Negotiating Table During Bankruptcy Into $132 Million Gain." (subscription required). A number of people emailed me the above article and asked me my thoughts on it. But first some background.

For those interested, the Accuride docket can be found here: Accuride bankruptcy docket

In April 2010 (docket #968), Dow Jones & Company (publisher of the WSJ) submitted a motion to unseal the Accuride's ad hoc note holder's groups Rule 2019 disclosures which at that point had been sealed. What is Rule 2019 you ask? From the same motion:

"Rule 2019(a) requires that unofficial committees or ad hoc groups disclose, inter alia, (1) the nature and amount of their claims or interests; (2) the date of acquisitions of their claims or interests acquired in the year prior to the filing of the bankruptcy case; (3) the amount paid; and (4) any subsequent sales of claims or interests."

In other words what / when they paid for certain securities...

Eventually, after objections from the ad hoc group, the judge ruled to release the 2019 disclosures. The below document is where all the details can be found:

1181_13449

There was a very interesting quote from the aforementioned Dow Jones motion to release the 2019 disclosures:

"Chapter 11 proceedings have emerged as the preferred venue for mergers and acquisitions, where private investors quickly buy, trade, and break up companies. These investors may attempt to force a company into bankruptcy."

What is this? Pretty Woman?

In the article mentioned above, another interesting quote emerged. This time from Deirdre Martini, a managing director at Wells Fargo Capital Finance and former U.S. Trustee:

"The evolution of distressed investing has made a mockery of the underpinnings of our bankruptcy process, which is total transparency," said Deirdre Martini, a managing director at Wells Fargo Capital Finance and former U.S. Trustee, the government watchdog for cases in federal bankruptcy courts. Chapter 11 was created decades ago as a way to give ailing companies a chance to fix their balance sheets and operations, and reimburse supportive creditors as much as possible, she said.

"The bankruptcy code's focus was never intended to garner profits for distressed investors," she said.

Now that I completely disagree with. Whether it be the blanketed releases the code has ALWAYS allowed to the 2005 changes which has made pre-packs basically inevitable, the code has been welcoming to investors with fresh capital to rehabilitate debtors and capture a profit on that investment. Do you truly think anyone is going to put up $140M of capital and expect a mid single digit return on that capital for a bankrupt company?

The WSJ quote above, as it relates to the bankruptcy as the preferred M&A route for investors - of course it is. Have you ever actually read the releases involved in a confirming disclosure statement and plan? No one is liable for anything. Furthermore, given the litany of legacy liabilities and trial lawyers that profit from any ailment under the sun, why would any investor pursue M&A OUTSIDE of the Chapter 11 process.

Yes - The purpose of Chapter 11 is to rehabilitate ailing companies. But ailing companies' securities trade at a significant discount to their healthy peers. Would you like me to buy high and sell low?

If anyone is to blame, blame the management teams. No where in the entire WSJ article does the author point to how well management teams have profited from Equity Incentive plans granting management teams anywhere from 6-15% of the post-re org company.

And because the code allows a company the exclusive right to file a plan for the first 18 months after the petition date, distressed investors HAVE to work with management teams and offer them a very large carrot to ensure their plan is accepted. Is this collusion at the expense of pre-petition junior creditors and equity holders? Not in my opinion. Remember - always look at the incentives of every party in an investing situation - It really can tell you a lot about how the chips will fall.

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Happy Holidays from Distressed Debt Investing

Hey everyone - Wanted to wish you all a wonderful holiday season. I will be back next Monday with many a post in hand. Happy holidays!

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Advanced Distressed Debt Concept: "A Gift"

As noted many times on this site, Chapter 11 cases are expensive. From paying $700-$1200/hour for senior lawyers, success based fees for financial advisors, and (in my opinion the most important) business issues such as loss of customers, suppliers, employees, etc costs start to add up. That being said, and because of certain 2005 changes to the bankruptcy code regarding exclusivity timing, more and more bankruptcies are going the prepack bankruptcy route. And to make sure things go smoothly, the creditors driving the show are offering a gift to possible dissenting classes to make sure the Chapter 11 proceedings go off without a hitch.

Last week, after all the hub bub of the Great Atlantic's bankruptcy filing, people seem to have forgotten that Insight Health filed for bankruptcy just a few days earlier. Here is the press release:

InSight Health Services Holdings Corp. (“Insight Imaging” or “the Company”) (OTCBB:ISGT.ob - News) today announced it had reached an agreement in principle with holders of a significant majority in aggregate principal amount of its outstanding senior secured floating rate notes due 2011 (the “Notes”) regarding a restructuring of the Notes. Insight Imaging has entered into a restructuring support agreement (the “Support Agreement”) with such holders (the “Supporting Holders”), which contemplates restructuring the Notes through a jointly agreed plan of reorganization to be filed with the bankruptcy court (the “Court”). The terms of such pre-packaged plan are set forth in a term sheet made part of the Support Agreement, but may be amended or modified in accordance with the terms of the Support Agreement (a “Qualified Plan”). The terms of the Qualified Plan contemplate an exchange of all of the Notes for all of the common stock of the reorganized Company upon exit from bankruptcy, resulting in the elimination of 100% of the Notes from the Company’s balance sheet.

The Support Agreement provides that the Supporting Holders will, among other things, vote to accept a Qualified Plan and support a debtor-in-possession financing facility (the “DIP Facility”). The Company is currently in discussions with Bank of America, N.A. (“Bank of America”), the administrative agent under its current revolving credit facility, regarding the DIP Facility. The Support Agreement will require Insight Imaging and certain of its subsidiaries to file a Qualified Plan with the Court, obtain a confirmation order from the Court and effectuate the Qualified Plan within the time-frames set forth in the Support Agreement.

Insight Imaging also announced that holders of greater than 75% of the principal amount outstanding of the Notes, the trustee under the indenture governing the Notes and the collateral agent under the security documents relating to the Notes have entered into an agreement to forbear from exercising their remedies under the Notes, the indenture and related security documents as a result of events of default arising from the November 1, 2010 interest nonpayment and the expiration of the applicable 30-day grace period. The forbearance period ends not earlier than December 10, 2010, by which time the Company expects to have filed a prepackaged plan of reorganization. Bank of America has also extended the forbearance period under the Company’s revolving credit facility, as amended, from December 1, 2010 to December 15, 2010.

