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Litespeed’s Jamie Zimmerman Buying MF Global Bonds

Happy Days in Distress

By ERIN ARVEDLUND, Barron’s Magazine

Hedge fund Litespeed Partners finds opportunities in bankruptcies like American Airlines, MF Global and Eastman Kodak. And what’s Tronox, and why is it so valuable?

Table: Best, Worst and Biggest Funds

As a sign of her competitiveness, Litespeed Partners founder Jamie Zimmerman named her hedge fund after her favorite model of racing bike. The fund has managed to maintain a pretty good pace of its own: It has averaged an 11.3% annual return since its founding in 2000 and has grown to just over $1.1 billion in assets.

Because of its event-driven style, Litespeed’s portfolio seems as current as today’s business pages, as it seeks out distressed debt and stocks, particularly companies that are filing for bankruptcy, undergoing restructuring or being targeted for possible acquisition or merger. “We’re value investors with an event overlay. Stocks can stay cheap, unless you buy something that monetizes of its own accord, say through a tender offer, a bond with a coupon in a takeout, or a distressed situation with a package of cash and bonds. To us, plain stock is the most questionable — you have to sell it to someone else for more, unless someone buys the company.”


Brad trent for Barron’s

Among its holdings, Litespeed owns distressed debt of AMR, the parent ofAmerican Airlines (AAMRQ.OTC) andEastman Kodak (EKDKQ.OTC), as well as bank debt of MF Global, the failed brokerage run by New Jersey’s former governor Jon Corzine. Litespeed is also a holder of preferred stock of Strategic Hotels & Resorts (BEE) and shares ofTronox (TROX.OTC), a former unit of Kerr-McGee that got saddled with much of its environmental liability.

Before founding Litespeed, Zimmerman was head of research for the risk-arbitrage situations portfolio at Toronto-Dominion Bank. Zimmerman received a B.A. from Amherst, where she played soccer, basketball and softball, and a J.D. from the University of Michigan Law School. She began her career as an attorney clerking for a federal bankruptcy-court judge in the Southern District of New York, but then jumped into finance as a Wall Street risk-arbitrage analyst. She ran an Oppenheimer proprietary account that invested in post-reorganization equities. She also was a member of a Dillon Read risk-arbitrage group responsible for distressed securities and research on merger-arbitrage opportunities. Today she oversees Litespeed’s 16-person staff in midtown Manhattan.

A marathoner and bicyclist who’s ridden across the country, Zimmerman still works out at 6:30 a.m. daily. A torn Achilles tendon has ended her basketball career, but she remains a big fan of the New York Knicks.

ZIMMERMAN’S FUND WILL TRADE some positions, though it holds others for years, waiting for a company’s fortunes to improve. For instance, once it comes out of bankruptcy, American Airlines, she believes, eventually will mimic carriers like Northwest, United and Delta, which emerged in much stronger financial shape. “They’ve all come out with labor costs significantly lower. Northwest’s labor costs were 33% of revenue, and after bankruptcy they were 21%. United Airlines was even higher; salaries as a percent of revenue were cut in half.”

American’s labor costs when it filed for Chapter 11 in November came to 30.9% of 2010 revenue. “We figure if they can take out enough to bring that number down to 22%, Ebitda [earnings before interest, taxes, depreciation and amortization] will fly, perhaps more than double,” says Zimmerman.

Litespeed bought unsecured bonds issued by American at 19 cents on the dollar, and they currently trade at 30 cents. American is also repositioning its plane fleet and could be bought or re-emerge from bankruptcy in a year and a half, she adds.

“It’s a pattern bankruptcy, in which they cut the pensions and renegotiate the collective bargaining agreement, etc.,” she explains. “You make the assumption that the airline saves $1.6 billion in costs per year and turns that into Ebitda,” Zimmerman says. When American emerges from bankruptcy, she expects Litespeed’s bonds to convert into more valuable equity in a new company. She anticipates more consolidation in the U.S. airline business once American completes its restructuring.

The pioneering camera and film maker Eastman Kodak filed for bankruptcy in January, and Litespeed invested in secured bonds at 71 cents on the dollar. “There’s enough value between the information technology and other Kodak businesses to make money. There’s over $2.3 billion of value to pay us off at par,” or 100 cents on the dollar.

