They swooped in to buy the debt of pandemic-battered airlines and cruise companies. Some got in on the lucrative role of funding Hertz Global Holdings Inc.’s bankruptcy reorganization, while others made wagers against commercial real estate. Now, some of the most seasoned distressed-debt traders are totaling up big gains.
Funds run by firms from Knighthead Capital Management to Diameter Capital Partners and Apollo Global Management notched returns that in some cases are approaching 50% after capitalizing on last year’s pandemic-induced market turmoil. While not necessarily the financial world’s biggest winners in a wildly volatile year that produced a more than 16% gain in the S&P 500 Index, they outmatched peers. Distressed debt funds on average gained 11.4%, according to Hedge Fund Research Inc., while the riskiest corporate bonds rose 2.3%.
Though not all of the industry has finalized their numbers for 2020, Bloomberg News rounded up results for several of market’s most well-known distressed-debt and credit trading shops, along with the trades that helped generate those gains. The information compiled is based on people who’ve been briefed on the results but weren’t authorized to speak publicly. Representatives for each of the firms declined to comment.
Apollo Global
Apollo’s flagship credit hedge fund posted gains even in early 2020 when most of its rivals were nursing losses. Through December, the $3.4 billion Apollo Credit Strategies Fund was up about 26% before fees.
The fund is run by John Zito, senior partner, deputy chief investment officer and co-head of global corporate credit.
Apollo began amassing beaten-down investment-grade debt in March, and saw the holdings rally after the Federal Reserve started buying up those notes. The firm’s credit fund had a net-short portfolio but shifted to a net long approach after the market plunge in March.
The fund also made a profit on Hertz, first taking a short bet on the rental company before buying up first-lien debt and other financings. The vehicle also profited from wagers against energy and CMBX 6, a commercial mortgage-backed securities derivatives index with high exposure to shopping malls.
Apollo also benefitted from bullish credit bets on Frontier Communications Corp. and Advantage Sales & Marketing Inc.
Bardin Hill
Bardin Hill Investment Partners, which manages nearly $9 billion in assets, started a credit fund in April to target debt pummeled by the market’s dive. The Bardin Hill Opportunistic Credit Fund, now with roughly $400 million of assets, posted an annualized gain of 31%.
New York-based Bardin Hill specializes in targets with $500 million of debt or less. Jason Dillow, chief executive officer and chief investment officer, said in a December interview that his firm is looking to lend to certain sectors like fitness and wellness that can snap back in a post-pandemic world.
The firm also spent time on travel and leisure, chemicals, and event and ticketing-related businesses. The majority of Bardin Hill’s capital is invested in secured debt, Dillow said. It looks to finance operating companies, adding positions that are ahead of existing creditors in line for repayment.
Diameter Capital
Diameter posted a return of 24% at its main $5 billion hedge fund. A $1 billion draw-down fund that started in April gained about 47% through December.
The firm saw some of its biggest wins from travel credits and software loans. The credit manager participated in Hertz’s bankruptcy and bought debt tied to Carnival Corp. The firm also bought a chunk of investment-grade bonds in March to capitalize on cheap valuations for healthier companies amid the turmoil.
New York-based Diameter was founded by partners Scott Goodwin and Jonathan Lewinsohn in 2017. The firm invests in securities including in high-yield and investment-grade bonds, loans and credit-default swaps.
Knighthead Capital
Distressed-debt shop Knighthead gained 15% in its flagship fund last year. The $4.5 billion firm, run by Tom Wagner and Ara Cohen, saw its drawdown fund surge, bringing its internal rate of return since its mid-2019 inception to 55%.
Knighthead’s returns were driven by investments in Sabre Corp., PG&E Corp., Azul SA, Latam Airlines Group SA, Marathon Petroleum Corp. and pipeline bonds.
Mudrick Capital
Mudrick Capital Management, which manages $2.8 billion, gained about 12% in its flagship hedge fund, making much of its money in the fourth quarter.
The fund’s returns were driven in part by a CMBX 6 short bet, and it also made money on investments in Gogo Inc., Ligado Networks LLC, and AMC Entertainment Holdings Inc. The hedge fund recently committed to lending $100 million to the world’s largest movie theater chain. Mudrick also sold its position in
The New York-based firm was founded in 2009 by former Contrarian Capital Management money manager Jason Mudrick. The firm is expanding further into Europe with the takeover of a credit hedge fund previously run by CVC Credit Partners, Bloomberg reported earlier.
Redwood Capital
Redwood Capital Management gained 10.7% at its main Redwood Master Fund through year-end. Redwood’s second drawdown fund posted an internal rate of return of 45% for 2020. The firm’s Opportunity Fund, which oversees $1.5 billion in high-yield and stressed debt, gained 11%.
Redwood, which manages $7 billion, had less than one-fifth of the cash in its $1.5 billion drawdown fund deployed before the Covid-19 crisis rattled markets, Bloomberg reported. It invested $1.3 billion from late February through late September as markets and the economy were roiled by the spread of the virus, according to an investor letter.
The Englewood Cliffs, New Jersey-based firm put money to work in hard-hit industries like hospitality, cruise ships, real estate and aerospace. It also invested in Argentina and purchased healthier investment-grade securities and leveraged loans as risk premiums blew out. Specific bets included Cheniere Energy Inc., Ford Motor Co., SoftBank Group Corp., Marriott International Inc. and real estate investment trust Vereit Inc., the letter said.
Sound Point Capital
Sound Point Capital Management’s Distressed Loan Opportunity Fund launched in January 2020 and finished the year with an annualized gross return of 65.6%. The roughly $400 million fund focuses on broadly syndicated loans trading below 90 cents on the dollar and remains active in restructuring situations. The fund invests across sectors and currently holds over 20 issuers.
New York-based Sound Point, which manages $22 billion, targets stressed and distressed loans that vehicles like collateralized loan obligations and daily liquidity funds typically look to exit.
