CounterPoint Analytix was established a few weeks ago, in May 2022, in response to what I saw as an inefficiency in the current markets. Credit investors were asking me to bring deals to them and companies were asking me if I was aware of alternatives to traditional bank financing.
My career in finance was born out of a curiosity as to why the company I was working with at the time, Addax Petroleum, was sold for 47% premium to the closing price the day prior. Extrapolating 13 years in the future from that point, I should be launching a platform providing equity analysis. I'm not. I'm continuing on one of the two threads which underscore my career; credit. The other thread is commodities which is the topic of another post.
Credit comes in a variety of shapes, sizes and guises. What credit doesn't come without is an understanding of the counterparty which extends to how their assets work, which trends in their industry could impact them and the character of the management running the show. Credit investors' operate on the premise that the principal will be repaid with interest. That's not to say that speculating in credit doesn't exist; the subsector (BB+ or below) is $5.58 trillion in size and grew 7.9% in 2021 alone. Howard Marks wrote in October 1992, "Two principal factors determine whether an investment will be successful. The first is the intrinsic quality of the underlying entity being invested in…The second factor determining whether something will be a good investment is price." CounterPoint enables me to continue answering the question that got me started in finance; what is the intrinsic value and are we getting a good price?
I'm fascinated by the spectrum of outcomes of Mr. Marks' two factors which credit provides. Good companies have one equity price which reflects investor sentiment now and make no guarantees about the future. The same good company can have many different credit prices at the same time. Debt prices at the time of closing the deal, similar to buying an equity at the price listed that day, and reflects market attitude at that time but the debt comes with a promise regarding the future.
Take Occidental as an example. The E&P company issued multiple notes in August 2019 which ranged between 1.5 - 4.5% depending on maturity. A few months later Berkshire purchased preferred equity (a form of credit for the purpose of this example) which paid 8% and offered a conversion of the shares to common equity. Occidental's average annual cost of their revolving credit facility the same year was 0.11%.
Arguing the risks and rewards of the three facilities is not within the scope of this short post which is intended to highlight why CounterPoint chose to focus on credit. Highlighting the range of potential prices the same good company will pay for debt capital is the intent. Credit comes with more levers to pull on in a negotiation. Control of the narrative, or at least the outcome, is more accessible to the active credit investor.
Upside is admittedly more elusive and the mismatch between unlimited downside and capped returns must be managed. Continuing with Occidental as a case study; an equity investor who bought in at $10/share in 2020 is now setting on $60/share whereas the a savvy credit investor who bought the 2024 notes at 60 cents in October 2020 might have been able to strike the 105 cent price level in November 2021 if they could find the liquidity. Being the direct investor offering $8 billion of liquidity during a bidding war bought Buffett an enviable position as a creditor; he got to keep his cake and eat it too. Initial reaction of the banks providing revolving credit facilities to oil companies (and airlines, hotels and car rental companies) when each called to draw on those lines at the outset of the pandemic speaks for itself. A 0.11% annual rate requires a HUGE portfolio which is maintained over a LONG time where companies keep the liquidity in place 99.9% of the time to maintain ratings before any investor can justify a single loss associated with that price.
CounterPoint focuses on similar asymmetric opportunities such as preferred equity and, when the markets breakdown, the public securities. I've highlighted two of the investors which serve as sources of learning, insight and temperament. I'll highlight others as I continue to post.
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