Profile on Distressed Debt Fund Canyon Partners

Last week, Bloomberg has penned an amazing piece on Canyon Partners. I know a few of the analysts at Canyon Partners and it really is an amazing organization. Canyon is and has been involved in a number of very high profile bankruptcies in the past years. Off the top of my head, they are / have played Lehman Brothers (through the Paulson Group), Tribune, Americredit, Charter, Univision, and many others. From looking at their 13F, they were involved in CIT and Spansion on the post - reorg side.

One quick point: I have respect and know a number of people that have come off the Drexel desk (Founds of Canyon Capital: Mitch Julis and Josh Friedman are former Drexel guys). For whatever its worth, in my opinion, if Mike Milken wasn't burned at the stake and barred from the securities industry, he would be one of the world's wealthiest investors with capital accumulated on par with (dare I say it) WEB.

In addition, to the Bloomberg piece, I have found the Value Investor Insight article on Mitch Julis of Canyon Capital on the web:

http://www.valueinvestorinsight.com/March06trial.PDF

Here are some of my favorite quotes from the VII interview:

"The credit culture of Drexel gave me an important way to frame investment opportunities. The idea is to combine a full understanding of whether a company will be able to pay back its obligations, in sort of a ratings-agency sense, with a focus on whether the company has a business model or competitive advantage that builds long-term value. Drexel was unique in looking at credit quality this way and we think it’s a great way to think about any investment in a business"

So often today I still find that many high yield and credit guys could care less about the business quality. While it is a different game in the sense that the "cigar butt" strategy is more viable in a restructuring, some of the best performing post-re org opportunities comes from great companies with terrible capital structures that happen to have maturities / covenant defaults at the wrong time.

On selling:

"We grew up in an environment at Drexel where the head trader always reminded us that you never went bankrupt by taking a profit. We’re not immune to the common mistakes of being overly risk averse on winning positions by not letting them run and taking on excess risk with losing positions by holding on.

We’ve gotten better at letting our winners run. Part of that comes from really understanding what we’re betting on. Say you bought something at $5 that’s now at $20. If $15 of that $20 is just the cash the company has accumulated since you bought in, the bet on the future business is still only $5. Absent a change in your thesis, why would you sell in a case like this just because you’ve already made a bunch of money"

As most value investors contend, I believe that selling is the hardest part of this business. To me, it really stems from the behavioral concept of anchoring. What I mean is when I look at a position, I will do my initial work and come up with a valuation of a security. I am then anchored to that valuation. And because we are intelligent, yet biased species, it is hard for me to get beyond that anchor even if the business prospects have improved dramatically. I think one antidote is consistently updating your numbers and your thesis based on a set of conservative assumptions. If you valued the business at 10x cash flow a year ago, you would be hard pressed to tell me that business is worth 20x cash flow today. 12x cash flow would not be out of the realm of possibilities if the company was spending its capital more wisely, or gaining market share, or permanently reducing costs.

By the way, before I conclude, during the interview Mitch Julis mentioned he was writing a book: "Beyond Graham and Dodd: A Multi-asset, Multi-strategy Approach to Value Investing" Says it is unreleased...can someone maybe nudge Mitch to get this done. I'll buy the first ten copies to get the orders started! :)