YouSaid · the spoken record

Bryan Krug

lines on the record: 58
first: 2018-12-11
most recent: 2018-12-11
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“I would say not one particular thing, but I would say in general I'd give my wife credit. She raises her three kids, and it's been really, I think it's been a sacrifice on her part to make sure that she has a good influence, raises our kids, and allows me to basically work and do what I do. So that's probably been the kindest thing that she's ever done.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Try to see how the cycle progresses. And thus far, it's been relatively light. And that's been kind of the big surprise is there's been this lack of private equity LBO activity concerning the amount of capital pools that have been raised. I think a lot of it has to do with the economics are challenging for the side to make it work on the buyout side.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's the whole business. What we're looking at right now is, I think the biggest question in the market is what happens on the issuance front and how will we progress through the cycle? And typically you have risky issuance and risky issuance is kind of a precursor to future defaults. And what we're monitoring is basically that leverage buyout activity. It's been relatively light, especially if you consider the amount of capital that's been raised by private equity firms that's been raised but not deployed. There's been about a trillion dollars of PE capital that's raised but not deployed. And as you assume a roughly a third equity investment, that's potentially two trillion dollars of debt if it all goes in the US, which probably about half of it will go. But is it, and we're going to look at the terms, we'll look at covenants. We'll look at the overall issuer quality.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Another example where issuers use this as the downturn. Companies would take subordinate capital and exchange into more senior capital at a discount. So Chesapeake did it as an example. California resources did it as an example in unsecured creditors where essentially allowed the opportunity to move up in seniority at oftentimes 50 cents on the dollar. And so it's a pretty clever way for the issuers to capture discount. And if they reduce that debt balance, So let's just say you take a billion dollar of debt exchange of 50 cents on the dollar you've essentially reduced 500 million of debt if you're the issuer.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“An example of that would be Caesars was an example where they moved collateral, J Crew moved collateral out of the group. And then if you look at Pet Smart, they bought Chewy. They actually used some of the Chewy collateral to try to strip that away from the group and basically move it into a different entity that will allow them to either give that value to equity holders or else capture discounts in their bonds by allowing subordinate bonds to exchange into that collateral and reduce principal balance. So I think in the next downturn that will be something that we're very aware of. We never buy an issuer based on covenants, but it can prevent us from buying one. Typically, the higher quality companies have the loosest covenants, which makes sense because they've got availability and probably the museum's less as we go going forward. We're going to spend, we think there'll be transfer value between different credit groups.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Covenant problem basically the bondholders or the loanholders essentially have the ability to renegotiate with the issuer. And so issuers have basically tried to take as much flexibility of that power and it's gone to themselves. And part of it is because of the structural change in the market, which we talked about earlier, where the market used to be a syndicated market. I'm sorry, originated market, now it's a syndicated market where investors like ourselves own it and we can try and get leverage over the issuer. But it's actually gone one step further. Now issuers have created docs or even looser and they've got the ability to transfer value away from creditors in certain circumstances.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So let's talk about covenants are because I think it's probably a good level point. So, covenants are a one way promise the issuer makes to the lenders in terms of what they will do in terms of one, what's called a maintenance covenant, which are profitability levels a company must sustain. And then two, there is also incurrent space covenants, which allows the company to incur debt as long as they meet certain ratios. And there's been a lot of attention about covenant light. And covenant light is tied to the maintenance of certain profitability levels, and that is essentially gone away. And that's in the loan market. It's around 85, 90% of issuers now are covenant light. And I think it goes beyond that covenants are essentially power that either the issuer or the investor has in terms of if there is some sort of issue or a”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, if you look at October as an example, when there was a lot of equity volatility, credit was off marginally, but it was off about a percent and a half. So the implication there was it's not a systemic. This is not like another recession. So there wasn't as much concern in the credit market, nearly as much as there was in the equity market. A lot of the equity market, though, a lot of the downside was really concentrated some very high multiple growth stocks that had massive upside moves in the prior 12 to 24 months. And we just don't have that same dynamic in the credit market. So credit markets are clearly very robust now and they're