GoldenTree Asset Management was founded in March 2000 and at present has approximately $5.6 billion in assets under management and a staff of 63. GoldenTree's focus is on the management of high-yield bonds and bank loans within CDO transactions, separate accounts and absolute return vehicles . The bank loan team is headed by portfolio manager and partner Frederick Haddad , who discusses the firm's approach to the market, revolvers and a secondary market for CDOs .
LMW: GoldenTree started out with an emphasis on high-yield bonds. Why did the firm migrate to loans and are there plans to go back to managing high-yield bond deals?
We are an opportunistic, credit-based firm and we tend to go where we feel the value is at any point in time. Over the last few years, there clearly has been significant value on the loan side, especially on some of the distressed and stressed names that fell out of certain sectors such as telecom and cable television, healthcare and utilities. Initially, most of our portfolio managers had a bond orientation while my experience was entirely loan based. However, the firm's relative-value orientation soon led us to focusing on the many attractive stressed and distressed loan opportunities that were available.
Bond CDO deals are really not in great favor right now. The investor experience for the most part has not been a good one, whereas in loans deals they have had a better experience. Our first two structured vehicles were market-value deals. They started out with a preponderance of bonds, with an initial target of 15-25% loans. But in time that shifted and currently in our first CDO there is 59% in loans and 40% in bonds. In the second CBO, there is 57% loans and 42% bonds. We still feel there is value in certain bonds, but many of the stressed loans at the moment have returns comparable to bonds with the added benefit of collateral.
LMW: GoldenTree's CDOs are among the few able to purchase distressed and stressed assets. Why does GoldenTree see value there and what type of stressed assets does the firm favor?
We firmly believe it is very difficult to outperform if all you are doing is buying par or new issue loans. It's an old axiom that there is little upside with par loans and an asymmetric degree of downside, and that particular risk reward equation makes it very difficult for a par-loan based manger to truly outperform. We try to develop loan vehicles that allow us to achieve a total return with part of the deal anchored with 70% par loans, while the remaining 30% affords us the flexibility to invest in stressed and distressed types of assets. If you pick and choose your investments carefully in that sector you have a much more favorable risk reward equation. If you buy something at 70 that you believe is undervalued, you can have 30 points of potential upside with maybe 20 points of downside. It's a much more favorable equation than a par loan where you have maybe one percent of upside and perhaps , 60, 70 percent of downside at times.
When we are talking about truly distressed situations we are generally a late-stage investor. We like to buy into the asset at a point in time when there is light at the end of the tunnel. A lot of times a reorganization plan is about to be approved or has been approved. It's much easier for us at that point in time to judge what the expected returns are going to be since we have a fairly good sense of what the time horizon is and a clearer view of what we are going to end up with after the reorganization is completed.
We've invested in names such as Dade [ Behring ] , Polymer [ Group ] , Conseco, Laidlaw and Hayes Lemmerz [ International ] on a late-stage basis, as well as [ United Pan-Europe Communications ]a European cable company, while in bankruptcy. We're currently involved in American Commercial Lines , which is winding its way through the bankruptcy process, but there appears to be light at the end of that tunnel. This strategy dictates that we are not necessarily going to get the low print on the trade, but at the same time we are buying in at a point in time when a lot of the uncertainty has been wrung out of the process.
LMW: The firm is one of the few institutional players able to buy significant revolver portions within its CDOs. How does GoldenTree get around the structural problems of buying these assets and gain the issuers consent?
We probably were amongst the first or maybe the first, to set up vehicles that have the ability to invest in revolving credits. Structurally, on the liability side we have revolving credits that fund the vehicles. These are fairly significant. In our first CBO, the revolving credit is $310 million and in the second it is $300 million. In our first CLO, the R/C is $70 million and in our second CLO $60 million. That basically allows us to purchase revolvers knowing that we will have the funding in place should there be a drawdown by the issuer and this also enables us to convince issuers that we should get assignments in their revolvers. We show them that we have a committed revolving credit from a syndicate of banks and that funding is always assured by the terms of the credit agreement. Once they see that, they generally get comfortable with approving us as an assignee in the revolving credit.
