05-13-2015, 08:20 AM
They are one of the biggest (if not the biggest) holders and the ones who produced some board changes last year. Good description and summary of an investor visit.
05-13-2015, 08:20 AM
06-11-2015, 02:10 PM
Discussed FairPoint Communications (FRP) and Madalena Energy (MVN/MDLNF)
http://www.finalternatives.com/node/31047
Q&A: Maglan Capital’s CIO Talks Distressed Investing, Is Bullish On FairPoint Communications
Jun 10, 2015
Steven Azarbad is chief investment officer of Maglan Capital, an event-driven hedge fund with a focus on the liquid instruments of companies approaching, in, or exiting bankruptcy. Based in New York, Maglan typically carries a concentrated portfolio of high-conviction investments, with 80% of positions in single-name, largely unlevered core long positions across the capital structures of small- and mid-cap companies. The fund is up 19.97% through the first four months of 2015.
FINalternatives' Steven Lord recently spoke with Azarbad about the firm’s approach to investing, it current portfolio and more.
Tell us a bit about Maglan
David Tawil and I started Maglan Capital in 2011. David is the president and I am the chief investment officer. We are both trained as lawyers, and started out in the bankruptcy department at Skadden Arps before David moved to Davis Polk and I went to clerk for Judge Walrath in the Bankruptcy court in Delaware and then moved to Weil Gotshal. After our various stints on the legal side we both wanted to get over to the business side, and through different paths, ultimately ended up both working together at Credit Suisse on the high yield and distressed desk.
Following the financial crisis, we decided to go into business for ourselves. Between our legal training and experience at Credit Suisse, we felt it was time to hang our shingle. We ran separately managed accounts through 2010, gained some traction, and rolled everyone into the hedge fund starting in January 2011.
What is your approach?
Maglan is a bit unique in that we operate in all phases of the distressed cycle and across the capital structure of a company. When we come across an interesting situation, we find where the best upside potential/lowest downside risk exists within the capital structure, and then determine when it makes the most sense to take a position (or positions) within that structure. The result is a portfolio with 12-14 positions, each with high conviction and usually representing at least 5% of the portfolio.
Our core philosophy is contrarian by nature. We want to buy something when no one else wants it. It is hard to catch a falling knife, as the old saying goes, so we try to be as thorough as we can on the diligence side, and patient enough to see our investment thesis through to fruition. If we’re right, we get to sell our investment when everyone else wants it. Our average hold time on our core positions is 2-3 years and we target a 2-3x return over that time frame. Some positions in the portfolio today were started when the fund began. If our thesis is correct, we have no intention of leaving early.
David Tawil and Steven Azarbad
Can you give us an example?
Sure. A good illustration of how we play the lifecycle of a turnaround is our position in MGM Studios. It was a very large position for us for a long time. We initially got into the company via bank debt we purchased prior to the 2010 Chapter 11 filing for $0.40 on the dollar, which in turn got converted into equity through the bankruptcy process at $20. Now it is in the high $70’s.
Are you a long-only fund?
No. We will also short the equity when a company looks like a bankruptcy waiting to happen. But we do have a long bias by nature, because whether we buy before a bankruptcy or after, what we’re really after is the long run equity appreciation of a recovered company. In other words, a real turnaround. And if we’ve structured it right, that’s also the more tax efficient approach.
Does that include taking an activist role in your positions?
Bankruptcy folks tend to have a natural activist tendency, so when it makes sense, yes. We’re not afraid of tackling complex legal matters, and we usually understand the bankruptcy process better than most. Most of the companies we engage with come with a story and hurdles that have to be surmounted before a turnaround can work, so if we can be helpful & effective behind the scenes, we like to do so. If we have to draw more visible attention to ways in which shareholder value can be created, we’ll do that too as we have in the cases of FairPoint Communications and Madalena Energy.
Do quantitative factors play in role in your investment process?
Yes, but only to an extent. We will incorporate quantitative metrics in our decision making, especially when it comes to timing entry into, or exit from, a position. But we’re fundamentally drawn to deep value situations. We don’t typically trade tactically around a core position; most of what we own, we bought until we’re pretty full on it.
Let the cake bake, so to speak?
Yes. It’s sometimes the hardest thing about what we do. Patience is an extraordinarily valuable commodity, especially in a mark-to-market business. Part of that process admittedly entails managing our own expectations, since once we’ve decided to go into something, there is a tendency to expect it to start working almost right away.
Let’s talk about the current portfolio. What’s top of your mind at the moment?
Our biggest position is FairPoint Communications (FRP), a small telecom company that operates in primarily rural areas. The company went through some serious integration issues a few years ago following its acquisition of Verizon’s assets in Northern New England, and we first started getting engaged via debt while the company was in Chapter 11.