strong in it. And they're not sensing or pricing in any sort of like economic deterioration”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“They have no ability to issue new capital. They can't grow production. They're likely shrinking production. And then there's kind of layoffs across layoffs. There's companies that are just trying to repair their balance sheet and there's no chance of any sort of value being returned to equity holders in the form of dividends, share repurchases. And so the credit side is something you have to be very careful of. Credit tends to be early cycle. It tends to lead equities in general. And if you saw in the last downturn, you saw credit underperform pretty dramatically before equities did. And that makes sense because credit is more focused on downside or equity is more of a looking for what the upside more focused on upside. So I think those are some pretty interesting dynamics that happen.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Get fixed income and credit in general if your cost of credit goes up, it's a disaster for equities, broadly speaking. So it's absolutely important and the implications are across the board. If credit costs are very high, if rates are expensive, it's very challenging for companies to want to invest to grow. They can't spend capital expenditures like they used to. And so it's actually got a very negative real economy connotation. So out of the, when you came out of the financial crisis, and the average high yield bond was yielding 20%, it was uneconomic for any company to incur debt, to do any sort of capital project. And so that partially, the flow through the economy is very real in that scenario. If you look at other sectors, when they lose access to capital, the knockdown effects are very real. And so if you go back to the latest crisis and like the energy space as an example, if E&Ps, if their bonds are in the 40s.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it's natural when you start in the business. You have this view that everyone's here to be honest and tell the truth. And then you learn through experience that incentives are not aligned, issuers want the lowest cost of capital, and so often they'll tell you what they need to tell you to drive that cost of capital down. And so we have bankers on the other side are working for the issuer. They're not working for the investor. We're fully aware of that. And so that's why we think the value of independence is very high. And so that's why we are totally independent. We don't really care what other people perceive. That's why our portfolios look very different than the benchmark and most of our peers.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“No, no, I wouldn't read that much into it. I mean, I love the high yield business. I think it was a situation the way I'm personally wired, I'm all in or I'm out. And so if I'm out, I'd be retired and I would do something with my, you know, spend time entirely with my family and my kids. And so that's what I would do. So I'm in or I'm out and I'm in and I'm not someone that's going to be like half in. I'm not going to, I found my calling. I'm sticking with it. And if I'm out, I'll be on the beach somewhere.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Forced to leave the high yield market. I probably would just leave the business. That would be, I mean, I love what I do.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“In basically 16 17 time period, I'm sorry, 17, 18 time period. And then recently it's been really the part of the market that's probably that we thought was the most overpriced was the highest quality part of the market, which is very interesting because investors perceived the higher quality as being more defensible and was actually the most vulnerable. And it was the most vulnerable because it was it had the most rate sensitivity. And so you saw a number of those companies with long duration sell off the most. And so we actually found that as an opportunity as we light that area because we saw some of the excesses and we actually moved a lot of our higher quality into more floating rate paper, which was immune to some of those risks.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“And then we took it even one step further and went and found another place such as gardener Denver, which had around half their business exposed to supply and basically components to the energy space that had the drop-off with E&Ps essentially reducing their spending. So that was an area that I thought was actually really interesting in the energy space and something that we aggressively added to risk when it was down and were able to find great opportunities that we got. We had a big cyclical recovery. Another example that we saw after that was retail sold off and it was kind of a continuation of the obvious trends that people see out there such as online and then there were a couple names like J Crew and Neeman which have meaningful online exposure between 35 and over 50% of their businesses online but it's kind of they had company missteps that we believed were going to reverse themselves and that played out.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Really kind of evolves. We have an opportunistic bend to us, and so it depends where the opportunity has been. So we, due to the environment, we went from essentially zero energy weighting in the middle of 14 to high teens energy exposure. And so we thought that was actually a really interesting time because you had an environment where the price of the commodity was basically unsustainable where it was from a reinvestment perspective and we were able to identify names where we could get 20 plus percent IRRs because of that fear of the price that underlying commodity. And we also able to extend it to different areas, which I thought was actually more interesting. So we were able to extend it into MLPs, which there was concern about the solvency of some of their counterparties combined with leverage answering to buy some investment grid assets between single B and triple C.