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| David Hinman |
Hinman joined Los Angeles-based Ares Management in March as a portfolio manager from Pacific Investment Management Co. Ares manages around $7 billion across credit products. Hinman is the firm point person in the investment-grade space and is also active in high yield.
How do you expect the Ford Motor Co. and General Motors downgrades to play out?
There are a few things going on. The market will remain volatile going into the summer, which is seasonally a pretty illiquid period anyway. As for the transfer of the autos to the high-yield market, relative to the market as a whole, people are more concerned about it than we are. We will see some technical issues around index selling and that is an important date to remember.
An area causing most of the instability of late is the unwinding of hedged equity correlation trades. This has broader implications for the double- and triple-B area than the autos. But volatility in the autos and concern about default risk there is the spark that lit the fuse of the correlation trade impact. There will be a second order of effect from that card.
How are you positioning yourself to accommodate this view?
Generally speaking, we're constantly looking for value. We do use a whole host of index products and credit default swap products in our portfolio. It's not enough to pick companies you like right now because there might be additional large marks down based on market skittishness. So we use index products, which have developed quite nicely, to protect on names.
Is this volatility a welcome source of opportunity?
The calendar was inflated for the last few years and several companies got financings that we will have to deal with down the road. A lighter new issue calendar and some volatility in prices leads to better entry and exit points for names we've known. Technicals are one of the macro factors we're focused on in the portfolio. The level of high-yield bonds is impacted by the amount of money coming out of high-yield but less so on a relative basis. At the end of the day, it's credit fundamentals.
Where do you expect to see spreads go?
It's hard to make a directional call. There are days when the market does well there are periods of stability and volatility. But, this year you'll make money as a coupon earner rather than through price appreciation.
Do you see opportunity in credit? What credit trends are you focused on?
In investment-grade in general, we have more short ideas than long. We are concerned about shareholder activism and companies looking to enhance their share price, selling out to [leveraged buy-out] shops. It's a very shareholder-led type environment and spreads still don't discount those factors. And investment-grade bonds are also more directly impacted by rising rates.
We look at companies in industry clusters and as individuals with lagging share prices, companies that have not been in the news. We have an idea of what kind of companies [LBO shops] are looking for--we have a target list of companies and we've put on short positions accordingly. I'd rather not discuss them individually.
Are there any attractive industry sectors?
The telecom area is most attractive. It continues to be one of the firm's views that high-yield bank debt is one of the best places to be on the high-yield side. For telecom in investment grade and high yield, consolidation trends are still positive. Free cash flow is one of the things that are very compelling. The industry still remembers from 2001 and 2002 how painful it was to be at the mercy of bondholders. They've tempered their shareholder-friendly efforts at this moment in the cycle and they are utility-like in their ability to produce consistent cash.
Are you concerned about outflows from credit?
That's if you're talking about high-yield mutual funds. We continue to see a definite interest in bank loan CLOs and there's still money coming into the relative value space. In general the asset flows are much less than a year ago, which is a positive thing because they were leading to bubbles that have caused some near-term volatility.
What's your view on default rates?
The default rate is going to eventually increase, but probably more slowly than past cycles. There's been a period of very easy monetary policy, very abundant private equity capital, robust corporate earnings and a lot of companies on the cusp of high yield getting financings. There's been a lot of very low-quality high yield, which about two to three years out does lead to higher default rates. Given the economy is relatively strong, corporate balance sheets are in very good condition and private equity capital is still available, near-term default rates will stay low. But 18 months, two years, three years from now, they'll definitely spike up. I don't necessarily think it's a 2005 issue however the auto sector is one to watch with Collins & Aikman filing for bankruptcy last week.
What do you expect to see this summer?
The summer is generally illiquid. It's hard to say, but I think it'll be more in fits and starts than usual. Either rating action or the CDX role or something going on in the autos will make the market fairly active. Other days, whether it's a sunny day in New York or there's no news, it'll be completely dead. I expect it to vacillate. It's been a rough spring and people are ready for a break.