Tiburon Capital Management: Climate, Themes, Opportunities And Risks

Tiburon Capital Management: Climate, Themes, Opportunities And Risks

Tiburon Capital Management: Primary investment strategies

Special Situations

• Spins/split-off orphans
• Process-driven legal trades
• When-Issued relative value trades
• Misunderstood Acquirer Companies
• Rich Balance Sheet stories
• Broken Merger value trades
• Corporate Structure Changes
• Reversed Tight Merger Spreads

Fundamental Distressed & Stressed

• In or near bankruptcy, in default, facing liquidity issues, and post-reorganization
• Covenant defaults
• Out of favor and/or limited research coverage
• Change of control language

Capital Structure Arbitrage

• Intra-credit capital structure arbitrage (Holdco/Opco, Sr. vs. Sub)
• Structural seniority trades
• Negatively biased “long put” capital structure arbitrage
• Short-biased “layering” credit trades

Strategies seek to be opportunistic with a plausible Revaluation Catalyst Long or short anywhere in the capital structure, predicated on the optimal risk-adjusted returns.

The 2015 Tiburon Panorama: Climate, Themes, Opportunities And Risks

Executive Summary

• 2015 a Nervous Calm – Mature Phase of Bull Market
• Favoring DM over EM; US Marginally over Europe-US one of only major economies expected to accelerate in 2015. Divergent Global Central Bank Objectives and GDP prospects. Gentle Rate Rise 2H15 earliest
• Europe and Quantitative Easing; UK the Best of the Bunch. ECB QE drives equity out performance and events
• Favoring DM Equities over Bonds; DM Equities are cheap to bonds on a yield basis
• In Mature Phase of Bull Market, but not Overvalued – Shareholder Friendly Behaviors and Revaluation Catalysts buoy downside. Prefer Liquid Large Caps as out performers in Mature Phase
• Social Contract – 3 Arrows in Quiver: Cash on B/S, Access to Capital Markets, High Share Price as a Currency
• Strong US$ – Favor Companies with High US Sales, Costs in Euros even Better
• Oversupply of Oil Creates Sovereign Winners and Losers – US, China, Japan, India vs EM
• Make the Easy Bets and Hard Bets Related to Oil Price Drop (Easy: Consumer, Cost of Goods driven; Hard(er): Energy Ecosystem – But Look for methodological edge)
• Prefer High Yield to Investment Grade Bonds – Oil will make it a Bond Picker’s Market. Lower Rates Longer

Tiburon Capital Management: Favoring DM over EM; US Marginally over Europe

• US one of only major economies expected to accelerate in 2015
• Increasing employment, industrial capex (+11% 3Q14) acceleration due to increased corporate capex and private consumption (jobs, gas price “windfall”)
• Global deflation, central bank easing (16 cuts this year and counting) = rates lower longer in US
• Estimate 3% GDP in US 2015, US assets attract global flight capital (safe haven, higher yielding)
• Watching out for Strong US$ and impact on US companies with international revenues

Tiburon Capital Management: Europe and Quantitative Easing; UK the Best of the Bunch

• Europe QE is = US QE x .70 (not as robust an impact)
• The unintended consequence of QE: Shareholder-Friendly cash use, not top line borrowing
• Dysfunctionalityof Europe and lack of structural reform requires parsing economic vs company
  • One will influence the other and requires close attention
  • Hand pick companies with catalysts, mindful of revenues, costs, eye on macro

Tiburon Capital Management: Favoring DM Equities over Bonds

• Solid momentum in US, coming momentum in Europe with low rates and low inflation
• Prospect of gentle rate rise in US (though very modest, possibly not 2015) good for equities
• Materializing “wealth effect” -greater disposable income should stimulate consumption
• “Fairly” valued US and European equities are cheap to bonds (S&P 500 total return= 4.2%* vs 10 Year Treasuries at ~1.70%)

Tiburon Capital Management: Are We Properly Compensated Long US Equities at Present Valuations (Yes)

• With interest rates low worldwide, return expectations should adjust lower too
• Prospect of gentle rate rise in US (though very modest, possibly not 2015) good for equities
• Scant evidence of cyclical excesses or inflationary pressures that historically end bull markets
• We are in the “mature” phase of the US bull market, begetting higher volatility and lower returns

Tiburon Capital Management: Cash on Balance Sheets and Ample Access to Capital Markets Drives Events

• Three Arrows in the Quiver –Cash on balance sheet, Access to Capital Markets, High Share Price as a Currency
  • Shareholder-Friendly behaviors: share buybacks, new dividend initiation or increases, special dividends, accretive M&A
  • Goldman anticipates 18% increase in share buybacks, 8% dividend growth in 2015
    • Unintended consequence of QE and low interest rates
    • Companies reward shareholders versus organic growth (statements about future confidence and historic rewards for proper Return on Invested Capital (“ROIC”) policies
    • Provides ballast in choppy markets (mature companies –equities are bond-like)
    • Buybacks and dividends for multiple immunization in a fair to rich priced equities market

See full PDF below.