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Within the high yield side, if you look specifically at what we're doing debt that is lower rated, some investors preclude themselves from buying low-rated papers as CCC paper, where they have specific limitations that they can only own X percent. And we tend to look at where we believe the trajectory of the credit is going and what we believe the credit metrics will expect them to be improving, which is a very different opinion. You have to understand why companies are rated lower quality. I think a lot of investors will say, oh, it's CCC. I don't want to own it. And if I can own CCC, I want to get paid greater yield for that because it looks bad on my fact sheet to have that exposure. We look at it and if you look at what's the trajectory of the business, what do we think leverage?”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a good question. So, in terms of investor errors, I never heard of the letter changing, but she put it. It's true, though. I think part of it is... If you look at the high yield side, when assets come from investment, right, it's just pure technical, where you have investors basically have to reduce exposure because of a change of downgrade. And there's a structural reason for that because those investors essentially are forced from a capital perspective to only have X number. They have to have X number of reserves depending on the rating criteria. It is what it is. In terms of”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Leg is essentially using data and analytics to essentially get confirmation and greater context as to what's happening. So I think that's kind of the evolution of our process. I think you need to, we'll see what's coming next, but I think we're still early in the third phase. And I think a lot of investors actually, particularly on the credit side, aren't even at the second phase. I think a lot of those investors are focusing on what management's telling them, what's in the roadshow. And it's a more simplistic type of research process.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Is starting to evolve a little bit. People are getting smarter on it for sure. I guess I would say I think of like evolution. I'll give you a sense of how I've evolved as an investor. So we started out. I'm dating myself, but I started out pre-regulation FD and regulation FD was when companies could basically tell you whatever they wanted and they had to put pressure releases out. That changed on 2001. And the edge before used to be having a good relationship with management and being able to kind of anticipate what's going to happen because they would basically tell you before it was like broadly known. The second evolution was essentially having greater independence and so greater independence would be triangulate what's going on through talking to competitors, former employees, suppliers. And so we do around 150 calls a year with those types of people that really give us independent view as to what's going on. I think the third”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“The most surprising learning is how companies are very good and bankers are very good at manipulating data. So when you actually go and look at the underlying data, they cherry pick. It's not really surprising, but it's more just reinforcing like how they're able to cherry pick and manipulate charts to make it look different than a broader sample. It's just more just the level of dishonesty. It's probably the more. That's probably the biggest”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Favorite part is always learning new information. You're always like evolving and you're always learning about new businesses. I'm a very competitive person. And the other piece is trying to get an edge relative to our peers and kind of pushing ourselves. Because if you look at active management, I mean, active management's changing a lot and you have to evolve your process because if you don't involve your process, I mean, it's just getting more and more competitive. And so it's really trying to find those next pieces that I think will continue to give us the edge in the moat.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Census data has got great data, for example. So one thing we're able to track as an example is very, very interesting is a vinyl siding data over time. You can see how many house have vinyl siding in like the mix over time. You can track it or there's like a vinyl siding institute, which I guess there's associations for everything where they basically track squares of shipments by year and so you can get some pretty good insight as to like how the penetration of that product's gone for years and that's the sort of things that we look for.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“It is Not every industry has got readily available data out there, but there is a lot of data out there that I don't even think people realize exists”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“The company, like the sample we just gave, so it's really trying to track storm data as an example. Another idiosyncratic area would be like theaters where we track literally every weekend the box office. Then we can track like with the major movies are and then to see like what drove performance. So for example in Q1 Black Panther drove the box office in that. We can say it was 30 or 40 percent the box. What's likely to repeat itself? We can use data to really kind of track updates on a weekly basis for us automatically.