As life insurers’ net investment income has fallen steadily over the past decade, such institutions have increasingly begun to allocate their investment portfolios to the high yield asset class as a critical, income-producing component.
David Breazzano, DDJ’s President, Chief Investment Officer and Portfolio Manager, recently participated in a video conference hosted by The American Council of Life Insurers (ACLI). Among many relevant topics addressed by Mr. Breazzano, in particular he spoke about how DDJ strives to generate additional yield in its portfolios above and beyond that provided by the high yield market while also taking on a level of credit risk that is in line or less than the overall market. During a Q&A session, Mr. Breazzano fielded questions from the moderator Chip Clark, President of New England Asset Management, about how DDJ sources attractive CCC-rated debt deals.
“In the investment-grade arena today, it's a food fight for new issues. Deals are 9-10x oversubscribed across all sectors. Talk a little bit about the technicals in your market - the middle market - when you're sourcing CCC deals. Are you sourcing deals yourself through contacts you've made through your career and people that source product for you? Are you getting it from mainstream broker dealers that we typically would deal with in the more traditional high yield market? And how are the technicals today? Are you getting good allocations? Do you find that there's plenty of ability to grow your business and put money to work in this market?”
“It's a good question. Certainly we do buy new issues and we have good relationships with underwriters, some better than others. However, our sweet spot is the relationships that we've developed with a lot of issuers and private equity (PE) firms. We've done deal after deal with many PE firms. So we'll get early looks. If one of these firms is looking to do a transaction and they want to make sure that the debt side of the transaction is lined up, we'll get a call and we'll get an early look at the deal. We sign a confidentiality agreement, of course. And we do that with the promise that we'll get a good allocation.
Also, many of our companies have been in the high yield universe for years, and we've refinanced their debt in the past. We've had companies where we've owned different debt issuances over the last 10 years. For example, we may buy a bond, let it run its course and then the company often refinances and we may or may not then roll into the next tranche. We typically talk to management every quarter – if not even more frequently – so we have a good rapport. A significant portion of our portfolio is in companies where we have an established relationship with the CFO and the management team. In some situations we may contact management and ask whether they need to refinance a certain tranche or whether they need capital to do an acquisition. Often we have long-standing relationships with the people at these various companies and the lines of communication are always open.
We believe that these aspects give us an edge in sourcing attractive deals. We've also done direct deals as well as club deals where there's just two or three investment companies that are allocated the entire tranche and it's one-stop shopping for the company or the PE firm. This can be helpful because we can cut out the underwriter and save the issuer a couple points of underwriting fee. And maybe we share those economics and networks so our clients benefit as well as the issuer. Generally our sweet spot is the relationships that we've established over all these years with PE firms, the companies issuing debt and certain underwriters.”