Kip Hallman, Insight Imaging’s President and CEO, stated, “This restructuring is being undertaken to eliminate more than $290 million of debt, substantially improving our cash and liquidity position. We intend to complete the reorganization as quickly as possible. In the meantime, we will continue to operate our business as usual to provide quality services to our customers and our patients. We look forward to emerging as a much stronger business, with a capital structure that will enable us to maximize the long-term value of the company.”

For those interested, you can find the Insight Health bankruptcy docket here: Insight's Chapter 11 docket

As those in the distressed community will know, this will not be the first trip to the rodeo for Insight. From the disclosure statement:

On May 29, 2007, InSight Health Services Holdings Corp. and InSight Health Services Corp. Filed voluntary petitions to reorganize their business under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700) (the “2007 Reorganization”). The filing was in connection with a prepackaged plan of reorganization and related exchange offer. On July 10, 2007, the Delaware bankruptcy court confirmed InSight Health Services Holdings Corp. and InSight Health Services Corp.’s Second Amended Joint Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and InSight Health Services Holdings Corp. and InSight Health Services Corp. emerged from bankruptcy protection on August 1, 2007. Pursuant to the confirmed plan of reorganization and the related exchange offer, (1) all of InSight Health Services Holdings Corp.’s then existing common stock, all options for the common stock and all of InSight Health Services Corp.’s 9.875% senior subordinated notes due 2011, or senior subordinated notes, were cancelled and (2) Holders of InSight Health Services Corp.’s senior subordinated notes and Holders of InSight Health Services Holdings Corp.’s common stock prior to the effective date received 7,780,000 and 864,444 shares of newly issued common stock, respectively, in each case after giving effect to a one for 6.326392 reverse stock split of such InSight Health Services Holdings Corp.’s common stock.

While the reorganization attempted to deleverage InSight Health Services Holdings Corp.’s and InSight Health Services Corp.’s balance sheets and improve their projected cash flow after debt service, both still have a substantial amount of debt, which requires significant interest payments. As of September 30, 2010, the Debtors had total indebtedness of approximately $298.3 million in aggregate principal amount, including InSight Health Services Corp.’s $293.5 million in principal amount of Senior Secured Notes.

Looks like we have ourselves a good ole' Chapter 22 on our hands.

Who are the parties of interest here? Well we know a Plan Support agreement will have been filed in a pre-pack like this, so let's take a look at the disclosure statement and see what we can find. On page 494 - 496 of the PDF, one can see that J.P. Morgan's Credit Trading Group and affiliates of Black Diamond have signed the agreement. To give you a sense of how this bond has traded over the past few years, take a peak:

According to Trace (the graph above is based on Trace versus my message runs) there was a million + dollar worth of bonds traded on the 22nd of November. Alex Bea, a fantastic distressed debt trader from JPM who was the axe in this name, stoppped making markets sometime in October - thinking they got restricted and all that was left was sporadic runs from a number of brokers / dealers.

For the rest of this post, I will assume the bonds trade at 25 cents on the dollar. The allowed claim, according to the plan, of the Insight secured floaters is $293.5M with very little debt ahead of you in the capital structure. There has been a $15M DIP authorized which, according to the disclosure statement, will be rolled into a $20M revolving exit facility.

The disclosure statement also came with projections:

As you can see, the company plans to emerge with very little debt and a marginal cash balance. What does that mean for our bonds?

Insight Health has two direct publicly traded comps: Alliance Healthcare Services (AIQ) and Radnet (RDNT). Both stocks have had lackluster performance in the face of declining reimbursement rates in a predominantly fixed cost structure combined with hefty debt loads. According to Bloomberg, RDNT trades at 5.1x 2011 EBITDA and AIQ trades at 4.9x EBITDA. What does that mean for Insights bonds?

According to the projections, Insight looks to generate approximately $25M of EBITDA in 2012 (full year 2011 not really helpful given reorg costs). At 5.0x, this translates into $125M of value versus $293.5M of claims or 40 cents on the dollar - which at a purchase price of 25 gives us approximately a 25% IRR over 2 years. Not too shabby. Of course, if we haircut the multiple 1.0x turns reflecting the weaker mobile business of Insight, we get an IRR closer to 16%.

As we've talked about in previous posts, one really has to scrutinize projections. Why? Because management's incentive is to create a low valuation for the stock so their upside is greater. In Insight's case:

The Management Equity Plan will provide for a certain percentage of New Common Stock, not to exceed eight percent (8%) of the fully diluted New Common Stock, to be reserved for issuance as options, equity or equity-based grants in connection with the Reorganized Debtors’ management equity incentive program and/or director equity incentive program. The amount of New Common Stock, if any, to be issued pursuant to the Management Equity Plan, and the terms thereof shall be determined by the New Board on or as soon as reasonably practicable after the Effective Date.

The scrutiny of projections will be for another post. The question I am trying to address: If the floaters are going to make 16-25% in possibly artificially low projections and management is making off with possibly 8% of the company, what is happening to the equity? The equity is receiving a "gift".

You think I am using that term as slang. No, gentle reader, it really is called a a "gift":

Now what are the specifics of this gift:

• They are warrants to buy up to 2% of stock on a fully diluted basis
• Three year expiration
• Exercisable when enterprise value is greater than $215M

Exercisable when EV is greater than $215M? In 3 years?? $215M on the contemplated $25M of EBITDA is an 8.6x multiple. Or backing into the cash flow required on a more realistic 5.0x multiple, EBITDA would have to grow 20% a year for the next three years to reach $43M for these warrants to be in the money. In my opinion, highly doubtful.

If you had simply read that you were getting warrants for 2% of the company you may have been happy (albeit nearly a 99% drop in the stock) and have even considered getting long the equity in a spec play out of Gordon Gekko's playbook. But that gift is in all likelihood a donut to placate equity holders that just want SOMETHING. As I try to stress often on this site, I spend just as much time on the document side of things as I do looking at business and industry trends. Always read the fine print in distressed debt. It can save you many a land mines in the future.

