YouSaid · the spoken record

David Breazzano

lines on the record: 62
first: 2024-09-12
most recent: 2024-09-12
sittings or episodes: 1
sources: podcast

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“Well, one of many things is to appreciate marketing and sales more than I did. As a young person, I thought if you just performed well, did a good job or had good investment results, people would recognize that and reward you for it. And in reality, you got to advocate for yourself and you got to hire sales and marketing people to get the message out and the narrative you want. So there is real value to marketing, sales, and good presentation and not just the cold hard facts of doing a good job because people overlook that often.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Forming your own opinion. Don't rely on the narrative or the story. Street research when it comes to investments or what the media says or what people are saying. Look at the cold hard facts and what do they suggest and come to your own opinion doing primary research where if you feel passionate about something, dig down and get the facts and don't get swayed by public common opinion or consensus because often it's wrong. And so that's something I try to live by.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“He provided a tremendous work ethic. So we did chores. We grew up in a rural area. We didn't watch TV. We went out and we worked. He said idle time is not the best. We didn't have video games back then, but we didn't play a lot. We did chores and work and all. And I think that work ethic carried me through my career where I actually now enjoy work.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Spend a lot. So I'd say certainly one of my first bosses, his name is Peter Smith, and he was a great guy. And he really taught me to be diligent and attention to detail. He said, when this business, you got to read everything that's public that you can get your arms on. And when you write a memo, make sure it's grammatically correct. You do a spreadsheet. And this was hand spreadsheets before Excel. You got to make sure every number is correct because if there's one typo, then you lose credibility with everybody. So it was really important advice and it made me more of a stickler for attention to detail. He was a great mentor for me. And interestingly enough, he left the investment business, became an artist and sculptor Renaissance man. And then I say my stepfather.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Cognitive dissidents, people don't let the facts guide their opinion or if they're presented with a series of facts that are different than opinion, they are stubborn about the opinion. And I like to say I made a whole career out of it because you look at the facts and people's opinions and you try to say what we do isn't as risky as you think it is. And they just say, yeah, but you got too many CCCs.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Probably people don't know that I actually landed on an aircraft carrier, spent 36 hours on it, and got catapulted off of an aircraft carrier on a small transport plane, a COD, they called it. And that was an exhilarating experience. They called it the tailhook society. And the first pass we had going to the aircraft carrier, we got waved off. So we had a flyaround come back, which was exciting, but a little nervous, but it was a lot of fun, great experience.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“I really like history and travel. So I took a lot of history courses in college and I'm avid reader of historical books and accounts. And I like to travel to regions where I know something about the history or I want to learn more about the history. And I think it's a good way of gauging where society heads. We don't repeat ourselves, but often things rhyme, as they say.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Over the last decade or so. Now that can translate into a couple things. One, will some of these PE firms take more risk to try to maintain the return profile? And how will that translate into what happens to the creditors in those situations and also to their investors? Or will the price of assets reset so that they're back in equilibrium again? The lenders get a nice return now and they get a fine return as well instead of skewed the other way. And if asset prices do reset, well, who bears that risk? And it's probably more of an equity valuation risk.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“It is an important question over the last 10 to 15 years, the private equity world was making money off lenders backs. Lenders were getting relatively low returns by historical and current standards. And that return that we were not getting was going to the private equity firms or their investors, essentially. So we were subsidizing returns, if you will. Now where interest rates are we're getting a respectable return and the private equity firms are going to have a little bit tougher job. The cost of debt is higher than it was for a long, long time. I wouldn't say it's a zero-sum game. It could be factored into the price they can buy businesses as well and it should work together, but they're going to have to be a little bit more careful to get the returns that they enjoy.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“next week or next month or next year or worse we don't know because we can't determine where the market goes so simply if we buy a bond and I'll just pick a number that yields 9 and we've done our work and we're confident that it'll mature and it does mature our return is going to be 9% now any month it's going to bounce around based on the price of the bond or what the Fed does or what other people assume but if we hold it to maturity, it's 9%. And that's all it is. Now next year, maybe I could have bought it at 9.5%. I don't know, but I might only be able to get 8% next year. So we're going to buy that 9% bond and hope we got it right. And we do most of the time or we wouldn't be in business. So that's really it. So it's just a question of what the return profile is. That's a function of forces beyond anybody's control.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“As a credit investor, we all worry. I don't like to say naturally pessimists, but you got to have some optimism that the company's going to survive. But you always worry, what did we miss? Have we crossed every T, dotted every I, and so forth. So that said, but where we sit, I think we're fine. We've always been able to find opportunities.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Down the road'll be too late. The cycles do not go away. Defaults don't disappear whenever there's this flood of money, there will be a bubble and excesses are starting to appear and things will get a little rocky out there.