DDJ President, Chief Investment Officer and Portfolio Manager David Breazzano recently conducted a video conference with Stacy Havener, Founder and CEO of Havener Capital Partners, discussing how the high yield market has evolved since the pandemic, opportunities his team is seeing, and other timely topics around investing and risk.
Ms. Havener relayed a question from an advisor involving the commonly-held notion that most CCC-rated bonds fall into one of two sectors: energy and retail. The advisor asked if this stereotype is true and whether the DDJ team is finding attractive investment opportunities outside these two areas. Taking a step back, Mr. Breazzano responded:
“Yes, certainly there are retail and energy issuers rated CCC and we try to avoid those. Our CCC investments are often in private equity-sponsored deals. So, if there's leverage of six or seven times a company’s EBITDA, it's going to get a CCC rating even if the enterprise value is worth 12 or 15 times EBITDA… it's still going to carry a CCC rating. Those are some of the names that we like to focus on because there's a huge equity cushion below us. There's a private equity sponsor that can provide creativity and support in the event that there is a credit challenge going forward. And these companies typically throw off a lot of free cash flow and can de-lever over time. If the EBITDA grows, all of a sudden the same company we lent to at six times EBITDA is down to five, and then down to four times EBITDA, and then we're likely refinanced out.
Sometimes another PE firm buys the company and we get another look at whether we want to roll into the new deal or move on to something else. So, those are the types of names that we like. And then we also look for some of the smaller names. There's a high correlation with the rating agencies based on size of a company. If you just line up the size of issuers and ratings, there's a high correlation. The smaller the company, there's a higher likelihood it's going to carry a lower rating. In many cases you could say the low rating is deserved, but not every small company is a high risk company. And one has to realize that every single company out there started out as a small company.”
Interested in hearing more on topics related to DDJ’s approach to high yield investing? Check out the full video call with David Breazzano titled Under the Radar Opportunities in the Loan and Bond Markets. Click on the graphic below to get started.