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Great Atlantic Bankruptcy (GAP)

Before I begin, I need to correct something I wrote last night introducing the GAP bankruptcy: Rejected lease claims are unsecured claims in a bankruptcy. The GAP 2nd lien notes should be senior to these rejection claims. Chalk it up to lack to sleep. For you real bankruptcy buffs: 502(b)(6) of the Code sets damages at the greater of one year or 15% of the lease (not to exceed three years). Apologies on my part. Net/Net it helped the recovery of the bonds. To note, bonds are up 3-4 points today (went out the day 83-34/flat).

Now to the fun stuff: Great Atlantic announced its decision to file Chapter 11 in the Southern District of NY. To access the docket, you can go here: http://www.kccllc.net/APTea

Now, the DIP is definitely large - but the increased size is to account for taking out existing LOCs and pre-petition bank debt. The DIP will be structured as a $450M RC and a $350M term loan. Pricing is talked at L+750 with a 1.75% Floor. From the docket: "...to secure an $800 million debtor-in possession financing facility, consisting of (i) a $350 million term loan facility to refinance the Debtors’ prepetition senior secured credit facility and provide approximately $187 million in incremental liquidity and (ii) a $450 million revolving facility, including access to a $250 letter of credit sublimit and (b) grant adequate protection to the Debtors’ secured lenders." Essentially, this number was near the upper limit allowed under the pre-petition intercreditor agreement.

As noted in previous posts, one of the most important documents to get yourself associated with a new bankruptcy proceeding is the First Day Affidavit. You can find GAP's here: GAP's First Day Proceedings Affidavit.

A few interesting takeaways from the document:

• "The Debtors’ primary retail operations consist of supermarkets operated under a variety of well-known trade names, or “banners,” including A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors. As of September 11, 2010, the Debtors reported total assets of $2.5 billion and liabilities of $3.2 billion. The Debtors currently employ approximately 41,000 employees. "
• Points out three "significant legacy costs" - Dark store leases, an unfavorable supply agreement with C&S Wholesale (a high yield issuer itself), employee costs (pensions, high labor % of sales)
• LTM Revenue: $8.4B, down from $9.5B in 2008 and $8.8B in 2009
• LTM EBITDA and EBITDA Margin: $104M and 1.2% respectively, down dramatically from 2008 of $333M and 3.5% respectively.
• 95% of employees under collective bargaining agreements (39 separate agreements)
• Paid $1.4B for Pathmark in 2007
• "The Debtors’ estimated dark store net rental expense will be $77 million in 2011 alone."
• Cap Structure:
• 
• Sames Store Sales down 6.9% YTD
• Cost Savings Efforts Paying Off: "These initiatives have already generated total cost savings of approximately $40 million on an annualized basis, including over $10 million in annual salary savings"
• Really putting a lot of blame on C&S through this entire document.
• $858M of NOLs and $121M in business tax credits

Will be a very entertaining case. Interestingly a few months ago, one Distressed Debt Investors Club member pitched the second liens as a long (they were in the high 60s at the time) right when another member pitched the unsecured bonds as a short. Been a tough ride for 6.75% of 2012:

We will continue monitoring the GAP bankruptcy - think this one could get interesting.

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One of my favorite pieces of investing from Michael Price

Michael Price is a legendary investor and someone I try to learn from whenever I get the chance. I mean, this is one the guys that taught Seth Klarman how to invest capital. A few years ago, Michael Price gave a speech to Bruce Greenwald's Value Investing course at Columbia Business School. While I do not have the transcript directly in front of me, his words can be summarized as follows: "Read proxies and bankruptcy disclosure statements because they tell you what rational buyers are paying for businesses."

Now this is not theoretical data - i.e. this stock should trade at 6x or 9x - this is a real buyer, with real capital at risk, deploying that capital to buy a certain asset or company. And that information holds value and is very rarely discussed or even analyzed by the sell side.

For those that are interested on Bloomberg, you can make a macro to type in NSE "PREM14 A", and assign that macro to a button and have all the proxies filed at the tip on your hand. For disclosure statements, the process gets a little trickier - you have to monitor the docket to determine when the disclosure statement actually gets filed.

To be sure, many times this information needs to be sensitized relative to company specific factors. For example, I think it would be ludicrous to use most on the run proxy statements to value a distressed company in the same industry. Or if a company is heavily capital intensive versus an asset light company in the same industry - those companies should trade at different multiples because of the ability of the asset light company to better translate EBITDA into real tangible free cash flow. Make sure you are comparing apples to apples here.

Let's take a real world example: On Friday, Great Atlantic said it may file bankruptcy as soon as this weekend. Great Atlantic is always a hot topic among distressed investors. I know many people that bought near dated puts on the company thinking that any rescue effort would fall short. Seemingly it has. Rumors were swirling around the market on Thursday with bonds down 4 or 5 points on the session and then dropping further on Friday.

In January of this year, Penn Traffic, a regional grocer that has filed three times in the past ten years, sold substantially all its assets for $85M to Tops Markets. Here is the disclosure statement: Penn Traffic 2nd Disclosure Statement. According to the Affidavite of the Chief Restructuring Officer:

"Tops proposed a multifaceted transaction pursuant to which it would acquire a substantial number of stores as going concerns with commitments to employ the unionized workers at those stores, act as the Debtors’ liquidation agent with respect to underperforming stores to conduct going out of business sales and liquidate the merchandise in the Debtors’ closing stores, extinguish approximately $72 million of prepetition withdrawal liability claims which otherwise would have been asserted by one of the Debtors’ multi-employer pension funds, and consensually reduce by approximately $27 million the claim of the Debtors’ largest supplier."

Using $85M, and the 2009 financials, this represented ~0.1x revenue, 7.7x adjusted EBITDA. What does this mean for GAP?

• LTM Revenue is ~$8.5B. Using PTFC's multiple gets you to $850M valuation
• LTM EBITDA is $100M. Using PTFC's multiple gets you to $770M

***Note - I have edited this section for an error I made last night - score it at "Error - Lack of Sleep" for viewers at home***

But this is where things get tricky. GAP has talked about in previous conference calls there is a $100M cash flow loss from dark store rent. Seemingly in a bankruptcy they could get rid of these leases. There is ~$130M available outstanding on the term loan, ~$140M in cap leases, as well as a plethora of other claims: Long term real estate liabilities, pensions, etc.