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, look at our process, there's a number of Pieces that I'd like to break it down. And first is the idea identification. Unlike the equity world, there's roughly three times the amount of companies in this market relative to the S&P 500. So you have to have a good way to really identify the opportunity set. The good news is that the opportunity set the return profile is much easier to model because it's mathematical as opposed to psychological where multiples can be whatever they want in the equity world.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“The probably default is very, very low, and the company generates meaningful free cash to debt, and the primary focus of the company is to delever its balance sheet because that will enroll align with the equity because that will help their equity value. So that's an example of something we accumulated material position in the portfolio as a way, and that's something that we identified.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“We also talk to competitors, former employees, as part of really triangulate how the integration was going in the acquisition. And then we also did some interesting proprietary work on the data side. So we actually track every storm that's out there and every hail storm, and we're able to quantify it by zip code. And then we overlaid every location. And then we looked at a 20 mile radius to see what the activity was because our footprint is a little different than some of their peers. Try to figure out what the implication was from the storm activity and use that as a proxy to see, to get confirmation in our views. The storm activity will be better than what market expectations are. And that's something we did to really kind of get an edge in terms of that investment. As we look at the business, we think the bonds are roughly 89 cents on the dollar. And so we think that's a very attractive IRR.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“To consummate that transaction. When they came with the transaction, the bonds were low coupon four and seven eighths, and that was done in basically October of last year. We actually thought the valuation was very expensive, but we liked the asset between a combination of concerns about interest rates and then interest rates slash housing, and then also concerns about storm activity being less robust than last year, which is factual. The bonds dropped basically 14 points. And as we look at that, we identified the name through a screen, and the bonds now are yielding roughly. We actually assume the company takes the bonds out two years before maturity. And it's just under 8% to that date for what we believe is part-type risk. As part of our research process, we obviously did financial modeling. We also talked to the management.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Good example of something that we identified. So there's been some weakness in cyclical type industries as rates have moved up over the last nine months, give or take. And one of the areas that has underperformed has been housing related bonds. And there's a company called Beacon Roofing. Beacon Roofing is roofing distributor. Most of their business is actually not new construction related. It's predominantly repair and remodel where it's your roof leaks. You need to replace your roof. And incrementally, what drives demand is when there's hail damage. So if you have hail damage, you're forced to replace your roof. It's paid for by the insurance companies. And the company perform transaction about 12 months ago where they bought one of their competitors. It was a debt finance transaction and they used high yield bonds.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Market because if you look at the investment grade market, the investment grade market tends to be a longer duration market with the average duration of nine, I'd contrast that the high yield market that's give or take three to four years. And so there's an unnatural home for a lot of that paper 20 to 30 year maturity paper in the event of downgrades.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Required to either outright sell or materially reduce their exposure because if you're an insurance company, you can only have so much capital that's double B or below. And so in that situation, you have forced selling and you have opportunities to take advantage of that. If you look broadly what you're seeing is ABB issuance has absolutely exploded over the last five years as issuers have taken advantage of low rates to either return capital shareholders, do M&A that's debt financed. And if you have a cycle or a cycle within a cycle like you had an energy in 2016, you can expect some prematerial downgrades in those sectors or broadly across the board. And so that could create a strong buying opportunity. And where there's probably the most vulnerability is in the longer duration part of the”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, if you look, I think there's a lot of topical things we can talk about on that. So there's about $5 trillion of BBB debt. where the biggest opportunity is is typically when issuers drop from investment rate to high yield because typically what you have is investment grade holders that are essentially”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“That were in low cost basins that were only in those low cost basins had shorter operating history such as the Permian were underrated. And we were able to identify companies that were actually upgraded when oil went from 100 to 30, which is kind of ironic. Well, they were downgrading assets such as like Chesapeake that were very diverse in those bonds ended up going down 90%, but they were a double B. So it's like you have a lot, which presents an opportunity for us as credit pickers because we're able to identify companies where they're just off.