Boaz Weinstein Short Banca Monte Despacio, Long Italian Sovereigns

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Bill Ackman described Weinstein as the smartest person in credit.

Boaz Weinstein Saba Capital, started in 2005, and manages over $5billion today.

Weinstein showed a funny chart of 18-24 men living at home and the very high correlation to 5 year sovereign Credit Default Swaps (CDSs). All the PIIGs are the highest in both categories.

Weinstein asked the audience: in June 2011, would you prefer to buy protection on AAA countries or PIIGs?  The audience mostly answered PIIGs. Weinstein demonstrated a chart, which showed that a basket of five years CDSs did far better for the AAA countries of Denmark, Norway and Sweden. The basket was up 228%. Portugal, Italy and Ireland were only up 61%.

The reason being that the average spread was only 25, and the returns were much higher due to the discount the countries were trading at. The reward risk ratio was much better for the AAA countries than for PIIG countries.  Most credit investors do not focus on low spread names. In general, this is where the most money is made.

Most pundits talk about equity versus credit and do not look at the risk reward ratio. Weinstein compared credit to an out of the money equity put on a company, or country in this case. When high yield are asymmetric, they can fall more than equities. Investors now get small premium for chance of very little return, with high yields and corporates are nearly at par.

With MBIA the CDSs were trading at 12BPs and went up to 1,100; investors would have made 100-1. This is an usual case, but it demonstrates that in general the money is made on the low spreads.

Most credit analysts focus on high yield and corporate bonds, but not on CDSs.

Weinstein bought CDSs on Computer Sciences and the spreads moved up many times over 100% in the past several years. Credit is different than equity in an important way. With equity if two stocks are identical except one stock is more volatile, investors will chose the stock based on their risk tolerance.

Even in credit, people do not look at CDSs. MetLife, Kohl’s’, Avon and Cisco are some example of CDSs, which rose significantly at some point in 211.

Credit is much more volatile than credit when looking at one day movements. Many analysts are mistaken when they think equity is more volatile than distressed credit.

When looking at high yield in relation to equity there was 0.77 correlation from 2004-2009. In the past two years, high yield has almost recovered completely but price to book of S&P has not recovered.  High yields cannot keep going up with equities. High yield gets pulled to par, since it has asymmetric returns. There has been a big rally in equities and credit. There are still problems with credit especially considering problems in Portugal, which looks like the next Greece.

One trade would be to buy investment grade trading at below NAV, maturing on 12/20/2017. Investors can get in at a 21% discount, due mostly to a large sale recently by a single firm. The discount should disappear over time. The exact same bonds maturing a year later are now at par.


Asked what is his favorite single name? An Italian based bank, Banca Monte Despacio is the only bank which trades above its own sovereign. 283% of the bank’s Tier 1 capital in its own sovereign debt. It makes no sense for it to trade above its sovereign. Weinstein is short Banca Monte Despacio and long Italian debt as a pair trade.

Shouldn’t out of money equity should give an investor equal returns to CDSs? There is much more liquidity in the CDS market, than in the equity markets for puts. There are aversions because of crashes like 1987, which put traders out of money. It is rare to find out of the money equity puts cheaper than CDSs, but

What will happen in Europe? Weinstein joked that it would take 30 minutes to answer. This situation is unpredictable. The ministers themselves do not know what will happen. Weinstein like straddles since there will likely be a lot of volatility. However now it looks like credit spreads have become complacent even if the situation gets resolved quickly.

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