Where does this leave us on our $260M of the 11.375% notes. Normalized EBITDA is probably somewhere between $150-$200M after adding back the lease losses. Using $150M and 7.7x multiple gets you to $1.15B in value. Less $130M in term loans, $140M in cap leases gets you to about $900M in value. But given how fast a grocer turns over its inventory as well as a large number of LOCs on the balance sheet, I believe a DIP here will be fairly substantial. For the last 4 years, accounts payable at the 4th quarter is around $200M, so I'll use that. We then have to add in admin expenses. I generally model 2-5% of total debt outstanding depending on the complexity of the case - I'll use 3.5% here which is another $50M of claims.

We are down to $650M in value versus our 11.375% notes. This leads me to believe these bonds are the place to play in the structure - I wish they were lower, but at 80 cents on the dollar, you are getting a decent (albeit possible inadequate) margin of safety here. Other reasons: The 2nd lien notes are guaranteed by the operating subs whereas all other debt (other than credit facility) is not. The bank debt looks to be money good here and seemingly the 11.375% quotes will be the fulcrum security.

We know we have any interested party here: Yucaipa is deeply involved here. Do they step up to take out the fulcrum security to gain control of GAP once and for all? Other things that keep me interested in this case: GAP has a number of brands they could sell to interested parties. While food deflation is all the rage among grocers, I believe this a temporary phenomenon. An investment in GAP's second lien notes may be one of the cheapest ways to play a wave of food inflation over the next few years. And remember, a rational buyer bought similar assets just 10 months ago at the 7.7x valuation - call them crazy if you think I shouldn't be using that multiple. We will continue to monitor this distressed debt case closely in the coming months.

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Updated List of Distressed Debt Hedge Funds

Thank you to all who helped me add a few names I missed on our list of distressed debt hedge funds. Some of you also suggested I sort the list alphabetically. Here is the new list of distressed debt hedge funds. If I missed anyone or you would like to be added to the list, please email me (hunter [at] distressed-debt-investing.com). Going forward, I will use this post to keep a list of all distressed debt / event driven hedge funds I come across, combining with linking these to relevant websites and 13Fs.

List of Hedge Funds Participating in Distressed Debt

1798 Global Partners

AAC GP LLC

Abrams Capital Management LLC

Advantage Advisers Multi Manager LLC

Advent Capital Management

AEGON USA Investment Management LLC

Ahab Capital Management LLC

Alcentra Inc

ALJ Capital Management

Anchorage Capital Partners LP / Anchorage Advisors LLC

Angelo, Gordon & Company

Apex Capital Management

Apollo Management

Appaloosa Management

Archview Investment

Ares Management LLC

Aristeia

Armory Advisors LLC

Arrow Investments Inc

Arrowgrass

Atalaya Cap. Mgmt.

Audax Credit Opportunities

Audax Group LP

Aurelius Capital Management

Aurora Resurgence Mgmt. Partners

Avenue Capital Group

Babson Capital Management LLC (David L. Babson & Co. Inc)

Basso Capital Management L.P

Baupost Group

Bay Harbour Management

Bayside Capital

Beach Point Capital Management LP

Beltway Capital

Bennett Asset Management Corp

Berens Capital Funds

Black Diamond Capital Management

Black River Asset Management LLC / CarVal Investors LLC (Cargill Inc)

BlackEagle Partners

Blackport Capital Fund

Blackrock

Blackstone Group

Blue Mountain Capital Management LP

Blue Ridge (Blue Water) Capital Management LLC

Blue River Asset Management

Blue Wolf Capital

BlueBay Asset Management

BlueCrest Capital Management LP

Bond Street Capital

Boone Capital Management

Brencourt Advisors

Bridgehampton Capital Management LLC

Brigade Capital Management

Brookfield Asset Mgmt.

Campbell GP

Camulos Capital

Candlewood Investment Group, LP

Canyon Capital Advisors LLC

Cape One Financial LLC

Cargill Value Invstmt

Carl Marks & Co.

Carlyle Strategic Partners

CarVal Investors

Caspian Capital

Catalyst Investment Mgmt.

Catalyst Partners

Caxton Associates

CDK Group

Centerbridge Capital

Cerberus Capital Management L.P / Madeleine LLC / Ableco Finance LLC

Cetus / Littlejohn

Chicago Fundamental

Citadel

Cohanzick Management LLC

Columbus Hill

Commonwealth Advisors Inc

Concordia Advisors LLC

Contrarian Capital Management

Corsair Capital Management LLC

Covalent Capital Partners

Courage Investments Inc

CQS

Creedon Capital Management (Creedon Kelly & Partners)

Cypress Mgmt

Cyrus Capital Partners

D.B.Zwirn & Co. L.P.

D.E.Shaw Group

Dalton Investments

Davidson Kempner Capital Management LLC (MHD Management Co. LLC)

DDJ Capital Mgmt

Deephaven Captial Management LLC

Deerfield Capital Management LLC  
Del Mar Asset Management 

Delaware Street Capital

Deltec Asset Management LLC

DKPR Wolf Point Mgm.t

DKR Capital Inc

Drake Mgmt.

Dreman Value Mgmt.

Drucker Capital

Dune Capital Mgmt.

Durham Asset Management

DW Investment Management, LP (Brevan Howard)

Eagle Rock Capital

Eight Capital Management Ltd

EJF Health Care GP LLC

Elliott Advisors

Endurance Asset Management LLC

EOS Partners

Epic Asset Mgmt.

ESL Investments Inc (Edward Lampert)

Eton Park Capital Management

Everest Capital LLC

Ewing Management

Fairholme

Falcon Point Capital

Farallon Capital Management LLC

Faxtor Securities BV

Fernwood Associates LTD

FH International Financial Services Inc

Fir Tree Partners

FirstCity Crestone, LLC

Forest Investment Management LLC

Forstmann Little & Co.

Fortress Investment Group LLC

Franklin Mutual Rec

FrontFour Capital Group LLC

Fulcrum Capital Mgmt.

