» The week before last, we bought subordinated debt in a top tier US financial institution that yields about 10% to a September 1 call date. To give you an idea of the credit quality of the firm, five-year CDS trades at roughly 75 basis points, which is tighter than all of the major US investment banks. Better yet, there’s a paragraph in one of the company’s recent filings where management tells you that they plan to call these securities. For an investor to potentially capture about 10% over seven months in that type of situation is goofy…and indicative of stressed markets.
» Similarly, we recently noticed another inefficiency in the equity of a small cap operator of vacation resorts. The company announced in mid-January that they would
conduct a Dutch tender for $50 million of its shares at no less than $9 per share. Following the carnage in late January and early February, the company’s stock drifted
down below $8 per share. At a minimum, we knew that 16% of our shares would be tendered at $9 (at least). That estimate was if everyone would tender, and we had a strong suspicion (based on the holder base) that not
everyone would tender. So we bought stock in the low $8s, and ultimately, almost 50% was tendered at $9 two weeks later. Kind of silly, huh?
These opportunities don’t exist in normal market environments. They’re indicative of panicked markets, where investors sell everything and there’s so much to look at that
a number of unique opportunities often get overlooked. So in short, despite the risks we mentioned, we believe this is a good time to put money to work. It just takes a bit more
patience and a stronger stomach than usual.
