| Gary Rodmaker |
Companies with free cash flow and strong asset coverage are important to Gary Rodmaker, managing director and portfolio manager at Cincinnati-based Summit Investment Partners. Rodmaker said there are a few common characteristics he looks for in companies. The first is positive free cash flow. "Companies that have free cash flow obviously have the wherewithal to repay you," he said. The firm also looks at companies with improving characteristics; companies that are reducing debt or have strong interest covenants. The third characteristic the firm looks for is strong asset coverage. "We prefer to lend to companies that have real assets. If things go wrong and they go into bankruptcy, you at least have something."
The firm also dedicates a portion of its portfolio to special situations. "We're not sure which way the high-yield market is going: up, down, sideways. But [for] the bigger company, investments will march to their own drummer." He cited United Airlines (UAL), which recently exited bankruptcy. The firm bought equipment trust certificates secured by the aircrafts after the bankruptcy occurred. "You're recovery goes up and down with the aircraft, not the [movement of the] high-yield market or interest rates going up and down."
Another name he cited is Calpine. The firm bought second-lien paper while the company was in bankruptcy and he said that regardless of how the bankruptcy goes or how the company does, "you [still] have a power generation plant you can go get if you want."
"We tend not to grab falling knives, we let them hit the ground first and then pick them up," he said regarding taking on risk. "It's been a market where you've been paid to catch a falling knife the last few years, but that's really not our style."
Rodmaker manages the Summit High Yield Bond Fund, which is up 9.37% for the year, about even with its benchmark. His benchmark is the Merrill Lynch High Yield Master Two. The high-yield fund has just under $25 million in assets, though Rodmaker anticipates it growing in size.
According to a press sheet, as of the third quarter, the high-yield fund has 50 holdings, with AES Corp. being the largest with 3.26%. Other top holdings include Loral Skynet and Ion Media Networks. Summit Investment Partners, established in 1986, manages in excess of $6 billion in fixed-income and equity assets.