Fundamental Capital Management LLC

Further Lane Securities

Gabriel Capital Corp

Gates Capital Management

Glenview Capital Management

GLG Partners, NA

Global Credit Advisors

Golden Capital

GoldenTree Asset Mgmt.

Goldman Spec Situations

Gores Group

Gracie Capital LLC

Gradient Partners

Gramercy Advisors LLC

Gramercy Capital

Gravity Partners LP

Greenhill Capital Partners

Greenlight Capital

Greywolf Capital Management LP

Gruss Asset Management

GSC Capital (Greenwich Street Capital Partners)

GSO Capital Partners LP

Guggenheim Investment Management

H Partners

H.I.G.

H2 Capital

Hain Capital

Halbis Capital Management USA Inc

Halcyon Partners LP / Halcyon Asset Management LLC

Harbert Fund Advisors

Harbert Management Corporation

Harbinger Capital Partners

Harbour Town Funding LLC

Harvest Management LLC

Havens Advisors LLC

Hayman

HBK Investments LP

HBV Capital Management

Helios Capital Management

Hicks, Muse, Tate & Furst Inc.

HIG Brightpoint Cap.

Highbridge Capital Management LLC

Highland Capital Management LP

Hudson Bay Capital Management

Huizenga Capital Mgmt.

IBS Capital Corp

Icahn Capital Corp.

Icahn Capital Corporation / Thornwood Associates LP (Controlled by Carl Icahn)

Insight Investments LLC

Intermarket Corporation

Invesco

Ivory Investment Management

J.H. Whitney & Co.

Jana Partners LLC

JLL Partners

JMB Capital

JP Morgan Asset Management

K Capital Partners

Karsch Global Credit

Katonah Scott's Cove Cap. Mgmt.

Kayne Anderson

KD Distressed Capital

Kellner DiLeo Cohen & Co., LLC

Kilimanjaro Advisors

King Street Capital Management LLC

Kistefos AS

KKR FINANCIAL Holdings LLC / Kohlberg Kravis Roberts & Co. LP

Knighthead Capital

KPS Special Situations Fund

KS Capital Partners

Lampe, Conway & Co. LLC

Latigo Partners LP

Laurel Ridge Asset Management LP / Laurel Ridge Partners

Leucadia Nat'l Corp.

Levco Debt Opps

Levine Liechtman Capital Partners

Lighthouse Investment Partners LLC

Linden Advisors

Litespeed Management LLC / Litespeed Partners LP / Litespeed Capital LLC

Littlejohn & Co.

Loeb Partners / Third Point Management

Lone Star Partners

Longacre Fund Management LLC

Longroad Asset Management

Luxor Capital

Lydian Asset Management

Lyster Watson

Maglan Capital

Magten Asset Management Corp

Marathon Asset Management LP

Marblegate Asset Management

Mariner Investment Group LLC (Caspian Capital Partners)

Marlin Equity Partners

Mason Capital Management

MatlinPatterson Global Advisors LLC / MatlinPatterson Capital Management LP

McDonnell Investments

Mellon HBV

MHR Fund Management LLC (Rachesky)

Mill Rock Investment Advisors

Millennium Global

Millennium Management

Millroad Partners

Mittleman Brothers Partners

MJ Whitman Mgmt Co.

Moab Capital Partners LLC

Monarch Alternative Cap.

Monomoy Capital

Moore Capital Management

Morgens Waterfall Vintiadis & Co. Inc

Moriah Capital Management LP

Mount Kellett Cap. Mgmt

MSD Capital

Mudrick Capital Management

New Generation Advisers

Newport Global Advisors

Normandy Hill Capital

North Run Partners

Oak Hill Capital Partners / Oak Hill Investment Managemetn LP

Oaktree Capital Management (OCM)

Och Ziff Capital Management Group LLC / Och Ziff Friedheim / OZF Management LLC

Octavian Advisors

Onex Corp. / Onex Capital Management LP

Onex Credit Partners

ORE HILL PARTNERS LLC

Outrider Management

Owl Creek

P. Schoenfeld Asset Management

Pacholder Assoc., Inc.

Pacific Altern. Ast Mgmt.

Pacific Capital Advisors

Pacificor LLC

Paige Capital

Panagaen Capital Management

PAR Investment Partners

Parallax Capital Partners LLP

Pardus Capital Management LLC

Patriarch Partners LLC

PAULSON & CO INC

Pegasus Investment Partners LP

PENN Capital Management Company Inc

Pequot Capital Management LLC

PERELLA WEINBERG PARTNERS CAPITAL MANAGEMENT

Perry Capital

Pershing Square Capital Management LP

Phoenix Investment Adviser

Pimco

Pine Creek

Pine River Capital Management

Pinewood Capital Partners

Plainfield Asset Management

Platinum Equity Capital Partners

PMI

Post / Beach Point

Principal Global Investors

Private Advisors LLC

Prophet Equity

Providence Equity

Pursuit Partners LLC

Quadrangle Group LLC (Quadrangle GP Investors LLC / Quadrangle Equity Investors Ltd / Quadrangle Equity Management LLC)

Quattro Global Capital LLC

Questor Management

QVT Financial LP

R2 Investment (Amalgamated Gadget LP / Q Investment)

R3/Blackrock

Radius Partners

RAMIUS Capital Group (RCG)

Redwood Capital

Relativity Fund

Remedial Capital

Resolution Partners

Restoration Capital Management LLC

Resurgence Asset Management

Resurgence Corp. Fund

RMBS Management LLC

Royal Capital Management

SAC Capital Advisors LLC (Sigma Captial Management LLC)

Sabretooth Capital

Salisbury Capital

Sandell Asset Management Corp.

Sandler Capital Management

Sankaty Advisors LLC

Satellite Asset Management LP

Saybrook Capital

Schultze Asset Management LLC

Scoggin Capital Management LP

Scott's Cove Capital Management LLC

Seix Investment Advisors

Senator Investment Grop

Seneca Capital Advisors / Seneca Capital Investments LP

Shenkman Capital Management Inc

Sierra Liquidity Fund

Signature Cap. Partners

Silver Lake Financial

Silver Point Capital

Simran Capital Management LLC

Smith Management / Alden Global Capital

Solus Alternative Mgmt.