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Fortress, the structured credit market, all the AAA debt that essentially went to zero through CDOs and CDOs squared. I mean, it just gives you an example of areas where they've been off. Even within credit, which they're arguably better than structured credit, there are some inefficiencies. So there have been companies, for example, in the energy space that we had that were actually underrated in our opinion because of a couple characteristics that they focused on such as like length the business has been around, which we think has nothing to do with the asset quality. Let's just look at within a sector. So if you'll get energy as an example, they overrated, diversified companies had scale, and they underappreciated cost structure, which if you're in a commodity business, cost structure is your primary driver if you're going to remain solvent.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, as we look at the agencies, we think they're terrible. I mean, just to be totally blunt about it across the board, there's been a lot of validation to that argument over time. You can go back and look at 10 years ago. AIG was AAA risk months before it essentially needed to get bailed out and going bankrupt. And AAA risk is supposed to be as good as a game.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“What it will be in 19 and 20. And if you assume a 60% loss in defaults, you should be getting paid 120 basis points for just pure default risk. And so spreads are a discounting mechanism for expected future defaults. And you're getting paid for that. And there's also liquidity component because investors should be paid an incremental value for not having Treasury type risk. So depending on the market conditions, they deviate. Right now spreads are at historically are closer to the tighter end of the range and part of it is for good reason because the fundamentals are constructive today. Defaults are benign and expect to remain benign. And that's kind of where we are in today's market.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, if you look at spreads, spreads, if we look at simplistically, what are spreads and what do they mean? Spreads are what investors are being compensated for taking the credit risk. And so it's return in excess of the treasury rate. And if you have a high yield bond as an example with a seven-year maturity, for simplicity, let's say that the Treasury is roughly three and a quarter percent. It's a little higher than it is today. And if you're getting 7.5% return, you gain 400 basis points of incremental spread for that risk you're taking. And if you look at the market aggregate, if you assume spreads are roughly $350 basis points, you're getting 353.5% over the market, treasury market yield for taking that risk. Defaults are your biggest cost of that. And if you assume the market has a 2% default rate, which is actually higher than it is today and higher than”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“We have an opportunistic sleeve. The market has been not very volatile. And so we tend to take advantage of opportunities across cap structure. So we'll take advantage of technicals in either the loan or the bond market, or we have an event-driven trade where we'll have a potential covenant violation due to market conditions. It's been very limited. It's a very small part of the portfolio. However, it's added value throughout a cycle.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Core name. Spread tightening is an example where we're trying to find a cyclical out of favor company. So it could have been energy when oil was down. And we're basically, we have a view that the business can sustain itself through the downturn. And if there's a macro recovery or company specific initiative, we believe it will have material spread tightening. And depending on the risk, it could be high single to 30% IRRs will underwrite depending on what the market environment is. So it can be equity plus returns for taking fixed income risk. Another example would be some of our insurance brokers and our insurance brokers and our software assets where the leverage point starts out high today. But as you look forward through cash flow, the ability to delever meaningfully because of their strong cash generation ability.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Very limited cost, your margins on high speed data, they're not broken out, but we believe they're close to 70% EBITDA margins, which are very high in the cable pay TV margins are actually materially lower because you have to pay ESPN and the content providers for all the product outsure.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“So look at the cable TV business is basically a commodity type product, so you're basically repackaging various channels. And we personally believe there is some advantage that the companies do have in terms of lower content costs relative to YouTube or Hulu just because they purchase more of it. However, they tend to have skinnier bundles and younger viewers particularly don't really want as much they don't need 150 channels. So there is definitely a loss incrementally of basic TV subscribers. However, in order to access the YouTubes, the Hulus of the world, you need a broadband connection and the broadband connection, the cable solution is by far the most robust solution versus DSL. And so we think there's continued pricing power that those businesses have and the margin structure is such that you really have.