Anchorage Posts Solid Gains in Distressed Strategy

February 18, 2014   Stephen Taub

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The low-profile New York firm profited from positions in MGM and Houghton Mifflin Harcourt, among others.

Anchorage Capital Partners, the low-profile, New York–based hedge fund firm founded in 2003 by Goldman Sachs alums Kevin Ulrich and Anthony Davis, continued its strong run of performance in 2013.

The firm posted a 20.85 percent net gain for the year; this came on the heels of a 16.44 percent profit in 2012, according to the hedge fund firm’s year-end report obtained by Alpha. This compares with a 14 percent return for the average distressed fund in 2013 and 14.75 percent in 2012, according to industry tracker eVestment.

The hedge fund firm focuses on the credit, special situations and illiquid investment markets primarily in North America, Europe and Australia. In its year-end report recently sent to clients, Anchorage, which manages $12.4 billion, attributes three quarters of its 2013 performance to its portfolio of distressed and formerly distressed companies. In many cases it bought the distressed debt at steep discounts and restructured the positions into deleveraged private equities.

More specifically, the firm notes that credit strategies in general gained 6.26 percent and 11.4 percent in 2013 and 2012, respectively.

Anchorage tells clients that the core of its distressed portfolio is composed of assets acquired through debt restructurings led or influenced by Anchorage over the 2009–2010 private distressed cycle. Its structured-credit portfolio also did well, thanks to the strengthening of the collateralized loan obligations market and low overall default rate. At the same time, the firm maintained a large net-short exposure to performing credit.

In the letter to investors, Anchorage also said it recently launched the fourth vintage of its Anchorage Illiquid Opportunities funds, which seek to target smaller and less-followed illiquid situations. In addition, it closed its second cash-flow CLO, which focuses on syndicated corporate loans.

"These products contribute to the flow of information throughout the firm, from the least liquid to the most liquid situations, and further enhance our ability to analyze fundamental and technical dynamics affecting specific sectors and individual companies’ capital structures," Anchorage explains in the report.

Before founding Anchorage, Ulrich, who serves as chief executive officer and portfolio manager, previously ran the proprietary-debt trading operation at Goldman. Davis, who serves as president, was a special situations investor and investment banker at Goldman. Daniel Allen, a senior portfolio manager and partner, joined the firm in 2008.

In 2013, Metro-Goldwyn-Mayer Studios was the fund’s largest position and largest contributor to performance, accounting for 5.4 percent of the gain. Anchorage had earlier bought MGM debt at a steep discount. Movie and TV studio MGM is best known for its rich film library that includes Rocky, Rain Man, Dances with Wolves and Midnight Cowboy. The company emerged from bankruptcy in late 2010.

Today Anchorage owns the largest stake in the company, which remains privately held but is reportedly mulling an initial public offering of stock for sometime this year.

"We believe the discount embedded in our position remains substantial, given the company’s unlevered capital structure and the valuations of comparable businesses," Anchorage says in its letter.

Anchorage also enjoyed solid gains from publishing company Houghton Mifflin Harcourt, which went public in the fourth quarter. "Despite this liquidity event, we do not anticipate exiting our position in the near term — in fact, we increased our position in the offering," Anchorage states in the letter.

It also enjoyed "significant returns" from investments in real estate and land development companies, including Newhall Land, formerly known as LandSource.

Anchorage also points out that although new U.S. distressed opportunities were limited in 2013, it helped TXU Energy, the troubled electrical utility, avoid bankruptcy before its looming default date. "We were able to structure a transaction that had substantial upside if the company did not default before December 20th, as it ultimately did not," it notes. "We believe this highlights our ability to use our investment, restructuring and trading expertise to participate in distressed situations using a range of tools to identify value."

Although Anchorage’s short book lost money, several investments did work out well. It made money betting against the collateralized debt securities of J.C. Penney Co. when the embattled retailer was forced to raise equity and dilute shareholders.

Anchorage also tells clients its strongest-performing short theme was in monoline bond insurers, including MBIA and Assured Guaranty. It also said it was early to assessing Puerto Rico’s deteriorating credit fundamentals.

Looking ahead, Anchorage sees several trends carrying over into 2014. It cites further improvement in developed markets, the Federal Reserve’s continued support for riskier assets and modestly rising interest rates. "The continuation of relatively benign conditions should benefit ACP’s portfolio, given that accommodative U.S. credit and equity markets support our ability to provide catalysts to increase value in our post-restructured positions," it adds.

In the fourth quarter it added additional exposure across all categories, including the distressed, structured-credit and performing-credit asset classes.

"U.S. and European economic fundamentals seem poised for continued improvement, which may contribute to reduced credit volatility and an ongoing low default environment," Anchorage tells clients. It concedes that a low-yield and tight spread environment would constrain returns for traditional long-only credit managers. However, the hedge fund firm believes this environment would continue to boost its restructured and event-driven equities portfolio.

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