SOROS Fund Management

Soros NY

Southpaw Asset Management

Spectrum Asset Management

Spring Street

Stairway Capital Advisors

Standard General Mgmt.

Stanfield Capital Management

Stark Investment LTD Partnership

Steel Partners

Stone Harbor Inv. Ptnrs

Stone Lion

Stone Tower

Stonehill Capital Management LLC

Stony Lane Partners

Strategic Value Partners LLC

Summit

Sun Capital Partners Inc

Sunrise Partners LLC

TA Mckay & Co.

Taconic Capital Partners (Taconic Capital Advisors / Taconic Capital Management)

Tålamod Asset Management

TCW Group Inc (TCW/Crescent Mezzanine LLC)

Tennenbaum Capital Partners LLC

TENOR CAPITAL MGMT COMPANY LP

The Broe Companies

The Carlyle Group / Carlyle Investment Management LLC

The Occasio Fund LLC

Third Avenue Management LLC

Thomas H. Lee Partners

Tiburon Capital Mgmt.

Tontine (Capital) Partners LP / Tontine Associates LLC

Toscafund Asset Management

TPG Capital LP (Texas Pacific Group)

TPG Credit Management

Tradewinds Investment Management

Treadstone Group

Triage Capital Management LP

TRICADIA CAPITAL LLC

Trilogy Capital

Trust Co. of the West

Tuckerbrook

Tudor Investment Corp.

Turnberry Capital Management LP

Tyndall Partners

Valinor Capital Partners, LP

Van Kampe

Varde Partners, Inc.

Vector Capital

Venor Capital Management LP

Ventura Capital Management LLC

Versa Capital Management

Viking Global

Visium

VR Group

W.L. Ross & Co. Inc

W.R. Huff Asset Management Co. LLC

Warburg Pincus LLC

Washington Corner Capital Management

Water Tower Capital

Watershed Asset Mgmt.

Wayzata Investment Partners LLC

Wellington Management Co. LLP

Wellspring Capital Management LLC (Wellspring Capital Partners LP)

Welsh, Carson, Anderson & Stowe (WCAS)

Wexford Capital LP

Whippoorwill Associates, Inc.

Whitebox

Wilfrid Aubrey LLC

William E. Simon & Sons

Wingate Partners

Wintergreen

Woodside Management

York Capital Management

Z Capital Partners LLC / Z Capital Management LLC

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High Yield Strategy: Expectations for 2011

As most of you know, I spend a large portion of my time investing in the high yield asset class. This has been a fruitful effort this year with high yield return about 13% this year. A lot of this performance was due to the tightening of the treasury curve (10 year treasuries returned about 10% this year). High yield spreads are at 600bps now, starting the year 650bps. All returns are not made equal and our call on investing in the cross over space has outperformed on a total return basis.

With that said, I always like to look at what strategists are saying for next year. This year the returns expectations are in a fairly tight range with a few outliers. For example, Banc of America is forecasting total returns of 10.3% for 2011. JP Morgan is forecasting an 8% return. And Barclays is projecting a 5-6% return.

While I am not a top down kind of guy, it is important to remember some of the factors that will contribute and detract from total returns next year:

• Assumptions of default rates
• Treasury curve
• Prices and call prices
• Relative value
• X Factors

Let's take a look at these in turn.

Assumption of Default Rates

High yield and leverage loan strategist use the forward looking default rate and recovery rate assumptions to make total return forecasts of the respective asset classes for next year. This year bonds and loans defaulted at a rate of about 2% and 3% respectively by count (versus by par amount which is lower for both high yield and leveraged loans). The consensus for next year among the various strategist is 1-3% for both asset classes - with most experts forecasting bonds to have a lower default rate versus loans.

As most people in the credit markets are aware, the 2011 maturity schedule is scant. In 2011, approximately ~$50B of high yield bonds mature as well as ~$20B of leveraged loans. To give you a sense of that relative size, there has been over $280B of new issue activity this year (all time record). Even in the doldrums of 2002 and 2008, high yield did over $50B in supply.

While there is always a chance that liquidity dries up dramatically because of some exogenous event (terrorism, massive fraud, etc - see X Factor section), I too believe default rates will be low next year. I also believe that recovery rates will be lower than expected on the gut feel that if a stressed issuer has not refi'd into the ridiculous supply we've seen this year, the business must be horrible to begin with.

Treasury Curve

As can be seen from returns this year across fixed income products, the treasury curve is one of the most important variable to look at when calculating forward looking returns. I may have missed one or two strategies in my research of the bulge brackets, but consensus across Wall Street is for an increase in treasury rates across the curve. And this is important because as coupons for high yield have decreased and maturities have extended, duration has increased. We are looking at some of the lowest coupons across the rating spectrum as well as the steepest credit curves I can remember - the curve definitely matters more today than in most previous cycles.

The chance of a Fed increase is quite small throughout the year. Using FFIP on Bloomberg, one can see that for the November 2011 Fed meeting, there is a 26% chance of an increase to 50bps, a 7% chance of an increase to 75bps, a 45% chance of no change, and a 21% chance of a decrease to 0.

With that said, if market participants start to see inflation expectations begin to pick up in CPI, PPI, etc the treasury curve will rise. If you look at what makes up CPI you can get a good sense that numbers will start to tick higher. Let's go through them:

• Food ~ 15% of basket. Food deflation is the talk of the town among grocers though expectations are for normalization next year. Let's call it flat.
• Housing ~ 42% of basket with OER being a large portion of that with the balance going to utilities. Listen to most of the apartment REITs and they will tell you they have regained pricing power in all but the worst areas. Utilities definitely going higher. Housing costs going up.
• Apparel ~ 4%. Look at cotton. Definitely going higher after 10 years of apparel deflation.
• Transportation ~ 17%. Made up of vehicles and fuel. Vehicle prices probably going higher. Fuel more than likely going higher.
• Medical Care ~ 7%. Don't even need to explain - going higher.
• Recreation ~ 6%. This is a catch all for many categories. I'll call it flat.
• Education ~ 6%. Definitely higher.
• Other goods (tobacco + personal care) ~ 3%. Tobacco higher, personal care flat.

