The credit focused, $3 billion firm Contrarian Capital added a 1.96% gain in its flagship strategy in Q2. Additionally the Contrarian Capital Fund I has added a 1.4% return in July, bringing the year to date gain to +8%. Contrarian Capital was also up in all of its specialty funds in July, Contrarian’s EM focused fund had a tough run in the first half, the Contrarian Emerging Markets returned 1% in Q2 and is up 1.28% for the year after returning +0.67% in last month. The Contrarian Capital Senior Secured fund was up 0.98% in Q2, and is up 6.9% YTD after gaining 1.97% in July. Contrarian Capital Trade Claims was up 2.1% in Q2, and gained 0.8% in July, bringing the YTD return to 6.3%.
Contrarian Capital’s U.S performing debt portfolio
In the quarterly commentary, Jon Bauer writes that dislocation in credit markets is a good sign for distressed debt investments, which is the major focus of the fund. In Q2, Contrarian Capital Fund I, netted the highest gains in from bankruptcy claims and post-reorganized equities while the short book generated the largest losses for the fund. Contrarian’s largest allocation is in U.S performing credit which was up only 0.6% in Q2. The profit and loss profile of Contrarian’s flagship fund is very similar to the returns of the first quarter.
Among corporate debt holdings, the fund gained in Clear Channel Outdoor Holdings, Inc. (NYSE:CCO), Coactive, a switch manufacturer and U.S. Shipping. In its RMBS portfolio, the fund wrapped some positions while initiating others. Contrarian is looking for assets that will do well in a higher interest rate environment as the Fed scales back its MBS purchase program. The fund also initiated new position in ABS collateralized against aircraft.
The hedge fund continues to gains from liquidation of Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) debt and is also up from debt restructuring of Eastman Kodak Company (OTCMKTS:EKDKQ).
Contrarian buys Cyprus debt
Interestingly, Contrarian added positions in Cypriot government bonds in last quarter, a position it further added to when global markets shook the small island country at the end of the quarter. Earlier in March, Natalie Harrison and John Geddie of Reuters reported that hedge funds were betting in favor of Cyprus, as investors dumped Government bonds. So far hedge funds have been winning on this bet; international hedge funds owned half of €1.4 billion of bonds that matured on June 3 2013.
The firm has been buying 2014 and 2015 Cypriot sovereign bonds around 85 and 75 cents on the dollar with a 20% YTM in 1 to 2 years. The fund managers of Contrarian Emerging Markets point out that while the banking sector of Cyprus was outsized, the debt to GDP ratio of the economy was comparatively reasonable at 85%. Contrarian has hired “the best international sovereign litigation law firms” to advise it on this investment; the managers believe that the the Cyprus bailout program further ensures that the country will survive the crisis.
Europe and emerging markets
In Europe, Contrarian bought debt of Pages Jaunes Groupe, a French web hosting company that provides directory assistance and yellow pages. As Portuguese debt yields crumbled in Q2, the fund was able to reduce its exposure in the early period of the quarter.
In distressed EMs, the fund initiated a new position in Renewable Energy Corporation (STO:RECO)’s debt, a company it believes can tough out the rise of cheaper Chinese solar companies. Contrarian was down in its position in Greek and Argentine government debt.
In the equity book, Contrarian was up in American International Group Inc (NYSE:AIG), Capmark Financial Group Inc. (OTCMKTS:CPMK), Charter Communications, Inc. (NASDAQ:CHTR), General Motors Company (NYSE:GM) and Bank of America Corp (NYSE:BAC) in Q2. Other equities that brought strong returns were MGM Studios, Houghton Mifflin, a textbook publisher, and DeepOcean, a Norwegian marine engineering company.