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's not going to be pretty. My advice would be to anybody that's looking to hire a manager is to really put a premium on experience, people that actually have been in the market before 2008. There are a lot of managers out there that tout their experience. I've been investing for 10, 15 years. And I go, you never saw a downturn. You can't view that as appropriate experience regardless of what anybody says when things are going down, people panic and they do things that they later regret they did. We saw it briefly with COVID, but it didn't last long enough. There are people that are going to see and experience things that they're unprepared for and take certain actions that they will regret.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“you try to identify what the challenges are and there's just too many of them just say you know what that ain't gonna work and we'll stand by that judgment so management competency is key and you use all the other statistics and information that you have to try to gauge that and then look at the outlook for the industry the business where the company is positioned in that business vis-a-vis its competitors and so forth high cost low cost average cost producer good brand weak brand all the drivers of the business and so forth and at the end of the day you just want to get confident that they can mature that debt instrument and just let the chips fall where they will during the course of that ride to maturity but as long as we got that right we'll be okay”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“team have performed fairly well through different cycles, you're going to have a higher degree of confidence in their ability going forward than another team that maybe hasn't. So you're constantly trying to evaluate management team, and that's meetings with them, quarterly updates and visiting their facilities and really getting your arms around whether they know how to run their business, what the true drivers are. And then something that we've learned over time is all companies have challenges of some sort. But in our experience, it's often the number of challenges. If there's too many, it can be overwhelming. And it's not a bright line test. But if there are five challenges that you can identify, that's typically too many. A company can maybe handle two or three before you're getting there and then after that, it's just too much.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“First and foremost, we want to make sure that in our opinion the company can pay us back and will do so. So it really comes down to trying to evaluate the competency of the management team. A bad management team can take a very good company down a bad path very quickly. I've seen companies get destroyed by poor management decisions that were very good companies. And then likewise companies that are struggling a little bit can be salvaged by really good management team. So at the end of the day, management is key. And how do you evaluate them? Well, you have a lot of proxies. And one is reading the financials and the performance of the company. And we all say past performance is no indication of future results, but it's certainly an indication of competency. So if a company and a manager”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“To you. It's just part of the game. Sometimes you make a judgment by saying, well, the odds of this outcome are fairly low. I'm willing to take that risk. And most of the time, you're okay. If a company never gets into financial straits, the covenants don't really matter. But if it does, that's when it comes into play. And it's important to really understand the games that can be played. And there are a lot of them.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Covenants have gotten more and more complex over time and more squirrely and there's certain provisions that get included since our inception we've always had attorneys on staff as part of our investment team because we think it's critical to understand the contract that we're lending against because no loans are identical. The contracts are unique often for each situation. Loans and bonds have indentures and loan agreements and are lengthy and they have words in there that are put in for a reason and you got to read them and understand what your rights are under various scenarios. If things don't go according to plan and you have to rely on those legal rights, what are they and how can you use them to your advantage or avoid somebody else doing something detrimental?”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Certain PE firms conduct themselves a little bit differently. Some are very aggressive with their creditor, some are a little bit more fair. And then there are certain creditors that you got to be careful with too, where they'll turn on their fellow creditor for their own advantage. Where fiduciaries to our client, so we're trying to get the best returns for our clients that we can, but not blow up the ship, if you will. So we're not going to do something crazy. We want to get the best possible outcome. And if that involves taking advantage of certain contractual rights or covenants or the lack thereof and using our position as a significant lender in that situation to advantage ourselves, perhaps at the detriment of other creditors, we have to make that judgment and do what's best for our client.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“All asset managers and PE firms have their own personalities and own track record and way of operating. Some P firms are a little more aggressive with their creditors and don't care about what some would say long-term relationships. And there's a saying in Wall Street. If you want a friend get a dog, you could be adversaries in one situation and people's memories.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“More real time what the default rates are and the recoveries are in the public markets, whereas in the private markets the same actions will be in play, but it's not going to be as readily available information. So there'll be misinformation out there. But we will have a recession, no doubt about it. The business cycle has not been eliminated. It's the one that we've been predicting for a couple of years hasn't quite arrived yet, but one day it will. companies are going to have defaults. That's not gone away. Default rates have been very low by historical standards because we've had free money and accommodating fiscal and monetary policies that are changing. So we had some good years in credit, but it's not going to stay that way forever. And it's going to hit all the markets. It's not going to avoid the private debt market.