The Interview - Andrew Rabinowitz, Marathon Asset Management: "One of the greatest opportunities ever to buy good credits at distressed prices"

Andrew Rabinowitz, chief operating officer at New York-based distressed investment specialist Marathon Asset Management, LP, says that in the near term, the firm's strategy will reflect a greater proportion of more liquid, high-quality credits and will evolve into a highly selective approach to invest in the higher-yielding, deeper distressed opportunities later in the distressed cycle.

Marathon Asset Management, LP is a global alternative investment and asset management company with USD10bn in capital under management and core businesses that include hedge funds, private equity, structured finance, emerging markets and real estate.

Founded in 1998, the firm has 150 professionals worldwide with headquarters in New York City and investment offices in London and Singapore. The firm's investment management team specialises in global debt, including high yield, bank debt, distressed debt, emerging market debt, special situations, structured finance, structured debt transactions, and real estate opportunities and investments.

HW: What is the background to your company?

AR: The key focus area of the firm has been distressed and special-situations investing in the global credit markets. The firm's growth strategy has involved building experienced investment teams in lines of business that complement and enhance our core competency in distressed and special situations investing across asset classes.

In line with this objective, our investment philosophy is to generate attractive risk-adjusted returns on behalf of investors by utilising our broad investment expertise, global presence and reach, significant resources and flexible capital capabilities to capitalise on pricing and market dislocations and situational opportunities through investments in the global credit markets.

Marathon pursues a highly-integrated, research-intensive approach with proven informational synergies across its platform to identify, structure and manage the best risk/reward investment opportunities across the capital structure at any point in time.

In addition, Marathon has developed a high-quality infrastructure that includes a dedicated professional staff, proprietary systems and software, and world class policies and procedures necessary for managing tax reporting, trading and other administrative, accounting and portfolio and regulatory compliance functions on behalf of clients. The firm has an important competitive advantage and benefits significantly from its extensive and high-quality infrastructure and administrative capabilities that have been developed over Marathon's 10 years of existence.

HW: Who are your service providers?

AR: Marathon's auditor is Ernst & Young, while legal counsel is provided by Seward & Kissel and Sidley Austin. Marathon's fund administrator for both onshore and offshore accounts is Citco Fund Services.

HW: Have there been any recent changes to the management team?

AR: Marathon recently expanded its partnership to include five additional partners: myself, Richard Ronzetti (global investment management and head of research), Jon Halpern (head of real estate), Steve Kim (chief investment officer of Asia), and Adam Phillips (chief investment officer of Europe). Bruce Richards and Louis Hanover are partners and co-founders of the firm.

Bruce has also promoted Jamie Raboy to chief risk officer. Jamie is a member of Marathon's executive committee and will focus on running global risk management. In addition to Jamie, Marathon's executive committee comprises all partners and portfolio managers Andy Springer and Scott Gordon.

Marathon's operations group has substantial excess capacity as a result of significant expansion of the operations team over the past few years. Marathon has invested heavily in technology such as Marathon Portfolio Management, infrastructure and people, and stands poised and ready to take advantage of significant growth opportunities as they arise.

HW: What key investment opportunities did you pursue through 2008? What impact has the credit crunch had on these opportunities?

AR: As the current credit deterioration cycle has intensified, Marathon has concentrated its focus on its core competency of distressed and special-situations investing in the credit markets to address the expanded universe for this strategy.

Given the level of volatility and systemic risk in the credit markets, we have also taken measures to mitigate risk such as reducing leverage (though historically not a meaningful element of our investment philosophy) and focusing on more liquid and higher quality instruments in the near term. We are also carefully managing portfolio concentrations and limiting investments outside the US market.

Marathon has a well-established, comprehensive body of rigorous internal compliance procedures that we continue to expand given increased demand for the managed account product. We have developed specific protocols for addressing allocations among managed accounts and to ensure the investment criteria of various managed accounts are faithfully carried out.

HW: What developments do you expect in the distressed debt and assets sector in the year ahead, in the US, Europe and Asia?

AR: Massive selling and unwillingness to lend have combined to create unprecedented spread widening and very attractive yield-to-maturity levels for both high-grade and distressed credits. This has created one of the greatest opportunities ever to buy good credits at distressed prices, and challenged credits at a fraction of recovery value.

Furthermore, in the US, default rates are anticipated to exceed 10 per cent in the next 12 months, and S&P expects a three-year cumulative default rate to reach 23 per cent for US speculative-grade non-financials between 2008 and 2010.

Given this current market dislocation and expected further macroeconomic weakness, we believe opportunities will exist to invest in credits of all qualities at attractive risk/reward profiles.

However, in the near term, our strategy will reflect a greater proportion of more liquid, high-quality credits and will evolve into a highly selective approach to invest in the higher-yielding, deeper distressed opportunities later on in the distressed cycle. Marathon's investment approach through 2009 will be driven by fundamental credit selection, overlaid on a macro view, technical trading views, and our investment sequencing strategy.

In Asia, economies are slowing down or contracting after a long period of growth. We expect that weaker exports will translate into less corporate hedging and currency conversion in favour of the local currency. Depressed credit markets will be faced with a lack of liquidity and a further flight to quality. Asian currencies are likely to experience extreme volatility.

 In Europe, it is unlikely that equities will rally substantially until the credit markets have truly stabilised and earnings downgrades have been incorporated.

HW: How will these developments impact your various alternative investment portfolios of hedge funds, private equity and property?

AR: We expect to increasingly target imperfect markets and distressed opportunities to generate attractive non-correlated returns and alpha across our investment platforms. The firm expects to continue to grow and adapt its investment strategies and focus to best address prevailing market opportunities while leveraging its core competencies and differentiated skills and capabilities in distressed investing.

HW: Do you foresee problems in raising capital from investors in 2009? If so, what are the factors that will drive investors back to your funds?

AR: The environment is tougher for raising capital in 2009 than it was a year ago. However, given the supply/demand dynamics for investing in distressed assets, Marathon believes there is a capacity for additional capital to be managed in this space. Marathon aims to grow assets with a diverse and stable capital base of institutional-quality, sophisticated investors.

Marathon expects to continue to expand its relationships with existing and new longer-term, large institutional investors including public and corporate pension plans and government entities. We have found significant interest among this investor type for sizeable segregated, customised accounts managed by Marathon.

We expect a significant component of our asset growth to be driven by these types of relationships. We are particularly well equipped to manage an increased number of these accounts. Marathon has built a multi-faceted marketing plan and has an experienced marketing and client service staff to pursue its asset growth initiatives.

HW: What differentiates you from other managers in your sector?

AR: Marathon possesses expertise in a wide range of key asset classes and types of distressed investment opportunities with dedicated teams for each. The firm has a significant competitive advantage in identifying potential investments through active internal proprietary deal flow, through dialogue with Marathon's internal credit research analysts and traders, as well as external origination, sourcing transactions from numerous management teams, members of the financial community and potential corporate partners with whom Marathon's investment professionals have had long-term relationships.

Marathon's investment professionals have also developed a broad network of relationships with regulatory and government authorities, corporate officers, investment banks, restructuring advisors, turnaround firms, debtor-in-possession lenders, consulting firms, accountants, lawyers, private equity firms and investment advisors around the world to identify and structure investments across the Marathon platform.

HW: Do you have any plans for product launches in the near future?

AR: Given the magnitude of the investment opportunity created across asset classes by the current historic distressed credit cycle, we expect to continue to grow our assets under management. Marathon has carefully grown and managed its organisation to address changing market conditions and opportunities over its 10-year history, and will adhere to this same growth philosophy in the future.



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