We buy these revolving credits entirely on a discounted basis. We rarely buy new issue revolving credits. We usually buy them with relatively short maturity dates and the more unfunded the better as far as we're concerned. Revolving credits, especially unfunded revolving credits, are quite punitive from a capital perspective to commercial banks and we've found them to be fairly motivated sellers of revolving credits. This is even more true of the investment banks, which give themselves even higher capital charges for unfunded commitments. There have been situations where an investment bank will come to us on a new-issue basis, as they have agreed to take down a revolving credit perhaps as part of obtaining some bond business. They know from day one they will have to discount it rather heavily to move it off their balance sheet. They turn to firms like ours that can make quick decisions and have the ability to buy revolvers. As a result, we have picked up several good opportunities.
LMW: What type of loans and sectors does GoldenTree target and why?
GoldenTree is relatively unique amongst investment managers. A good number of our portfolio managers originally were highly rated sell-side analysts. Tom Shandell came from Bear Stearns, where he was an Institutional Investor rated analyst in gaming and lodging. Treacy Gaffney joined from Credit Suisse First Boston and she was again II rated in healthcare. David Allen recently joined us from Morgan Stanley , where he was associate director of high yield research covering the cable TV, media and entertainment industries. He, too, was an II rated analyst. Steven Shapiro joined us from CIBC World Markets where he headed up media and telecom research. Not coincidentally we have significant investments in many of the industries covered by these portfolio managers.
As top notch analysts these PM's have the aptitude to learn new industries. Treacy came to us with a healthcare focus, but now she spends more of her time on the power, energy and utility sectors. The analytical talent is transferable across a host of industries.
LMW: What are the major achievements and issues in the loan market in the last year on the structural side?
Settlement is a thorn in everybody's side, even more so on distressed settlements. CUSIPs will be helpful (CUSIPs will go live in the loan market after New Year), but initially CUSIPs are not being uniformly adopted, the ratings agencies are not going to reference their ratings by CUSIPs and neither are the pricing services going to use them. They will help the settlement process because it will be absolutely certain what you bought is what you are getting. However, until they are adopted universally, we will never get to the point where loans trade with the ease of bonds.
Distressed settlement is a situation unto itself probably created more by the lawyers than anybody else, but this can be extremely problematic, especially on some of the older, more distressed deals. Really you have to push the lawyers aside and let the layman make the decisions. Some of the law firms have built up very profitable practices dealing with this heap of paper that accompanies every distressed trade. Personally, I don't see why it should not be traded like a par loan, and settled T+10 instead of sometimes the T+30, 60 or 90 days.
LMW: The CDO market itself is evolving and there is now a traded market in CDOs. What benefits does this bring to asset managers?
It helps. Liquidity is always helpful to any market. As a repeat issuer, liquidity is good because it allows investors that might be full up on our name to maybe sell down a previous investment they have so they can buy into a new one we may be offering them. Liquidity is also good because an investor knows that if they do invest in our deal and for whatever reason they need some liquidity they can get out without feeling a tremendous amount of pain. There was a fairly significant overhang of CDO paper earlier this year. We were in the market with our second CLO last winter and were competing against some of our own CLO paper in the secondary market being offered at a discount, not for any performance related reason. Our CDOs have all performed very well, and, in theory, this paper should have been trading at a premium but because you had more sellers than buyers, you ended up with fairly ridiculous discounts on this paper. I am told that the CDO bond overhang has worked itself through the system. However, CDO investors are aware that these notes do not enjoy the same degree of liquidity as a corporate bond. As more dealers get involved and as CDO's of CDO's increase in number liquidity should be enhanced.
LMW: What are your returns?
The return on assets for our first CLO (95% loans, 5% bonds) which closed in June 2002 has been above 13% since inception. Our cumulative loan returns have been over 46% since inception in our first market value CDO (which closed in October 2000), and nearly 30% in our second market value CDO (which closed in September 2001).