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Modify covenants. They could defer interest, convert some debt to equity to delever it out of court and so forth. They can do those things that might not show up as a default otherwise because there's some secrecy to it. It's private, so you don't know what's going on in some of these situations. Whereas if it's in the public markets, it's harder to get unanimity of creditors. And for some of these transactions, you need a high percentage of the lenders to agree to a restructuring plan. And there has been a tendency for creditor on creditor violence where a small group of creditors will try to enhance their position at the detriment of the other ones and creates all sorts of turmoil in the situation as well. So it's more public information, certainly in the public markets. And so you'll know.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's where you borrow. But in a broadly diversified world of credit with thousands of companies and over a trillion dollars in each of these buckets, one should assume that there should not be a material diversion in the default rate between those buckets because they're all companies borrowing money and a certain percentage aren't going to work out. But secondly, what will happen in the private credit market is the company and its advisors can negotiate with the lenders a little bit more easily. If you have five lenders, it's easier to negotiate than if you have 50 or 100. So likely scenarios will be a company gets into trouble in the private markets. It'll go to its lenders and say, we got a problem. You got to work with me to avoid it. And they could amend and extend. They could pick interest.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Going to be interesting. There's been an explosion in private credit that's a function of traditional bank lending going away and being replaced by money managers effectively. So there's three legs to the stool. There's public bonds, syndicated loans, and private credit, which typically is floating rate as well. Now, there's no reason to believe that in the aggregate that the default rate between any of these three markets is going to be materially different. If your company A and you want to borrow money, you hire investment banker and you canvas your options. Do you go public bond, syndicated loan, or private credit? Whichever market gives you the best terms. And it's not only interest rate, it could be covenants, maturity, and structure, but whatever the best terms are.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Short order. So companies got squeezed and they're struggling. Now many of these are rapidly trying to refinance and kick their maturities down the road and reduce the interest burden they're experiencing. And most will be successful, but not everyone. So we think there's a probability that the default rate in the loan market might exceed that in the bond market and the recovery rate in the loan market might be lower than that of the bond market, which is different than what it was in the past. So we've got to incorporate that into our analysis as well.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Ago. So the statistics are going to be different. And there's also loan only companies out there. It's not the old capital structure where there was a first lien loan and then a subordinated bond or an unsecured bond. It's Unitranch loan only. So the growth in the loan market and the changing dynamics of the capital structures going forward is going to alter the recovery rates going forward. Also floating rate heavy capital structures experienced the increase in interest rates immediately. So the interest expense on loan-only companies in some cases doubled because you went from zero or 1% base rate to five and a quarter or five and a half base rate and sulfur plus 500 your interest expense doubled in a very”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“My belief is it won't be the same as we experienced in the past. So part of our job is to try to anticipate how the market has evolved and what the differences will be going forward. And a couple of dynamics that we think are important to get our arms around is historically the recovery rate for loans was higher than the recovery rate for bonds. Going forward, we think that's going to be different. because of a number of factors. One, the loan market has exploded in popularity. The growth of CLOs, which are effectively replacing traditional bank lenders, the shadow banking industry, have grown to probably over trillion dollars in size. And as a result, the loan market has grown to be larger than the bond market, which was not the case 15, 20 years ago.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“We've gone for a long time now without a significant sustained default cycle. There have been a few blips. Curious how you think about managing the portfolio in an environment going forward that may not be the same as what we've experienced in the past.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“And we've had situations where there were cyclical declines, where it was a cyclical business for a year or two, the revenues were down because of macroeconomic factors. But then we gained control of the company through a bankruptcy or restructuring process. And then when the economy or the business prospects recovered, the equity that we acquired through the restructuring appreciated in value. So we've had situations where we've made more than 100 cents on a dollar a couple years out. And then we've had situations, obviously, where we didn't do quite so well. But on average, our recovery rate is substantially higher than that of the broader market. So we have this yield premium and we have net credit losses less than the market.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Our default rate has been in line with the industry in the twos. So we're neck and neck with the index. But what's more significant is our recovery rate. The market history has been in the 40s to 50 cents on the dollar. And our recovery rate is significantly higher than that. Going back to that example, if that company that had six times leverage and got acquired by a PE firm at 15 times, if that company defaulted, obviously the PE firm made a mistake and the business didn't perform as anticipated. And we probably made a mistake in our initial investment thesis. So the enterprise value came down considerably to where we were impaired. But the recovery rate there could be significantly close to what the leverage was, to Paul.