Kodak has three business segments, some of whose elements are cash-flow positive, and some not. The Rochester, N.Y., outfit is shutting down its digital-photography business, while its online photo-printing unit, Kodak Gallery, and other components like ink-jet printers could be sold, Zimmerman believes. Kodak’s commercial-printing business makes money, while a scanner business could also be bought up by a competitor. However, “I don’t think Kodak emerges as a business again, like American Airlines. Lots of little pieces will be sold off,” she contends.

STRATEGIC HOTELS & RESORTS is a real-estate investment trust that owns and manages luxury hotels like the Four Seasons in Jackson Hole, Wyo., the Ritz-Carlton in Half Moon Bay, Calif., and the Fairmont Hotel in Chicago, among others. After the financial crisis of 2008, Strategic stopped paying dividends on its common and preferred shares, but Litespeed stepped in to scoop up the preferred about two years ago. They now trade at $29, up from $18.50 when the fund started buying.

“The properties are fantastic, and are recovering occupancy rates, although they’re not back to the peak in 2007 yet,” she says.

This summer the company will pay hefty back dividends owed on the shares, Zimmerman adds. Unpaid dividends payable on June 29, 2012, will be $7.22 per share, which works out to about an 8% return for the firm. If the preferreds trade at par once dividends are reinstated, the shares will be worth $32.22, Zimmerman estimates.

There are companies even an expert distressed investor avoids. Zimmerman says a low interest-rate environment is protecting many weak companies with heavy bank debts like Harrah’s, Univision Communications, Clear Channel and Rite Aid (RAD). “They have heavy debt loads benefiting from low rates; when interest rates go up, the whole system goes.”

ZIMMERMAN, A WIDOW for more than a decade, devotes her time to her two high-school-age daughters and her firm. She’s considering opening a Litespeed office in Europe, depending upon the opportunities that emerge from the euro zone’s debt turmoil and possible defaults.

Litespeed bought some Bank of Ireland (IRE) bonds as the country’s real-estate problems worsened, but the investment underscored for her the risks of government ownership. “We the bondholders should have wound up with full equity; we got a fraction,” notes Zimmerman. The fund still holds the stock into which the bonds converted. The bank’s chief financial officer assured Litespeed that it was the best deal the government would allow. The Irish government still owns about 15% of the lender and therefore is expected to support it. Yet, “you don’t really know the outcome. The opportunity in the crisis in sovereign debt is tricky. It’s just a different risk; you can take it but you have to understand it’s a political calculus rather than just straight payoff.”

Zimmerman has more clarity on industrials like Tronox, the Kerr-McGee spinoff. The maker of titanium dioxide declared bankruptcy in 2009 to get clear of environmental problems its parent encountered in the former subsidiary. Litespeed purchased Tronox bonds, which then converted into stock at an average price of $47 a share.

Without the environmental liabilities, Tronox has a promising future. It’s the fifth-largest producer of the paint chemical. Zimmerman estimates 2012 Ebitda will more than double to $400 million. The market is dominated by a few players that reduced capacity during 2008 and 2009 and are now operating at nearly full bore. As demand recovers, Tronox and its rivals are raising prices, she says.

Tronox now trades at $155 a share, and Zimmerman has a target price north of $200. A little more legwork, and it could push across that line.


I Bought A Corporate Bond… All By My Bad Self. So Can You.

Sometimes my research pays off very selfishly. I wrote this column for the Philadelphia Inquirer on Tuesday; it helped me to figure out how to buy a 2025 maturity corporate bond in one of the U.S. automakers via my online trading account. It’s not only possible for anyone to do, but it saves the annual fee of buying a bond fund….herewith the story.

Your Money: Tips on buying corporate bonds

By Erin E. Arvedlund

Inquirer Columnist


Corporate bonds are grabbing the spotlight these days as investors grow desperate for yields above rock-bottom U.S. Treasuries, which are returning just 3 percent or so annually.

 How does one go about buying corporate bonds?

We’ll show you the ways to buy individual corporate bonds and bond funds, the pros and cons of each, and the fees to watch out for.