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Everything we invest is corporate. So we don't do any structured product. So we tend to look at the underlying businesses. And so as we look at the businesses, cash for lendings obviously something that it sounds very simple, but it's like if you've got the cash flow at the service of the debt that reduces our risk, we internally tend to bucket in three criteria. We look at core, which think of it as a stable, predictable business. An example, that would be like a charter communications. We don't want the cable business, but we really love the broadband business, which does well regardless of the over-the-top threat.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a little different dynamic in fixed income versus equity. So let's start out if you have a benchmark that is tied to market cap or in this situation be total debt. There's a little bit of a different incentive system on equity having great big market cap is actually very positive dynamic. In the space in general, they've underperformed for a few reasons. One is that their fee differential is not as big. Two is transaction costs are much higher for fixed income investing versus equity where it's almost free to trade. And three is there is some inefficiency. There's 1,600 issuers in the high yield market. And so through credit analysis, we can basically find opportunities out there and take meaningful stakes and have them meaningful affect our returns as active managers in general.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Where active managers actually beat their passive peers, which is actually, I think it's a very interesting dynamic that occurs out there. And that's partly because of the inefficiency that happens from the analysis perspective.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“It spreads and determine what the spread return of leverage is as a quant metric, that would have been a very painful experience because you would have underpriced the cyclicality in that piece. And when you had massive swings in profitability, leverage spiked. And there was significant impairment in those sectors if you just used a purely quant approach from a debt to unit of leverage, which is probably the key metric that most people look at. So I think there's an art to it as well as a science to it. I think you need to have both in my opinion. And so that's just because partly because of the nature of the businesses. Interestingly enough, in the credit space, there is some inefficiency. And when artisan, one thing Artison is attracted by the space is the ability for Act demand to provide value. And this is one of the few space.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“You look at credit investing, there's a broad suite of industries. I would say that there's a little more of a focus in the market on old line businesses. So if you look at some of the areas like, for example, energy is roughly 25% of the entire market, a little under 25% if you include E&P, MLP, and oil field service. And if you look at those businesses, they're okay businesses. However, if you look at their ability to incur leverage, I would say that's very different than a software business. It's very different than insurance brokerage business because you don't have that same degree of cyclicality. So as we look at the high-yield market historically, the biggest sector in 05 and 06 was autos. Tremendous amount of cyclicality. And if you were to take a quantum approach and just say, I'm going to look at leverage, debt to EBITDA.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Value coverage and try to avoid permanent impairment. If you look at what credit investing is doing, there's an asymmetric risk profile. Bonds are issued a par. And we want to avoid mistakes. And that's something we've been able to do at my time at Artison.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“Cash flow and the ability to delever the business, so that's one big differentiator from a research perspective. I think we believe in the main and the machine. And so as part of our process, we spent a lot of time looking more at data and analytics, which we think gives us a little bit of an advantage. So we'll use outside data sources to reinforce some of our views. So we'll get like credit card data as an example to essentially be able to get confirmation on trajectories of everything from cable TV spending to retail spending to consumer spending. And we feel like that gives us a real time edge on a weekly basis, which I think a lot of people don't look at. And then the other thing that we do is we're very disciplined. We don't, it's hard to quantify, but we believe enterprise value is. I think a lot of investors will stretch for yield. And when they stretch for yield, that can be very, very expensive. And so what we will try to do is we basically, we don't want to sacrifice enterprise.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source
“A couple things that we feel like we do differently from some of our peers. One is we tend to cash fill lenders at par. We tend to look at asset value in a more stressed scenario. A lot of our peers will tell you that they look at assets to protect them. Asset value can evaporate pretty quickly as fundamentals change. And so the best example of that would have been the energy market. So the energy market is very asset heavy, oil and its acreage is worth X per acre. However, that math changes dramatically as the price of oil goes from 100 to 30 and the average E&P as an example, which was perceived to be high quality, dropped roughly 55, 60 points from par to roughly 35 to 40 cents on the dollar in Q1 of 16 into that asset value at par basically didn't help you. And I think a lot of our peers will say, oh, you know, that's how they think first. We tend to think.”
2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source