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“The keys, but they never will. So that company likely will never default. And it shouldn't because they could just sell it if they were struggling servicing the debt or just put more equity in to save their original equity investment. There are a lot of levers they could pull to salvage it. So those are some of the things that we look for. And we constantly are monitoring the loan-to-value of our companies and underwriting them as if we were a private equity firm. What would we pay for that business? And that gives us another sense of comfort because we know there's an equity cushion below us.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Say seven times Ibita, it's got a very small margin. It's in 80s plus percent loan to value. Very little cushion. Conversely, if there was a business that a private equity firm paid fifteen times EBITDA for because it's growing rapidly, has low capex requirements and has a bright business future. They put six times leverage on it. Both companies will carry in likely a triple C rating, but one is 40% loan to value and the other is almost 90% loan to value. And they both have the same credit rating or close to it. And so we pick the second one facetiously. I would say, I hope it defaults. Because if I get to own that company at six times leverage when the PE firm paid 15 times, I can more than double my money if they hand me.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“equity cushion or a low loan to value and even if the credit coverage ratios initially appear tight it could be eligible for inclusion in a portfolio because there's a high likelihood that if the company were to default it could be sold for more than the debt or god forbid we actually have to foreclose and own the company we could turn around and sell it for a lot more than we lent against it so This is where we often find opportunities, that loan to value, because the market often doesn't distinguish as much as we do the importance of that metric. So we like to use an example. If there was two companies with six times debt to EBITDA, but one was a capital intensive, low growth business that had a total enterprise value of”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Coverage ratio. So that's a clearly important determinant that they do. But they also hire an appraiser to go out and determine what is the house worth because God forbid you lose your job and you can't make your mortgage payment and the bank has to foreclose on the house. They want to sell it for more than what they've lent against it. And that's loan to value. We do the same thing with our companies. We look at all the metrics that other credit investors would look at to make sure that the company can service its debt and maturity schedules and all the other calls on its cash flow. But we also look at the loan to value. If the company were put up for sale, what would somebody pay for it? If there's a high amount of debt to enterprise value, even if the coverages fit, we're not going to lend against it because it's got a very small room for error. But likewise, if there's a significant”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think we all look at some of the same credit metrics, interest coverage and so forth. But we also like to look at enterprise value and loan to value. And I believe my experience in talking with other people in the industry, not all firms do that. So it's an important determinant for us. And essentially, I like to equate it to a home mortgage just to make a simple explanation. When you go out and buy a house and seek a mortgage from what used to be a bank, now who knows who the lender is, they will want your W2 income investment income you may have and all that. They spread your income and make sure that you have a healthy margin of income in excess of what the cost of that mortgage and homeownership would be and living expense.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“It goes back to par or to maturity or sooner. So nobody has to agree with us. We just have to get our thesis right and then we're rewarded. So it's a simpler process. We're just identifying 70 to 90 companies that we think are going to be able to pay us back out of thousands to pick and choose from. And the price action of those bonds over the course of that ride to maturity is noise, but we don't want to overreact and do something that we regret because if we did our work right, it goes to maturity and we're fine. So I will sacrifice liquidity for yield.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it's harder for the equity investors because they identify a stock and they make that purchase and then they hope the next day or shortly thereafter the rest of the market agrees with their investment thesis and buys that stock so that trades up. If nobody agrees with their investment thesis, that stock could just go sideways forever and they underperform. So you're dependent on two things. You got to get the fundamentals right, but you also got to hope that others identify the same positives that you did after you and then buy it. In credit, we got to get our fundamentals right. And our sole job, or at least what I tell our analysts, is just be certain in your opinion that that company can mature its debt. Then don't worry about where the bond trades between the day we invest in it. and maturity because if sentiment goes against us and people don't agree with our investment thesis and the bond trades down if we did our work right”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Your asset allocation, select your managers, make your investments, and if you've done the fundamental work that you're supposed to do and you did it appropriately, you'll be okay. It'll work out. Now, one little side story I like to use as a difference between equity investors and fixed income investors.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Down to buy something that's down, and you just got to make sure that whatever you bought is going to move up more than what you sold. And that's a difficult thing for people to do. I've sat on investment committees and I think in many cases when you have too much liquidity, I've seen people do regretful things. I talk to people in all the downturns and they say, my stock portfolio is down 25%. Should I sell? And I'll try to say no. And then I'll call them up a month later and they go, yeah, I sold. And they did it because they could. Whereas when something is ill, liquid, they say, well, geez, I really can't sell it. So I'll just ride it out. And sometimes it protects you from doing something dumb. Now, that's an oversimplification. But if you're a long-term investor, you shouldn't be so hyper-focused on liquidity.