In August 2009, The Distressed Securities Report and The Capital Structure Arbitrage Report, both published by the Horizon Research Group, were combined into a comprehensive fixed-income reported entitled, The Fixed Income-Contrarian. The Distressed Securities Report, which began publication in April 2002, was focused on identifying investment opportunities within the high-yield and distressed areas of fixed-income, while The Capital Structure Arbitrage Report, published since October 2000, focused on the identification of arbitrage opportunities, typically within the capital structure of a given company.

During the course of analyzing a typical high-yield investment, the analysts of the Horizon Research Group will often identify multiple investment opportunities within the capital structure of a company.  Based upon in-depth analysis of the financial outlook and liquidity position of the company, an unhedged investment in a high-yield security may be the most attractive approach.  If analysis of the debt structure reveals pricing anomalies within the capital structure, a hedged transaction may be recommended.  The limited-risk properties of such trades make many of them particularly suitable to the use of leverage.  The combination of The Distressed Securities Report and The Capital Structure Arbitrage Report, created a research service with the flexibility to present multiple strategies with different risk profiles, while allowing the subscriber to choose the strategy most suited to their risk tolerance and investment strategy.

Distressed Securities The service presents situations in which the price of a particular security implies a high-risk of near-term bankruptcy - a view in direct contrast with the conclusion reached through our own analysis. Opportunities of this nature present themselves when companies exhibit characteristics of a distressed company, yet maintain the financial flexibility to repair their balance sheet through the sale of non-core assets, the tendering of certain classes of debt for common stock, or the refinancing of near-term debt. Securities recommended for purchase will often be trading at levels that indicate a more severe loss, in reorganization, than our internal research supports – creating significant downside protection in the case of default.

Restructuring Situations When companies are expected to emerge as a going concern, the Distressed Securities Report will identify debt securities that present intrinsic recovery value for pre-petition creditors. This is typically accomplished through the conversion of corporate debt to equity. This approach necessitates a full fundamental analysis of the company prior to reorganization in order to properly project profitability as a restructured entity.

Leveraged Equities Occasionally, the service will identify corporations that are transitioning from a phase of high-growth to a period of stable cash flow, and have chosen to restructure their balance sheets through a “leveraged recapitalization”. As the company uses its free cash flow to repay debt, its equity market capitalization should increase by similar amounts. The reduction of debt should decrease annual interest payments, which in turn should produce higher free cash flows.
 

The service identifies debt securities that exhibit an asymmetrically favorable risk/return profile. These ideas will compliment or be exclusive from the investment recommendations described above. Strategies employed will provide a high return in the positive case, but with limited or well-defined limit of loss in the negative case. Generally, the abridgement of risk is achieved through an arbitrage or hedge transaction with a second or even third security, typically within the capital structure of the same company. Trades with multiple securities will include a sample hedge ratio as well as a set of scenario analyses. These generally include an expected base return, as under a condition of static prices; the return in a success scenario; and the expected return or breakeven point under a failure scenario. It will also include a valuation of the issuer to the degree that the trade is dependent upon a security’s valuation.

 

The Fixed Income Contrarian Compendium, published on a monthly basis, provides an effective forum for Murray Stahl to discuss investment ideas and arbitrage opportunities outside the realm of traditional high-yield investing. The most compelling of these situations will be revisited and expounded upon in full length comprehensive reports, as described above.