This has been an especially good year for hedge funds that specialize in credit related strategies, and Greenwich, Connecticut-based Silver Point Capital is no exception.
The firm, founded in 2002 by Goldman, Sachs alums Edward Mulé and Robert O’Shea, told investors it was encouraged by central banking actions and what it deemed to be attractive investment opportunities. The firm manages $7 billion two funds: Silver Point L.P., which is up 19.5 percent through the end of November, and Silver Point Offshore Ltd., up 15 percent.
Credit-focused hedge funds have been on a tear in 2012. The median credit hedge fund was up 8.15 percent through October, according to the Absolute Return index of credit hedge funds, and data provider eVestment Alliance points out that November was the tenth straight profitable month for the strategy. And we earlier pointed out that LibreMax Capital, co-founded by Greg Lippmann and Fred Brettschneider, was up more than 16 percent through the third quarter alone. Despite some concerns that the big gains in credit have already been made, managers from well-known credit shops BlueMountain Capital Management and Pine River Capital Management said at an investment conference last week that they think there will be plenty more opportunities in 2013.
Mulé and O’Shea agree. In its third quarter report, Silver Point told clients it lifted its net exposure throughout the three-month period, investing $1 billion in the third quarter alone in existing and new situations. “We have been bullish on the potential length of the cycle and number of liquidation opportunities since 2009, but even we have been surprised at the steady flow of opportunities,” the letter stated. The managers asserted that the cycle has been broader and longer than earlier ones because of global deleveraging at financial institutions thanks to government regulation and weak economic growth.
Silver Point’s three biggest winners through the first nine months were investments in the post-restructured equities of Delphi Automotive; paper issued by media company Granite Broadcasting, which is restructuring its debt; and investment bank Lehman Brothers Holdings, which is currently in liquidation.
In the third quarter alone, it also made money on the secured debt of Quinn Group, a multi-industry company, and from gaming companies Station Casinos and Caesars Entertainment. The firm also profited from liquidations at several companies, including MF Global, the futures and options trading firm formerly headed by Jon Corzine; automaker Chrysler Holdings; and Bernard L. Madoff Investment Securities LLC, the one-time broker/dealer (the firm’s investment arm was revealed in 2008 to be running the largest Ponzi scheme in history).
And if the global economy weakens, Silver Point expects to see even more attractive investment opportunities that it thinks will offer the kind of downside associated with debt investments but the upside more usually associated with equity investments.
“We believe weak global growth may cause some companies to be unable to meet financial targets and result in covenant breaches, refinancings, restructuring and bankruptcy opportunities,” the investor letter stated.
Entering the fourth quarter, the fund had devoted 27 percent of its assets to investing in the liquidations such as those at Lehman Brothers, MF Global, and Icelandic bank Glitnir, to name just a few examples. In fact, Lehman is its largest holding, at 8.29 percent of the fund’s net asset value.
Another 22 percent was invested in post-restructured equities, with the largest positions being Delphi Automotive, AIG, and Cooper-Standard, which makes automotive systems and components. Delphi and AIG were the fund’s second and third largest holdings, behind Lehman.
Silver Point invested 17 percent of assets in what it calls fundamental value — issues like YP Holdings, which produces the Yellow Pages for telecom companies; Granite; and HealthSmart Holdings, which offers certain types of health insurance products.
It also had 13 percent in what it calls restructurings — particularly Caesars Entertainment and Rotech Med, which provides home medical equipment — and another 15 percent in what it calls “other events” and 6 percent in what it calls “market transitions.”
Mulé previously spent 16 years at Goldman Sachs, where he headed Goldman’s distressed debt businesses along with O’Shea. He also previously headed or co-headed Goldman’s legendary special situations group, concentrating on distressed debt, and the Asian distressed-debt investing business. Prior to founding Silver Point, O’Shea retired from Goldman Sachs as the global head of the high-yield business unit after nearly 10 years at the firm.
