(MENAFN- ValueWalk) Miguel Fidalgo learned his trade under one of the world most regarded value investor, Seth Klarman.at the beginning of 2015, Fidaglo set up his own value fund, .
According to the firm's , a copy of which has been reviewed by VaueWalk, Triarii returned -0.99% for investors during the third quarter as the profits from winning positions were offset by losses stemming from the firm's generic drug sector and Greek bank bets.
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Like his mentor, Fidalgo searches, and his hunt often leads to the debt markets. One such trade described in the third quarter letter is the debt of Agrokor, a retail and consumer products conglomerate based on the fast-growing (fast for Europe) European nation of Croatia.
/ Pixabay
Economic conditions in the Eastern European states are vastly better than the rest of the region, but in many ways, these countries are still developing. For example, Croatia is part of the European Union and, as such, is subject to broader EU regulations. However, compared to the rest of Europe the region is cheap and thanks to a booming tourism industry, the Croatian economy is growing 2.5-3.0% in real terms.
Against this backdrop, turnaround situations like Agrokor look attractive.
Klarman Cub Triarii Likes Agrokor debt
Agrokor has a 65% market share in its food business, and its retail outlets are also market share leaders in their respective countries. Despite its dominance, the company has run into some problems recently. Mismanagement and accounting irregularities forced the company into bankruptcy earlier this year (the company took over €1 billion of new impairment charges and restated net debt was 65% higher than previously reported). Due to the size of the enterprise, local lawmakers enacted a new law, colloquially named Lex Agrokor, which introduced U.S.-style debtor-in-possession priority financing.
Triarii has acquired part of a €1 billion super priority loan provided by Agrokor by its existing creditors to help the company resolve the crisis. Triarii acquired the debt at 'an expected yield in the teens to low-twenties depending on the ultimate maturity.'
To say prices of the security collapsed is an understatement. The chart below shows how quickly the shares of some of the debt dropped as the chart below shows.
Like Klarman, Miguel bought on the cheap and may already have made a nice profit, he states "subsequent to the super priority loan being funded in June, we were able to buy our position in the secondary market at an expected yield in the teens to low-twenties depending on the ultimate maturity. Super senior loans that are covered multiple times over and backed by a business with a great competitive position do not usually trade for such high yields"
There are four reasons why the firm believes it will ultimately profit from this trade:
The loan is senior to all of the existing €5.3 billion debt at Agrokor The initial maturity is one year, though it can be extended to three years with a rate step up. To guarantee repayment, there is a 90% sweep on all asset sale proceeds. Total loan coverage is 200% to 300% assuming a €1.0-1.5 billion value for food subsidiaries and €1.0-1.5 billion for the retail business. The economic backdrop of Croatia
In summary:
Ultimately, we believe Agrokor's super priority loan will be repaid at par. Should the payment take the maximum three years, we will end up making a low-teens IRR in a highly downside-protected security. More realistically, at least part will be repaid sooner via asset sales and a potential refinancing, resulting in a mid-to high teens IRR.
Chart via S & P Capital IQ
The hedge fund's biggest gainers were
Par Pacific Holdings (PARR), Argentina GDP warrants, CGG bonds, Ally Financial (ALLY), and ANI Pharmaceuticals (ANIP).
However, the biggest losers were positions in places like Greece.
The letter notes Alpha Bank (ALPHA GA), and Piraeus Bank (TPEIR GA) among top four detractors, but the hedge fund think the selloff in those names was more of a macro panic and less company specific issue.
The letter states:
While the recent news flow may result in an acceleration of the clean-up of bad loans still on the balance sheets, we believe the net result is minimal for most of the banks given the high current capital ratios and effectof strong pre-provision profits continuing to allow build ups in reserves over time. The Greek banks now trade at less than 0.3x tangible book value, a 60-70% discount to even banks in countries like Italy and Portugal.
Miguel is showing that for value investors patience is a vital aspect.
Hunting for value under every rock
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