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“I mean, I'm biased. I think there is a rational value to liquidity. And the reason I say that is people value it and willing to pay for it. And then I say, well, what do you do with it? They'll say, well, if the markets change, then I could sell my liquid stuff and take advantage of those deep down opportunities. I can reposition my portfolio. And I go, okay, my experience has been when markets go into those situations, people freeze. They don't know what to do and they're terrified of buying anything that went down. So they plan for it and then never execute on it. Two, when it comes time to reposition, you're going to have to sell something to buy something. Well, likely everything you own is down. So you're selling it.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Prospects for people. If we did not have any defaults in our portfolio and we have that yield advantage, then we're not pushing the yield advantage as much as we should because we should push it to we have a couple defaults still in line with the market or less, but if we have none, that means we're leaving some potential yield on the table. So it's a balance act of how much yield can we get without increasing the default rate above the market average.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think statistically speaking it provides more than adequate diversification. And we try to avoid over diversification. So our analysts have the time and the experience to research these companies quite thoroughly. And if we don't like something about a company since we're not obligated to own everything out there and there are thousands to pick and choose from, we could just move on, find another company. We're not forced to actually own it. We make assumptions and try to anticipate worst case scenarios and ensure that under these worst case scenarios, in our opinion, the company is still solvent. It can mature the debt. Certainly we don't bat a thousand. We make mistakes. So there will be companies in our portfolio that actually do default. And I will facetiously say to”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“to determine whether the investment thesis remains intact. Occasionally it doesn't, then we have to reinwrite the situation to decide whether we want to exit it or it's still solvent and still going to mature in our opinion, even though it underperformed what our expectations were. So it's a dynamic process where we constantly monitor our holdings. Now we're a little bit different than many other credit investors. We run what many people would consider relatively concentrated portfolios in our opportunistic strategy. We'll have 70, 80, maybe 90 names max, many high yield mutual funds out there will have hundreds of names. So it allows us to spend more time researching our companies because we have fewer of them and we still”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“We constantly have to monitor our portfolio companies. And depending on the type of security that we hold, if it's a bond, typically we get quarterly information and every quarter we can see the numbers that the company's generating and determine whether our investment thesis is still intact. We're agnostic to the type of debt instrument that we invest in. We can do fixed rate bonds. We can do floating rate loans. We could do publics as well as private credit in our strategies, we take advantage of all areas of the debt markets. In our opinion, it's just the company borrowing money. We have to determine whether it's going to pay us back. We don't care whether it's a bond alone, public or private. We just want to get paid back. So with a loan, you can often get monthly financials. So you get real-time data.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“When you think about risk in the market or participating in the original interest in high yield came when people used to get 10% on their CDs and rates start coming down, now you have the opposite, where we're at the bottom of the cycle, it's coming back up. And you've had good businesses that find their way into your universe because of the leverage. How do you think about the ongoing due diligence of whether something remains attractive in a significantly higher interest rate environment?”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Environment and NASA supported the growth in PE transactions and in the ability to acquire companies with a healthy amount of leverage because the interest costs were low. We'll see going forward at a higher interest rate environment if that changes the dynamics of that industry going forward. And I suspect it will.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, polling capital has a mid and small cap growth equity product. Some of her companies are companies that may find their way in our portfolio if a PE firm identifies it as an attractive target. They can buy it and add leverage to the equation to support the premium price that they might have to pay to buy that company and take a private. So these are companies that exhibit those positive characteristics in the PE firms, that's their business, is to look to see what they can acquire that can handle a healthy amount of leverage, which reduces their purchase price, their cash outlay effectively for the equity, and makes the whole equation work. Now, part of what happened over the last 10 to 15 years before 2022 was a very low real interest.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Initially, you were talking about high growth businesses, low capbacks, secularly stable or growing high free cash flow. You don't associate that with high yield or junk bonds. Create the risk. Did I get that right”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“They have an impossible job of trying to put a lot of risk factors in just a handful of buckets. So one is leverage and that CCC rating will exclude a whole percentage of potential buyers and translate into a yield premium. And if it's high growth, low CapEx, business sponsored by a sophisticated private equity firm, they've done their due diligence. We've done our due diligence. You got several eyes looking at it, and we come to the conclusion that this is a good business and it can handle that type of leverage. It's a good investment for us.”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source
“Throwing off free cash flow, relatively low cap X, and can handle a significant amount of debt and grow into their balance sheet if they're exhibiting high single digit, low double digit growth rates, if they leveraged that business six or seven times debt-to-BIBITA with a mere passage of time a year or two into it with that kind of growth rate and the growth in EBITDA all of a sudden the leverage can come down one or two points. And that's significant and that free cash flow can be used to pay down debt as well. So what started out a six or seven times leverage in a couple of years is four or five times and then it's eligible for an upgrade. But if a company has six times leverage, typically it will be rated triple C by the agencies. It's just the”
2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source