Einhorn bets against U.S. high yield, investment grade debt

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Hedge fund manager David Einhorn says that he’s shorting U.S. corporate debt as protections for creditors deteriorate.

His firm Greenlight Capital is wagering against both junk and investment grade debt, according to an investor letter seen by Bloomberg. The macro position will provide a hedge for the firm’s bullish equity positions in addition to being an attractive, standalone bet, the letter said. The cost of taking such a position is “quite low” as credit spreads tighten, according to the letter.

“Rating agencies have been complacent and allowed debt/Ebitda and debt/equity ratios to deteriorate without a corresponding reduction in credit ratings,” Einhorn said in the July 25 letter. “Meanwhile, we are a decade into an economic recovery and there are signs the economy may be slowing.”

Credit graders have come under scrutiny by investors in recent years for letting companies load up on debt to fund acquisitions with minimal reductions to their credit ratings. A 2018 Bloomberg analysis of the merger boom found that more than half of companies making acquisitions pushed their debt ratios to levels typically associated with junk-rated companies but were allowed to keep investment-grade ranks.

Companies including Anheuser-Busch InBev NV have now come under pressure from the ratings companies for failing to swiftly cut their debt loads after acquisitions. Years of easy-money policies from central banks have spurred companies to borrow cheaply in the debt markets and pushed the amount of debt rated in the BBB range -- the lowest investment-grade tier-- to $2.8 trillion, more than half the U.S. high-grade universe.

Despite signs that debt metrics have deteriorated, investors have continued to load up on corporate credit. Risk premiums on investment-grade bonds sit at just 1.09% over Treasuries, near the lowest levels since the financial crisis. An index of junk bonds hit an all-time high Thursday, and the notes have returned more than 10% this year, prompting some investors to warn it’s time to take profits. Corporate earnings are expected to soften and economic growth may slow, undermining the outlook for credit in the second half.

After losing 34% in 2018, the manager has rejiggered his portfolio to take fewer, more-concentrated bets. The main fund at Greenlight is up 18% for the year through June -- the best start to a year for his value-investing strategy since 2009. It’s a welcome vindication for Einhorn, who has seen his firm’s assets collapse from their $12 billion peak to about $2.5 billion toward the start of the year.

Bloomberg News