We have now had $14tn of worldwide stimulus. When you consider global GDP was $87tn last year this stimulus has made up for three years of no growth. Stimulus will not hit all parts and there is concern over the future viability of a large range of businesses. As we all know now the world will become bifurcated between winners and losers.
There seems to be a disbelief in the current rally and a feeling that the market is exhibiting cognitive dissonance over the longer-term impacts of this crisis. Hundreds of millions of people have suddenly found themselves out of work. As landlords, lenders, utilities etc., rightly, exhibit forbearance this may lead to further distress. The recovery from this deep recession will be complicated with cascading effects.
There will be a longer term move to stakeholder rather than shareholder capitalism. Corporates that survive will need a social licence to operate and be accountable to society first and shareholders second. There will now be possible cash requirements for all companies akin to banking Tier1 ratios as a means of solvency for subsequent storms.
I have spent a great deal of time over the last few weeks on calls with allocators and money managers discussing investment ideas and opportunities and there have been a few recurring themes to the calls:
• unprecedented opportunity set leading to bandwidth issues
• the potential opportunity set is primarily in credit as downside protection wanted
• increased complexity in special situations
• return to quality managed funds away from indexing
• more partnership capacity opening up
• renewed interest in niche alternatives
• expectation that the crisis will deepen in Q3/4
• expectation that temporary government intervention dries up
• extreme liquidity needs
• seeking of alternative sources of capital
Redemptions and performance have cut hedge fund industry assets by 6.4% to $496bn but seeing as c.66% of assets sit with c.6% of funds (Citadel, Millennium etc.) this will be the smaller funds at the margin that are affected. In this crisis the majority of hedge funds have proved they can both protect and redeploy capital. The target now for funds is to capture the crisis alpha in the coming recession.
It was interesting at the start of April that PIFS decided the best way for them to participate in the recent Carnival Corp liquidity raise was to buy 8.2% of the depressed equity. While this may turn out to be a good investment a “Warren Buffet-type” angle might have been to approach the company and fully underwrite its $4 billion 11.5% coupon first lien debt and secure a convertible right or equity warrants for free. This would, potentially, put them far higher up the creditor list should the worst happen and hugely improve gearing in a better scenario.
Like Carnival there will be many more companies generating zero revenue that have extreme liquidity needs. The depth and severity of this liquidity crunch is likely to worsen. Distress will continue post-Covid as the world gets used to a new normal.
At the same time, it is interesting that lending may be increasing globally but US banks are pulling away from European lending à la 2008. JPM has pulled away from an additional credit line to BASF and in the UK pulled out of the £324m debt and equity rescue package for SSP. GS did not get involved in the Daimler e12bn facility and BofA didn’t finance the Cineworld capital raise.
It is no surprise that companies are tapping existing commercial revolvers, securing new lines of credit, and even adding to existing debt capacity to outlast this crisis. I had a call with a senior PE partner last weekend, and they had drawn their RSFs with all their banking counterparts whether they needed them or not. Now c.80% of RSFs have been drawn so banks, whether they want to or not, will be compromised on further lending.
Alternative pools of capital are going to be more important and the opportunity unprecedented to structure deals similar to the Buffet-type investments.
Also, the strategies employed now will be loan to own, debt for equity, debtor in possession financing, litigation etc. and the instruments used will be CBs, reorganised equity, trade claims and equity derivatives. As always, the proper execution of this strategy requires a sophisticated investor with significant capital.
We are moving into an unprecedented deal rich environment. We are seeing a lot of deal flow at Ocean Wall and in a small break from tradition I am going to lay out some of those opportunities. Some we will help fund and some we will pass on. Contact me if you have any interest.
• A large European based event fund seeing annualised spreads at 75% on a sample of 55 deals raising more capital to deploy into this dislocation.
• A European special sits business looking to partner with an SWF to exploit the opportunity by matching significant capital with their expertise to originate and structure complex restructuring situations.
• A European distressed special sits fund which, while closed to new investments, is looking for a SWF to partner them to take advantage of this once in a lifetime opportunity utilising their expertise to originate and structure complex restructuring deals.
• A global distressed hotel fund. They have $900m committed and are looking for approximately $500m more. Exponential projected returns from a fund operated by one of the world’s most experienced and successful international hotel management teams.
• A value driven US hedge fund with $30m capacity looking to take advantage of the dislocation in the Uranium mining sector via selective equities and private financings.
• A European Covid platform pursuing three projects to tackle the current and future pandemic outbreaks via drug repurposing, anti-viral spray and food supplement and pan-Coronavirus vaccine to deal with all future variations of Coronavirus outbreaks. Seeking e5m for 20% equity.
• A global long/short equity multi-portfolio manager fund running low net exposure combining the best of discretionary investing with bespoke trading technology, behavioural insights and performance analytics. Fund is +3.5% YTD with a Sharpe of 3.6 and open to capital.