Distressed Debt Investing

FCXoptions said:
So slightly random question, figured I'd just ask it here first instead of creating a new thread.

I found a small closed end fund that is pretty heavily discounted. All its holdings are public except one which makes up a considerable portion of the portfolio. Coincidentally, the fund is trading at a basically the same discount as the size of this position.

I dug into the private company, they put out an annual report, do a stock valuation annually etc and based on their financials it just doesn't make sense why this big of a discount. Liquidity sure, but not enough to discount the whole position essentially! Looking back over the past 15 years the fund has consistently ranged from a 10-20% discount.

So my question is, suppose someone with deep pockets wanted to play this, how would they go about it? I don't know if there is even a mechanism or way to buy out a closed end fund. Seems to me that any premium you could make would be eroded instantly on the news. Could somebody take a controlling interest and then try to force them to sell to realize the gains?

I was interested in the play until I saw how long the discount has persisted. Just was trying to think how it would be gamed to remove that big NAV discount. It is very likely I'm wrong on this whole thing, but it seems if you could buy out the fund at the current price you'd get this private company for free essentially.
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Yes. There was a hedgefund or an investor who would buy up closed end funds and force them to liquidate for him to capture the discount to NAV.
 
Gotcha, I was wondering if that would be the approach taken. Being a small fund I wasn't sure if there would be enough volume to get a controlling interest for that or not. Not that I have any plans or ability to do that, just learning.
 
FCXoptions said:
So slightly random question, figured I'd just ask it here first instead of creating a new thread.

I found a small closed end fund that is pretty heavily discounted. All its holdings are public except one which makes up a considerable portion of the portfolio. Coincidentally, the fund is trading at a basically the same discount as the size of this position.

I dug into the private company, they put out an annual report, do a stock valuation annually etc and based on their financials it just doesn't make sense why this big of a discount. Liquidity sure, but not enough to discount the whole position essentially! Looking back over the past 15 years the fund has consistently ranged from a 10-20% discount.

So my question is, suppose someone with deep pockets wanted to play this, how would they go about it? I don't know if there is even a mechanism or way to buy out a closed end fund. Seems to me that any premium you could make would be eroded instantly on the news. Could somebody take a controlling interest and then try to force them to sell to realize the gains?

I was interested in the play until I saw how long the discount has persisted. Just was trying to think how it would be gamed to remove that big NAV discount. It is very likely I'm wrong on this whole thing, but it seems if you could buy out the fund at the current price you'd get this private company for free essentially.
More...
Back 15 years ago before ETFs came out with redemption and creation features there was a whole close end fund industry with lots of funds that trading at persistent discount to NAV. A couple activist hedge funds did exactly what you mentioned, buying up enough shares to get seats on thee boards and forcing them to offer some type of redemption at NAV. Don't remember the names now, but worth a Google.
 
Haven't come across a whole lot of interest recently, but watching a few retailers. Seems quite a few have been having issues. I know I've seen H.H.Gregg mentioned in an article as well as Gander Mountain for filing bankruptcy. I didn't see any of their debt trading though when I searched the other day.

Claire's (the kid/teen jewelry and specialty store) is in a tough spot. They have a subordinated issue maturing this year, only $25m of $335m is still outstanding on it, so there is a pretty wide bid/ask on it at the moment, showing around $78/$95. They also have a senior secured issue that matures in 2019. About half of it ($222m) is still oustanding. It is trading at a huge discount relative to the one maturing this year (wide spread also). It is around $4/$16 on the bid ask.

The company is owned by Apollo and I believe they have been responsible for buying up the issue maturing this year. Most was picked up at a solid discount I believe and I'm assuming so they can try to retain control if/when it goes to bankruptcy. I've got to dig into this one more to figure out why the secured bond is trading so much lower than the subordinated one. Not sure what the collateral is on it or if it has to do with the way things are structured and the maturity date. I'm sure Apollo owning most of the other issue doesn't help things.