Just looking at that list you can see CPI will be higher. And I have a sneaking suspicion that even in spite of very high unemployment rates, you will see wages go higher. And let's not forget the ballooning of the Fed balance sheet or that M2 which was growing at 1% per year in March of 2010 is now growing at over 3%.

So I agree with the strategies - in my opinion in spite of the Fed holding tight, treasury rates will increase across the curve.

Prices and Call prices

About 9 out of every 10 bonds issued in the high yield market have call protection schedules. And according to a recent Banc of America piece that average price at which high yield bonds are callable today is 104. Currently, the average high yield bond is trading slightly less than par (it had gotten to as high as 102) so this call schedule theoretically should act as a speed bump for returns.

The current yield in the high yield market is about 7.8%. With that said, I think it is a stretch to think that the entire high yield market will trade to 104 without another leg down in the treasury curve which as mentioned above, we do not believe will happen.

Higher dollar prices also imply higher losses in defaults. As the market starts to look out to 2013 and 2014 where maturities are a serious issue it is my opinion that prices will begin to decline. But that is more of a early 2012 factor.

Relative Value

One reason I can get bullish on high yield is the fact that it's one of the best yielding asset classes in a sea of incredibly tight rates. Investment grade is getting ridiculous, municipals, in spite of recent weakness, are still tight (and have serious fundamental factors against it), EM debt is at an all tight low, bank debt is marginally attractive if not for the nearly free call option on rates, ABS (outside of CLO paper) is too tight, RMBS and CMBS are very attractive in some instances, but still on the whole, not terrible enticing.

With that said, on a daily basis I wear two hats: total return and spread products. Some of the money I help manage has to be invested (think insurance and pension money). In these accounts, I think select, high quality high yield with some positive tail events (make whole premiums, early take outs, no LBO risk) are the place to play. On a total return basis, not so much.

X Factors

Things like European sovereign woes, more failure of Congress to get their issues in order (How can I be writing this in the December and still not know what my tax rate will be next year), municipal budgets, terrorism risk, mortgage put backs, China currency and interest rate policy, etc. Hard to handicap some if not all of these. Seth Klarman has always talked about "disaster insurance." That is definitely the best way to play these. Yes you lose a small bit of performance if nothing happens, but if things get really bad, your 2011 returns will outperform.

Another thing I'll lop into X Factor are the animal spirits that have pervaded high yield and credit products in general in 2010. All time high in new issuance. This causes me to be very cautious putting money to work - call me contrarian if you must.

All in All

Low default rates combined with higher rates and probably flat spreads gets me to a 6-8% return for high yield in 2011. If I had to pick a number I feel like closer to 6% because inevitably one of those X Factors will show up (let's hope its not my tax rate going up). Here's to hoping.

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Distressed Debt Hedge Funds

This week, I was sent a paper by Jongha Lim, a PHD student at Ohio State, entitled The Role of Activist Hedge Funds in Distressed Firms. In my opinion this is one of the best academic papers addressing distressed debt and distressed debt investing this year. I reached out to Jongha and we will be doing an interview with him in the coming weeks. Fascinating piece of work.

With that said, Jongha compiled a list of all funds participating in distressed debt and he is allowing me to use his data here. And if you would like to add yourself or another name to the list, please email me.

Cerberus Capital Management L.P / Madeleine LLC / Ableco Finance LLC

Oaktree Capital Management (OCM)

Angelo, Gordon & Company

Highland Capital Management LP

Appaloosa Management

Silver Point Capital

D.E.Shaw Group

Loeb Partners / Third Point Management

R2 Investment (Amalgamated Gadget LP / Q Investment)

Avenue Capital Group

Fortress Investment Group LLC

GSC Capital (Greenwich Street Capital Partners)

Citadel Investment Group LLC

Farallon Capital Management LLC

Stanfield Capital Management

Apollo Management

Ares Management LLC

Black Diamond Capital Management

Contrarian Capital Management

Elliott Associates LP

MatlinPatterson Global Advisors LLC / MatlinPatterson Capital Management LP

Satellite Asset Management LP

Sankaty Advisors LLC

W.R. Huff Asset Management Co. LLC

Harbert Management Corporation

Icahn Capital Corporation / Thornwood Associates LP (Controlled by Carl Icahn)

Taconic Capital Partners (Taconic Capital Advisors / Taconic Capital Management)

TUDOR INVESTMENT

Harbinger Capital Partners

AEGON USA Investment Management LLC

Bear Stearns Asset Management Inc

Blackstone Group

Davidson Kempner Capital Management LLC (MHD Management Co. LLC)

DDJ Capital Management LLC

Everest Capital LLC

LoneStar Partners LP

Mariner Investment Group LLC (Caspian Capital Partners)

SOROS Fund Management

Stark Investment LTD Partnership

Baupost Group LLCMA

Third Avenue Management LLC

Magten Asset Management Corp

SAC Capital Advisors LLC (Sigma Captial Management LLC)

Oak Hill Capital Partners / Oak Hill Investment Managemetn LP

Anchorage Capital Partners LP / Anchorage Advisors LLC

Babson Capital Management LLC (David L. Babson & Co. Inc)

Canyon Capital Advisors LLC

The Carlyle Group / Carlyle Investment Management LLC

ESL Investments Inc (Edward Lampert)

Fir Tree Inc

GSO Capital Partners LP

Halcyon Partners LP / Halcyon Asset Management LLC

Jana Partners LLC

KKR FINANCIAL Holdings LLC / Kohlberg Kravis Roberts & Co. LP

Marathon Asset Management LP

MHR Fund Management LLC (Rachesky)

Moore Capital Management

Och Ziff Capital Management Group LLC / Och Ziff Friedheim / OZF Management LLC

Onex Corp. / Onex Capital Management LP

Patriarch Partners LLC

PENN Capital Management Company Inc

Perry Capital LLC

Plainfield Asset Management

Sandell Asset Management

Seneca Capital Advisors / Seneca Capital Investments LP

Stonehill Capital Management LLC

TCW Group Inc (TCW/Crescent Mezzanine LLC)

Turnberry Capital Management LP

Varde Partners Inc

W.L. Ross & Co. Inc

Wayzata Investment Partners LLC

Fernwood Associates LTD

Harbour Town Funding LLC

HBK Investments LP

Welsh, Carson, Anderson & Stowe (WCAS)

Hicks, Muse, Tate & Furst Inc.

