A Complete Team is a Dominant Team
It's fall again and that means football teams across the country are meeting head to head on the gridiron. The process of assembling the team and putting the pieces together in a quest to dominate is no small task. In order for a football team to be dominant, it requires all three phases of the game to step up and support the others. At Destra, we like to equate this concept to Alternative Credit Investing, more specifically our investment partners at BlueBay Asset Management. If you are curious how this translates, we want you to read on...
The 3 Phases of Alternative Credit Investing: BlueBay Puts the Pieces Together
Offense
Every good football team this fall will need an Offense with a strategy to score points.
The Multi-Alternative Credit team at BlueBay runs the offense through the global, macro top-down process that looks at opportunities around the globe and tilts the Fund into areas and categories that they believe will best achieve the Fund’s objective.
Idea: Contingent Convertible Bond (CoCos) are issued by banks as part of their Tier 1 capital structure. A bondholder is adversely affected if a bank’s capital ratio falls below a predefined “trigger level”. BlueBay believes European CoCos are undervalued as they overprice the probability of hitting the trigger.
Implementation: BlueBay’s Multi-Asset Decision Group allocated 17% of the total Fund to CoCo bonds on the basis that CoCos are the most under-priced of all the asset classes. A range of “national champion” bank CoCo bonds were purchased.
Outcome: This is a medium term view that thus far has been vindicated by a sharp reduction in spreads year-to-date (and outperformance versus most asset classes).
Asset Allocation as of 6/30/19
Source: BlueBay Asset Management as of 6/30/19.
Defense
The old adage, “defense wins championships” is never more true than when looking at fixed and variable income investing.
The Destra International & Event-Driven Credit Fund is founded on a strong, bottom-up bond and loan picking process that draws from the entire strength of the BlueBay organization. Every desk and team at BlueBay can contribute their “best ideas” to the Fund, setting up a portfolio with strong credit characteristics and the competitive current income, so important to protecting capital during points of market turmoil. Yet these same attributes also lead the portfolio to opportunities for total return as well.
Greek Sovereign Bond Spreads over German Bonds
Source: BlueBay Asset Management as of 6/30/19.
Idea: BlueBay believes many peripheral European government bonds have been under priced relative to realistic underlying default probabilities. In their view the market tends to misprice both election and European exit risk.
Implementation: The debt of several peripheral countries was purchased. The example of Greece is shown on the left: purchased at a spread of 383 bps.
Outcome: As of June 30, 2019 the spread is 290 bps (approximate cumulative return 23%).
Special Teams
Field position is often won or lost in the kicking game. Special teams can be the difference in any game.
For the Destra International & Event-Driven Credit Fund, the Event-Driven Credit team plays the role of “special teams” in the Fund. They look for the opportunity to buy loans and bonds and other debt instruments from companies and entities experiencing an “event” or “catalyst” that should unlock value and provide the chance for better returns.
Idea: Momentive is a global manufacturer of chemicals and silicones. Following bankruptcy, new bonds were issued with a coupon lower than considered equitable and further litigation followed to increase the coupon, an outcome BlueBay believed would prevail.
Implementation: The debt was purchased over a period from May 2018. The average price was ~$105.
Outcome: Supreme Court ruled in May 2019 that the coupon should be increased and bond values jumped (to $117). BlueBay sold the bonds on June 14, 2019 at 118.34, equivalent to an IRR of 12.14% (including coupon payments and price appreciation).
Momentive Bond Price
Source: BlueBay Asset Management as of 6/30/19.
As you can see, the team at BlueBay is looking at all 3 phases of Alternative Credit Investing to put together a portfolio that has the means to dominate. Destra has partnered with BlueBay Asset Management to bring you the Destra International & Event-Driven Credit Fund, a closed-end interval fund with access to credit opportunities across the globe.
If you'd like to know more about the Fund, or just simply hear more about BlueBay and their capabilities, please fill out this brief questionnaire or call Destra at 877.855.3434.