2019 bond - 179584AL1
2017 bond - 179584AJ6

Jones Group ( I believe that is Nine West and a few other companies) as well as Gymboree (kids store) are both in similar distressed situations. They are trading at $30 and $25ish respectively.

Anyways, just thought I'd share these. I'm going to dig into Claire's a bit more and see if I can find out what is going on and the financials. I know anything that is primarily in malls isn't doing so hot, but doesn't mean there isn't potential to profit of course. Heard this Howard Marks quote the other day "No asset is so good that it can't become a bad investment if bought at too high a price. And there are few assets so bad that they can't be a good investment when bought cheap enough."
 
So I've been doing all my bond searches through my Etrade account since I first went down this rabbit hole...just logged into IB from my computer (first time in awhile) and realized they had a pretty solid bond searching tool in comparison that shows a multiple of the amount of results I get through Etrade :banghead:. I think they filter out quite a few of the issues and I know Schwab doesn't show anything below a certain credit rating either. Interesting to see all the other potential plays here. Looks like I've got some work cut out for me.

Side note: It is surprising how many of these companies in distressed situations are controlled by PE firms. I know there are a couple reasons for it, but just surprising the names I repeatedly see pop up when googling these firms.
 
FCXoptions said:
Gymboree (kids store)
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So just pulled up Gymboree today and it has dropped to around 9 cents on the dollar. That made things a bit more interesting. Their annual report actually came out and their conference call the day I posted the above and I had no idea.

Anyways, they aren't in good shape financially. Seems to me the primary concerns are A. refinancing their debt and B. Not letting their sales decline to a point where they can't even service their debt.

There is $760m outstanding on a secured term loan and $170m on senior unsecured debt. That is what I referenced above as trading at 9 cents. Both have been paid down a bit from their initial amounts. The unsecured was $400m initially I believe.

Where it gets a bit scary is looking at their balance sheet. Total assets are $755m with total liabilities being $1.36b...that's a problem. Given that is on par with just the term loan, it doesn't make me too confident on the recovery prospects. It costs them around $80m annually to service that debt (based on last Q's interest expense) so they would definitely get a nice benefit from restructuring and wiping out that debt. I think that restructuring would result in the note holders not getting much of a recovery (if any) of course though.

I'm still looking into this, mainly thinking out loud and open to any input if anybody has looked into it as well. I just don't know if they could potentially take some efforts to cut costs, close unprofitable stores, etc or what has already been done on that front.

http://ir.gymboree.com/secfiling.cfm?filingID=1193125-17-82009&CIK=786110

http://files.shareholder.com/downlo...7D2477002CA/Q217_Earnings_Release_3_13_17.pdf
 
There was a decent amount of "customer buys" on Gymboree yesterday. About $1m reported after 5pm all at the same price broken up over several transactions. Plenty of sells other days too so can't use that to discern much I'd say. The price has still been dropping though so not sure. I haven't had a chance to dig into it much more yet. Interesting it is now trading flat. I pulled up an order through Etrade and it showed the usual "Parties must agree on the accrued interest" etc part since it is trading flat and listed the amount. Through my retirement plan, they didn't show that they had to accrue any interest. I wonder the mechanics behind that and if you actually have to pay that out or would be credited it back or not.

Update: I was wrong on the retirement plan, the accrued interest is in there
 
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Haven't check in lately, I ended up buying the Gymboree bonds for just a little under 7 cents on the dollar in my retirement account within a couple days of my last post. I bought $25k of face value so not a very large investment $ wise. I believe total tied up was $2,500 but $750 of that was accrued interest (still at risk of course if they had filed bankruptcy).

Anyways, they made the interest payment today so that put the accrued interest back in my pocket plus a little over 20% return on the principle. I haven't paid a whole lot of attention to it since buying to be honest, I've just left it be so no significant updates on where I feel they stand financially. Main thing I've read on is how Bain has bought a significant amount of debt trying to maintain their equity position. So more than likely we will be looking at a bankruptcy in the near term I would guess.

Nothing else new, I haven't had time to do much research on any other companies lately. I'm sure there will be plenty more retailers showing up though in the distressed debt world.
 
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