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| Claudio Phillips |
Claudio Phillips, senior managing director at The Seaport Group,has been trading fixed income assets for more than 20 years. He has traded everything from U.S. Treasuries to Emerging Market bonds/loans. After graduating from Harvard University with a degree in political science, he started at Citigroup in 1983, left in 1986 before returning in 1997 to start the first Latin American loan trading operation. After transferring over to the U.S. performing loans trading desk, he rose to become managing director and head trader at Salomon Brothers until mid-2002. After a near two-year sabbatical building houses for Habitat for Humanity of Westchester, Phillips joined Seaport in May 2004, where he has been running the bank loan trading desk, covering U.S. and international corporate credits. Here he discusses with LMW opportunities in Latin America, changes in the loan market and why traders hate to admit when they're wrong.
What type of plays does The Seaport Group get involved with?
The Seaport Group is focused on the distressed assets sector. While we have traded performing assets, our research capabilities and investor relationships are geared toward distressed equity and debt. We are able to trade the complete capital structure of a distressed credit including equity, senior and sub debt, litigation claims and trade claims, which makes us very unique.
Our research department also drives the type of business we generate. Last fall we sponsored a Post-Reorganization Equity Conference, which was well attended by the investor community. The eight stocks we recommended, as of last week, had returned over 36%. Seaport's structure allows us to focus on the markets with most trading potential. As the opportunities in distressed loans are more difficult to uncover, there may be other opportunities in the equity, bond or trade claim markets. And we are able to trade these assets with one phone call from/to our investors.
What opportunities do you see in this distressed market?
With default rates at recent all-time lows, opportunities in the traditional distressed loan market are scarce. At this point I still think that in the short run there are opportunities in the auto and auto-parts sector, airline lease sector, middle market companies and in Latin America. Further down the road, given the explosive growth of issuance in this sector, I see second-lien loans becoming extremely vulnerable in tighter credit and slowing economic scenarios.
Can you expand on why Latin America offers potential opportunity?
This is as much of a technical as it is a fundamental trade. With the scarcity of U.S. corporate assets available, funds are forced to look for alternative asset classes. The Latin American capital markets have, for better or worse, been through several recent credit cycles and thus have quite a variety of debt offerings, from new performing issues to long time distressed credits.
The size of the borrowings, going across pretty much all industries, is greater than those of the Emerging Markets in Europe. I'm sure there are exceptions, but as a whole, the economies of scale dictate that Latin America might provide more opportunity. We can't underestimate the geography either. We are within two hours, in the same time zone, thus making communication and information exchanges that much more viable.
Brazil and Argentina currently provide the most opportunities, again in terms of economies of scale. Telecoms and energy related companies are at the forefront, but there are also one-off opportunities in the private and public sectors of the smaller South and Central American countries. In addition, I have noticed an increase in the willingness of investors to take local currency risk by purchasing loans denominated in the borrowing companies' currency.
What are the challenges in Latin America for loan and bond trading?
For the most part in Latin America there's been an effort to modernize or reform bankruptcy laws, but I still think that the actual ability of a non-national financial entity to seize assets is going to be very limited. And at this stage recovery values will be limited to the willingness or need of borrowers to have access to the international capital markets as there is no real viable way to actually take control of a company or liquidate local assets.
What's the most interesting situation you've been involved with at Seaport?
Since I'm relatively new to the U.S. distressed game, trading in AEI Horizon was a quick introduction to the asset class! At The Seaport Group we followed it quite closely from both the research and trading side. From the original default and the loans trading down into the 20s and then through the restructuring process it was almost a case study. Watching the restructuring discussion over the newswires along with being in the middle of trading a coal-based asset during the run up of coal and oil, made this one of the more interesting stories of 2004.
What is the defining moment in loan trading that you have experienced?
Without a doubt, it is the exponential increase in secondary loan trading volume from 1996 to the present. This has created an effectively new asset class and has attracted a new type of investor.
Who is the best trader you have ever worked with?
When I was a young U.S. Treasury trader back in 1986, I worked with a bond trader who seemed he never lost money. Until I met him, I thought the best traders had to be right only 51% of the time to be successful. He showed me that you could be right less than 50% of the time as long as you rode your gains and cut your losses quickly.
Taking losses is difficult for many traders to do as that would be admitting they were wrong and boy do we hate admitting we are wrong!
How does working for The Seaport Group compare to working for Citigroup/Salomon Brothers?
They are two completely different dynamics. At Salomon, the loan group is one part of a very successful fixed-income financial platform, with the ability to facilitate both borrowers and lenders. There is the ability at most large banks to commit quite a bit of capital when appropriate. Here we use small amounts of capital on a very infrequent basis.
Due to the nature of the business of working at a smaller firm, there is a much more entrepreneurial focus as we do not have as many constituencies to answer to. We are able to realign our strategy more quickly as we are that much more flexible.
From Wall Street To Broadway
In the summer of 2002, Phillips was working at Salomon Brothers. It was a big year in loan trading and the business was growing. "Working with that group was a fantastic experience, both personally and professionally," Phillips said. "At that point however, I felt I had accomplished as much as I wanted as head trader." Wanting to give something to society, Phillips left Salomon to begin working with Habitat for Humanity of Westchester building affordable housing in Westchester County.
The combination of building affordable housing in the community and helping his wife, Betsy, more directly in raising his three children (Aemilia 11, Robertson 8 and Nicolas 5) for two years proved to be an extraordinary experience, Phillips said. This year alone Habitat has built four houses and will finish another 10 by the end of the summer. (Phillips urges anyone interested in volunteering to call him.) A high profile fund has already committed to build for three days this winter in Yonkers, beginning Jan. 28, he said.
Additionally, Phillips was able to rekindle his artistic interest. He had studied sculpture at Harvard and at the Florence Academy of Art. Using different mediums, he was able to cast sculptures of his children and various other pieces. "I realized then how great it was to take time off!" he said.
Without having any prior experience, Phillips also invested in a Broadway play, joining a syndicate to produce the multiple-Tony winning play Thoroughly Modern Millie. "It was great watching the play develop from the first rehearsal to opening night," he said. "Certainly, a much different world." His current venture involves backing a small, independent movie director producing a feature length movie for intended release in the fall of 2006.