The stock came out of bankruptcy at ~$20, and promptly collapsed in 2011. We ended up accumulating a lot of stock in the mid-single digit range, because we just didn’t believe the company was going back into bankruptcy. Management was doing too many good things, increasing cash flow and so on. But the market didn’t appreciate it. Recently, the company had to deal with a labor strike (now resolved) which allowed it slash its pension and OPEB liability by ~$700 million. Throughout, we were confident the issues facing the company were transient and unrelated to the underlying business model. We’ve been right so far – the stock is now back near $20 per share – and the firm is ready to be sold. We think a deal worth doing will come within the next 12 months or so, and for a substantially higher valuation. Given that most M&A in FairPoint’s industry takes place around 6-7x EBITDA, we’re looking at $30 per share.
FairPoint is also a good example of the activism I mentioned earlier. We’re one of the largest shareholders in the company, and went activist in order to push for board representation. It was a good process, because it raised awareness of the company and added some corporate savvy to the board that has come in handy.
Are your plays always company specific or do you also trade broader trends?
Sometimes both. It all depends on the opportunity. Take our investment in Madalena Energy, a small oil and gas company headquartered in Canada but whose assets and operations are primarily in Argentina.
Our initial foray into Argentina was via sovereign debt, and later in state-owned energy company YPF. After exiting those investments, we looked further downstream and found Madalena about 18 months ago. We watched it for a while, and by the second half of 2014, when the energy markets were falling apart, we decided to go into the name heavily.
Madalena is good example of a contrarian bet all around. First, it’s Argentina, which is an issue all by itself. But then there is the commodity exposure, the small-cap element, and the currency. We have to deal with all these risks.
But at same time, the company is very asset rich. With oil collapsing, those assets are not being fairly valued at all. This is a true case of the baby being thrown out with the bathwater. The stock market totally underappreciates this company’s advantages, such as a locked price of $77 per barrel set by the government and adjusted monthly. Plus, the energy space in Argentina is complicated – it used to be net exporter, now it is a net importer – so there are massive incentives for companies to increase production.
Argentina has the third-largest shale deposits in the world, and Madalena has assets in the sweet spot of the Vaca Muerta formation. We own 14% of the equity, and have made changes to the board to focus on its Argentine shale and conventional plays, and to monetize its noncore assets in Canada and Argentina. While the balance sheet and assets are great, the company was spread too thin amongst too many plays and needed to narrow its focus on its most prized assets.
It’s a very representative deal for us in terms of what we look for when sourcing investment opportunities. It’s suffered a momentary lapse or shift in its underlying business (oil), but it isn’t facing a broad, endless secular decline. The situation has put companies like Madalena under extreme pressure to tighten up and increase efficiency, both of which will be very valuable when the inevitable recovery occurs. In our experience, the upswings from situations like Madalena can be dramatic and long.
Concentrated positions generally equal risk. How do you hedge?
Risk is obviously pretty high on our radar. We always to try to figure out whether a position can be effectively hedged. And we don’t just rely on the financial markets – for instance, with Madalena, energy risk doesn’t need much active hedging, since the price it receives for production is locked and sector risk is already fairly well mitigated due to the sharp selloff.
When necessary, though, we hedge. For instance, in Madalena’s case, we’ve hedged against the Canadian dollar. We’re always trying to find good hedges that make sense. But at the same time, we’re cognizant that you can’t hedge things for long periods of time. It’s pretty hard to hedge off risk over 2-3 years, which is easily within our horizon – carry and borrow will kill returns. So we try to focus on what makes sense.
How does the macro environment fit in?
We’re mindful of what is around us on the macro side, since everything we’re looking at also fits into a larger picture. For instance, we expect interest rates will grind higher and energy prices will recover back near $75-$80 per barrel towards the end of this year or early next year, and we expect the equity markets to be constructive over the next 24 months, so we view all potential investments through that lens. We think the next couple of years will be a real stock pickers market. Bets on the right horses will work out pretty well – underfollowed, deep value situations will have the potential for significant capital gains.
Do you have targets in mind or wait until it seems tired?
It depends. For most of our positions, the target is always changing. We tweak our expectations based on what we see happening, data points, and what we think the fundamentals will be. Once we’re in a stock, and we see real execution, there really isn’t a set point at which we’ll sell. We’re pretty flexible once something is working.
Until that point, though, we’re always revaluating, scrubbing every data point. We’re nervous guys, always looking for what we’re missing. Why do we like a company when the market hates it? What does everyone else know that we don’t? As contrarians, understanding the opinion of the crowd is very important to us. Why is the herd moving the way it is? Is it smart to be moving the other way right now? We ask ourselves these questions every day.
We never get the timing perfect, but we try not to be too far off the ball. Sometimes something fundamental will change that alters our original thesis, and then we’ll sell. It happens. But the bottom line is that in our experience, if we’ve done our homework, chosen our positions correctly, and bring the requisite patience and discipline to bear, we can generate relatively uncorrelated, above-average, long-term alpha for our clients.
Steven Azarbad
Chief Investment Officer