Avoiding cheap trades and value traps
Torgos Credit Opportunities: Best Distressed Debt Hedge Fund – Torgos Credit Opportunities is a multi-pronged credit strategy seeking to invest across debt capital structures of corporate issuers primarily in North America and Europe.
The strategy allocates capital on a bottom-up basis, seeking out deep value opportunities in three key areas: 1) hard and soft catalyst performing and non-performing corporate events; 2) senior secured loans with strong collateral coverage and credit fundamentals and 3) credit volatility, to protect against downside movement.
Raj Davé is the portfolio manager of Torgos Credit Opportunities and when asked to explain the investment philosophy he comments:
“We focus on generating consistent returns by having a strong handle on knowing when to be defensive/aggressive in our portfolio construction. Embedded in the portfolio is a process to seek out deep value opportunities in the US and Europe in leveraged loans, stressed/distressed debt and equities and CDS. Rather than look at melting ice cubes or value names where a catalyst is largely uncontrollable (i.e. energy), we focus on names where there are under appreciated core/non-core assets that provide downside protection, or secularly stable names.
“This year, we have held names in the portfolio that were defensive in nature and trading lower just because the market was lower, as well as good quality cyclical names that were also trading lower because of the economic ramifications of Covid-19 – i.e. autos, industrials. A third iteration involved looking at Covid-impacted names, in hospitality, leisure and aviation.”
Looking ahead, with a continued central bank back stop and a viable vaccine around the corner, Davé anticipates a decline in default rates through 2021, although a long road ahead for hardest hit sectors (travel, leisure, tourism), “as their balance sheet liabilities have ballooned and such expect those sectors to contribute meaningfully to the increase in zombie capital structures over the next two years”.
“Additionally, the increase in leverage and market access provided to some of the weakest and least credit-worthy borrowers combined with continued weakening in covenant protection will continue to siphon off value away from CLO lenders to private equity sponsors/distressed investors, despite recent attempts to fight back on part of CLO investors,” opines Davé.
While focusing on three key sources of returns (senior secured loans, tactical credit in high yield, stressed and distressed, and credit volatility) Torgos Credit Opportunities has the flexibility to rotate across each of them, depending on the economic cycle and market conditions. Davé confirms that the tactical opportunities bucket generated most of the Fund’s returns in both 2019 and 2020 (YTD).
A key aspect of how the strategy is managed is guarding against investing in cheap trades and value traps. Davé says the team goes out of its way to avoid consensus trades that are overcrowded.
“We are always on the alert for group think trades, whereby many smart market players agree on the merits of an investment, its path to profitability, and investment returns. One example is Intelsat’s C-Band gold mine. It had an estimated target of USD45/share but has since gone into bankruptcy and its price is now USD0.52/share.
“We are willing to go against popular opinion and are comfortable coming up with a differentiated view relative to the consensus. To do this requires having a strong sense of the market view and what is being priced in the security,” explains Davé.
Davé attributes the team’s discipline to only investing in sectors it knows, and not straying into areas it doesn’t understand, such as commodities and healthcare, to winning this year’s award.
“Sometimes what you don’t do is more important that what you do,” concludes Davé.
Senior Managing Director, Portfolio Manager & Head of Torgos Credit Opportunities
Raj Davé heads the Torgos Credit Opportunities strategy. He also serves on the investment and risk management committees at the firm. Raj joined the investment team in 2013 and has 20 years of experience investing in the high yield and distressed markets. Raj was a Proprietary Credit Trader at Citigroup, Morgan Stanley and Commerzbank and a Portfolio Manager at Diamond Notch Asset Management. Raj began his career in Investment Banking & Leveraged Finance at UBS and Credit Suisse, respectively.