Retail investors can research company bonds’ risk via credit ratings. The three main agencies are Standard & Poor’s, Moody’s, and Fitch, as well as independent credit ratings services Rapid Ratings or Egan-Jones. S&P, for instance, rates “investment grade” corporate bonds at BBB or above; below that are known as “high yield” corporates, or junk bonds.

The higher the rating, the less risk, at least in theory. But a lower rating means potentially a higher yield – since that can result in a higher cost of borrowing. Understanding the security or collateral pledged against the obligation as well as the credit quality of the underlying issuer is key.

Think of a corporate bond as an IOU, money that companies borrow from investors at a specified interest rate over a specific time period. A good place to start tracking corporate bond prices and yields is on Bloomberg’s website (http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/). The FINRA/Bloomberg Active U.S. Corporate Bond Indexes are comprised of the most-often-traded corporate bonds, and these indexes can help you compare returns among them.

Investing in a high-yield corporate bond fund? Then it should have returned at least 4 percent in 2011, compared with the benchmark indexes Barclays Capital High Yield and Merrill Lynch High Yield Master II, which rose in the 4 percent to 5 percent range last year.

When examining historical performance of an individual corporate bond or fund, the most important measure is “total return,” not just the amount of income the bond generates. Total return measures the amount earned by owning a security over time, incorporates the accrued interest on the bond during ownership, and coupons paid out on the bond. Total return is the most complete measure of money made.

Jeremy Brenn of Sensenig Capital Advisors in Fairview Village, Pa., says his firm mostly advises clients to buy bond funds like DFA Two-Year Global Fixed Income Portfolio (DFGFX), with a low, 0.18 percent fee annually. The fund typically keeps maturities very short and credit quality high so as not to take on undue risk. Short-term corporate bonds generally mature within three years, medium-term is up to seven years, and long-term is generally up to 30 years.

The fund’s returns haven’t been great recently, with one-year at 0.78 percent, 3-year returns at 1.5 percent and 5-year at 2.8 percent, but “we think of the bond side of the portfolio as a way to temper the volatility of the stock side. Therefore, we educate clients about a ‘total return’ approach to investing rather than focusing purely on income,” as many investors do.

However, Sensenig Capital also purchases individual bonds in large-cap A-rated companies such as PepsiCo and GE Capital for clients’ portfolios. They use the Vanguard Short-Term Bond ETF (symbol: BSV), which has a tiny 0.11 percent fee.

The advantage of bond mutual funds is they are more easily traded than individual bonds. Among some of the more well-known are: the iShares iBoxx High Yield Corporate Bond Fund (HYG) or the PIMCO Investment Grade Corporate Bond Index Fund (CORP). There are also fixed versus floating-rate bond fund options. Van Eck was among the first to provide an investment grade-rated, floating-rate corporate bond ETF, which offers a play on the direction of interest rates; if rates go higher, then the floating-rate bonds return more.

Guggenheim Bulletshares also offers corporate bond ETFs that vary based on bond maturities all the way out to 2017 (BSCH).

Exchange-traded funds are another option, but be aware some bond ETFs are not as tax efficient as once thought.

Remember, you can calculate the total return yourself for a mutual fund, an ETF or a corporate bond, either by contacting the fund firm, checking the fund on Morningstar, or the fund’s website.

Finally, buying corporate bonds individually is an option – but retail investors may have trouble buying in small lots. Some companies let you buy directly by contacting the investor relations department. If they don’t, call your discount or other brokerage firm and buy over the phone, or online via your brokerage account.

It’s key to check at what price and when the bond has traded before making your purchase, to avoid getting a marked-up price. Bond traders are notorious for marking up prices to build in unnecessary commissions.

Again, FINRA’s website has good recent price data (http://cxa.marketwatch.com/finra/BondCenter/). For instance, local utility company Exelon’s June 2035 bonds (EXC.JL / CUSIP: 30161NAC5) yield 5.08 percent with a semi-annual coupon, according to www.finra.org/marketdata.

Read more: http://www.philly.com/philly/business/20120124_Your_Money__Tips_on_buying_corporate_bonds.html#ixzz1kZxFbqJ6