Mitchell Julis and Joshua Friedman’s Canyon Capital has been doing well this year, particularly on the basis of its European portfolio. The credit focused hedge fund, Canyon Value Realization Fund, has gained over $300 million on its $2 billion investment in the European region in the past one year, and this was achieved without the fund selling any of the original assets.
CVRF is up 11.5 percent in the third quarter of 2013, beating all of the major indices that watch bonds. Even better, CVRF has gained 0.97 percent through October 18 so returns are up close to 13 percent for the hedge fund. Recently, Canyon hired Rob Teahen from Citigroup Inc (NYSE:C) (who it appears left in October) to work on energy sector investments.
Investment thesis in Europe, momentum is fully up
Julis and Friedman, who are two of the best credit managers around these days, are very optimistic about the Euro region. The quarterly letter emphasizes that Europe has now transformed into a rich momentum story and the recovery is likely to strengthen even further going forward. The European region makes up 13 percent of the fund’s assets, and the fund has invested $700 million in the third quarter alone. On the heels of ECB’s commitment to do whatever it takes to anchor EU’s troubled economy and banking balance sheet, the banks in the region moved to divest off their large corporate loan portfolios. This massive deleveraging created a bundle of opportunities for entry to the fund and it has been buying up loans and bonds of companies that are generally missed by most investors.
The fund believes that the UK- and Ireland-based banks are going to sell more non-core assets, which will create more opportunities for investments in loan and debt portfolios. Another rising opportunity is the likelihood of Spanish banks spinning off their non-core assets, a process that is likely to pick up pace in the coming months.
Canyon’s major investments in European credit
The fund’s largest purchase in the third quarter was $85 million worth of debt in a shipping company, which can potentially yield in excess of 12 percent and up to 15 percent in case of a restructuring. Another investment in UK law bonds have a potential to return 20 percent and this one is a big investment that gives Canyon a blocking stake that means it can reject any unfavorable changes to terms of the agreement. The bonds are guaranteed by a peripheral European country and there are already signs that in the event of sovereign yields tightening, Canyon could net higher returns on this investment.
The fund is also the principal lender in an Irish hotel’s debt, and holds the debt of a Spanish commercial real estate company, where its total holding amounts to $250 million and is the fund’s largest position.
Best performing positions in Q3
The fund’s best performing positions in the last quarter were liquidations from an investment bank, which have distributed $280 million in Q3 to Canyon’s Capital’s profits. The position was taken up in 2010 and since then it has generated a 32 percent gross return. Among corporate positions, the fund gained from the debt of above-mentioned Spanish real estate company, Irish hotel and with liquidations from a UK consumer lender.
The fund was also up in its equities portfolio and added a +13.3 percent gross return in Q3. Major winning positions were in media companies both in the U.S. and Europe.