GoldenTree has roughly $5.7 billion under management, distributed between structured products, a hedge fund and a long-only fund. Prior to founding the firm with three other partners in 2000, Tananbaum spent 10 years at MacKay Shields, where he was most recently senior managing director and head of high-yield and hedge fund products. He also worked in the corporate finance department at Kidder, Peabody & Co.
Describe your investment philosophy.
We're a bottom-up asset manager. We look to buy a dollar of assets at 50 cents. We have a three-step process: first, we look for yield; second, we look for safety--how do we know we're going to get our money back? Safety is if you have two dollars of assets for one dollar of debt.
We define asset value in three ways: where do like companies trade in the public markets, what do companies trade for on the private markets and do the public and private markets have reasonable expectations. A few years ago, for instance, in the case of the Internet, we didn't feel there were reasonable expectations. Third is the catalyst: What's going to get us to realize the value.
There are three reasons why we would sell a security. Once a company reaches its target price we automatically sell. The second reason we sell is for diversification reasons. And, we would sell if the investment premise did not come to fruition. In other words, if we're wrong--if what we expect to happen doesn't happen--whether it's improving earnings or the winning of contracts or improved liquidity--if that does not occur then we would automatically sell.
Do you view the overall high-yield market as attractive right now?
We think there's currently mediocre value in the marketplace. Spreads are at historical averages and we think interest rates are vulnerable [to rising]. History has shown that spreads go well through their averages in the early part of an economic recovery.
Are there particular sectors you find attractive or vulnerable right now?
We think the auto sector is vulnerable. I think that the cheap sectors are those sectors that are most likely going to be refinanced at lower rates or are trading above par and still have a good total return to their call. That would include European cable and domestic utilities. One example of that is NTL Corp. which is taking out debt through an equity rights offering.
Finally, we like the middle market part of high yield, which is really smaller deals that have enterprise values of greater than $100 million up to $1.25 billion.
Some of those companies must have illiquid bonds, no?
Yes, but there's a discount at which those issues trade and we still think that discount is fairly wide. One example is the new O'Sullivan Industries transaction. The 10.675% notes of '08 were trading at 97.5 on Nov. 6.
There have been a few recent deals done to pay a dividend to a company's private equity sponsor. Some investors are calling these bull market deals. Is that your view?
We believe so. We don't think that these are the kind of deals that have great long-term value. You really are betting in order to get long-term value that they go public relatively soon. So to the extent that the market for initial public offerings is open for these companies and they go public, then it'll be a good deal. Unless the sponsor has grown cash flow significantly, you're decreasing your margin for error.
Are these companies planning IPOs?
No. Though in these cases you assume the current ownership is going to want to do that eventually. That's particularly true in the directory sector: the equities have done well so you assume it's something certainly being discussed.
What other trends do you see in the high-yield market?
What's been frustrating to us is that the market seems to totally disregard poor earnings. There are two issues that we find. One is that the market is not a terribly differentiated one. In other words, everything seems to go up in unison. For instance, we think some of the cable operators had poor earnings. Some of the chemical companies had poor earnings, but the market seems to believe that next year will be a better year so current earnings don't matter. We don't think some of the businesses will get better with a stronger economy. More troublesome to me than the tight spreads is that volatility is rather low. Greed is less volatile than fear. We've done very well in volatile environments.
Can you name some businesses where you feel that earnings are not going to improve even in an improving economy?
I think that there are some structural issues in some of the names in the chemical and auto industries, and in some telecom names. I think that there is a dichotomy between cellular bonds and cellular stocks. Cellular stocks are down significantly. We think the stocks are cheap, frankly, but the bonds are trading at relatively tight spreads to where they've been.