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Bryan Krug

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58
first
2018-12-11
most recent
2018-12-11
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1
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  1. “We tend to get business quality first. So we tend to look for businesses with high recurring revenues, low capital intensity, generally higher margin profiles in those companies generally have strong free cash flow to debt and examples of areas that we have significant overweights that exhibit those financial characteristics are insurance brokers, their software businesses, where they have low 90s retention rate before the sales force does anything after the sales force is able to grow organically low single to double digits, a predictable cost structure. And those characteristics generally support strong enterprise values, which also gives us downside protection.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Lot of the investments that are made in the high yield and loan market are actually to privately held companies. So we don't have, there is some similarities, there are some differences. The J-Crew example is actually private equity owned asset that we gave as an example. Some of the differences are we are much more fundamental. We are looking for basic core, as we look at the business, what is the defensibility of the business, what's the cash flow stream, what's the ability of the company to delever its balance sheet. That is the primary metric that we look at is the company's ability to basically delever the business. And that's a little different than equity where I think there's a little more expectations in terms of growth rates. How will the company do relative to street expectations? Will there be earnings division positive or negative? We're a little more fundamental. Like, is this a good business? Is this business going to delever? And then what are the priorities for that cash flow?”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Times, which is very comparable, so you're not taking the same amount of valuation, risk broadly across the market, obviously realizing within various companies can be different leverage points. But if you just look broadly out there, the risk is not nearly that of equities into the volatility is generally less with the exception of when you have the 08 example. Let's have a little different example. We can get into that later if you'd like where there was a lot of leverage that was unwound at that time period. So generally, if you look at returns, the high yield has had three negative return years in the last 35 years, which is actually very benign. And if you look at returns going forward, we're under between 6 and 8% IRRs today, depending on the risk across the portfolio.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “So, if you look at the return characteristics and risks of high yield and leveraged loan investment, it's a little bit of a hybrid between the two. And at different points of the cycle, they have different characteristics. So there is clearly more economic sensitivity to a credit investment relative, a high yield or loan investment relative to an investment grade investment. That's very obvious in exchange for that investors get incremental spread. That is one factor. Relative to equities, credit does not experience nearly the same amount of volatility as equities do. If you look at the high yield market in aggregate leverage as you define debt to EBITDA is around four and a quarter times in the market. If you look at the S&P mid-cap example as an example, the EV to EBITDA is around 12%.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “And it's similar to like a mortgage where if you have a rate of 5%, if market rates are not 4% for your mortgage, you'll essentially refinance. And so it's capital that issuers have the ability to reprice. High yield market is typically seven to eight year maturity on average. It is typically non-call for approximately the first three to four years. And there's a call premium of four to five points at that time. And so if the company wants to address the maturity earlier, there's breakage that the issuer must pay to move on. So that's actually a big benefit to a high-yield piece of paper.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “It was more expensive for banks to hold that capital from a risk weighted capital perspective. So banks moved from an origination model where they used to originate and retain the risk to a syndication model. And the syndication model essentially evolved to where investors such as ourselves, CLOs, and other managers essentially take that risk and a more senior part of the market. And so that started 15 years ago, and that market essentially went from nothing to a trillion dollar market in the last 15 years, give or take. So that's been a significant growth on the loan side. The way that the public high yield and the public loan markets work is typically the loan market is your more senior tranche. It's often floating rate. It's characteristics are that it has limited call protection, which is important because if there's a lot of demand for loans, spreads will compress.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Equity turns, and it's also grown through companies that have incurred capital to build out CapEx. So examples would be MGM or WIN. Those casinos were built with high yield capital. Sprint used high yields capital to build its network out. So those are examples of businesses that actually have tangible needs for it. So that's how it started out. The banks used to lend and then High Yield was the more junior capital solution for the fixed income side. Then structured credit happened probably about 15 years ago. It became much more universally accepted and the loan market moved from a bank-owned market to a syndicated public market. And what happened is structured credit made it cheaper for syndicated structures such as CLOs to essentially give risk to companies cheaper than banks could do it. And you also had regulatory changes.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “So let's talk a little bit about the evolution of the markets. I think can I give some very good context as to how things have been in the past and how they're going in the future? So if you look historically, if you go back 20 to 30 years, the high yield market was a subordinate credit solution for companies that the banks went on to. So in the past, banks used to land and they would lend to typically let's just depend on the business between three to four times debt to EBITDA. And then when companies wanted incremental leverage, the banks wouldn't take that risk. So a public market solution occurred, which was basically the high yield market. And the high yield market really started in the early 80s, and it's grown pretty significantly through prominently the growth of alternatives. So if you think of alternatives private equity as an example, private equity uses high yield to basically leverage it.”

    2018-12-11 · Invest Like the Best · Bryan Krug – High Yield Credit Investing - [Invest Like the Best, EP.114] · IDENTIFIED FROM THE TRANSCRIPT · source