PAR Investment Partners

Oak Hill Advisors LP

1798 Global Partners

Abrams Capital Management LLC

Ahab Capital Management LLC

Bay Harbour Investments Inc

Bennett Asset Management Corp

Black River Asset Management LLC / CarVal Investors LLC (Cargill Inc)

Catalyst Investment Management Co LLC

Cohanzick Management LLC

Commonwealth Advisors Inc

Delaware Street Capital

Dune Capital Management LP

Durham Asset Management

Forest Investment Management LLC

Gabriel Capital Corp

Gracie Capital LLC

Gramercy Advisors LLC

Greenlight Capital Inc

Greywolf Capital Management LP

Harvest Management LLC

Highbridge Capital Management LLC

King Street Capital Management LLC

Latigo Partners LP

Laurel Ridge Asset Management LP / Laurel Ridge Partners

Litespeed Management LLC / Litespeed Partners LP / Litespeed Capital LLC

Longacre Fund Management LLC

Mason Capital Management

HBV Capital Management

ORE HILL PARTNERS LLC

Owl Creek Capital

Pershing Square Capital Management LP

Quadrangle Group LLC (Quadrangle GP Investors LLC / Quadrangle Equity Investors Ltd / Quadrangle Equity Management LLC)

RAMIUS Capital Group (RCG)

Scoggin Capital Management LP

Strategic Value Partners LLC

Sunrise Partners LLC

Tennenbaum Capital Partners LLC

TPG Capital LP (Texas Pacific Group)

Triage Capital Management LP

Trilogy Capital LLC

Venor Capital Management LP

Wellspring Capital Management LLC (Wellspring Capital Partners LP)

Wexford Capital LP

Wilfrid Aubrey LLC

York Capital Management

Z Capital Partners LLC / Z Capital Management LLC

Tontine (Capital) Partners LP / Tontine Associates LLC

Morgens Waterfall Vintiadis & Co. Inc

Pacificor LLC

QVT Financial LP

Sandler Capital Management

J.H. Whitney & Co.

Quattro Global Capital LLC

Wellington Management Co. LLP

Warburg Pincus LLC

Forstmann Little & Co.

Thomas H. Lee Partners

Lydian Asset Management

Creedon Capital Management (Creedon Kelly & Partners)

Kistefos AS

Dalton Investments

Deerfield Capital Management LLC

Greenhill Capital Partners

Mittleman Brothers Partners

Toscafund Asset Management

Blue River Asset Management

AAC GP LLC

Advantage Advisers Multi Manager LLC

Alcentra Inc

Apex Capital Management

Armory Advisors LLC

Arrow Investments Inc

Audax Group LP

Aurelius Capital Management

Basso Capital Management L.P

Beach Point Capital Management LP

Berens Capital Funds

Blue Mountain Capital Management LP

Blue Ridge (Blue Water) Capital Management LLC

BlueBay Asset Management

BlueCrest Capital Management LP

Boone Capital Management

Brencourt Advisors LLC

Bridgehampton Capital Management LLC

Brigade Capital Management

Campbell GP

Camulos Capital

Candlewood Partners LLC

Cape One Financial LLC

Carl Marks & Co.

Caxton Associates

CDK Group

Concordia Advisors LLC

Corsair Capital Management LLC

Courage Investments Inc

DB

D.B.Zwirn & Co. L.P.

Deephaven Captial Management LLC

Deltec Asset Management LLC

DKR Capital Inc

Eight Capital Management Ltd

EJF Health Care GP LLC

Endurance Asset Management LLC

EOS Partners

Epic Capital Management

Eton Park Capital Management

Fairfield Greenwich Advisors LLC

Falcon Point Capital

Faxtor Securities BV

FH International Financial Services Inc

FrontFour Capital Group LLC

Fundamental Capital Management LLC

Further Lane Securities

Gates Capital Management

Glenview Capital Management

GLOBAL CREDIT ADVISORS

Gravity Partners LP

Gruss Asset Management

Guggenheim Investment Management

Halbis Capital Management USA Inc

H Partners

Harbinger Capital Partners

Havens Advisors LLC

Helios Capital Management

Hudson Bay Capital Management

IBS Capital Corp

Insight Investments LLC

Ivory Investment Management

K Capital Partners

KS Capital Partners

Kellner DiLeo Cohen & Co., LLC

Kilimanjaro Advisors

KS Capital Partners

Lampe, Conway & Co. LLC

Levine Liechtman Capital Partners

Lighthouse Investment Partners LLC

Lyster Watson

Marblegate Asset Management

Millennium Management

Moab Capital Partners LLC

Moriah Capital Management LP

MONARCH ALTERNATIVE CAPITAL LP

Monomoy Capital

New Generation Advisers

OCTAVIAN ADVISORS LP

Outrider Management

P. Schoenfeld Asset Management LLC (PSAM)

Pacific Capital Advisors

Parallax Capital Partners LLP

Pardus Capital Management LLC

PAULSON & CO INC

Pegasus Investment Partners LP

Pequot Capital Management LLC

PERELLA WEINBERG PARTNERS CAPITAL MANAGEMENT

Pinewood Capital Partners

Private Advisors LLC

Pursuit Partners LLC

Redwood Capital

Restoration Capital Management LLC

Resurgence Asset Management

RMBS Management LLC

Salisbury Capital

Schultze Asset Management LLC

Scott's Cove Capital Management LLC

Seix Investment Advisors

Shenkman Capital Management Inc

Sierra Liquidity Fund

Simran Capital Management LLC

SOLUS ALTERNATIVE ASSET MANAGEMENT LP

Southpaw Asset Management

Sun Capital Partners Inc

TENOR CAPITAL MGMT COMPANY LP

The Occasio Fund LLC

Tradewinds Investment Management

TRICADIA CAPITAL LLC

Tuckerbrook

Ventura Capital Management LLC

VR Group

Washington Corner Capital Management

Whippoorwill Associates, Inc.

William E. Simon & Sons

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