Investment Strategy
AUIM's Credit Opportunities Strategy is a fundamental, value-driven investment approach for stressed, distressed and defaulted securities. Driven by a seasoned group of investment and risk management professionals performing in a team-oriented environment, the group focuses on fundamentals, technicals and valuation throughout each step of the investment process. The Strategy is heavily focused on fundamental analysis across a company's entire capital structure and across different credits in order to determine the best risk adjusted potential.
We begin our investment process with fundamental, independent, bottoms-up research across the lower quality portion of the leveraged finance market. The analysis is focused on a company's business, industry and capital structure. The research is developed in collaboration with research analysts and portfolio managers of different asset classes throughout AEGON, particularly the High Yield asset class, in order to fully leverage all resources and provide the most optimal investment management to our clients.
The Strategy is focused on positions across the capital structure with no use of leverage.
The Strategy invests in:
Distressed and high-yield bonds
Distressed and high-yield leveraged loans
Special situation and reorganized equities
Underfollowed and/or misunderstood exchange-traded equities
Debtor-in-possession ("DIP") loans
Exit facilities
Index products
Credit default swaps ("CDS")
Screening Process
AUIM's history as a manager of insurance assets has ingrained a strong culture of risk management within our investment framework. Adhering to this company culture, we have developed and maintain a very rigorous credit review process designed to identify and assess individual investments both as an independent holding and as a credit that will complement the current portfolio and ultimately add value. The Team is also able to leverage the expertise of all of the resources at AUIM, including the High Yield and Leverage Loan teams.
Security selection involves a rigorous, bottoms-up fundamental analysis to identify potential attractive total return opportunities that are misunderstood by the market. Distressed analysis builds off of the analysis done for the High Yield asset class and further investigates factors specific to companies experiencing financial or operational stress. In addition, the Team leverages the expertise of the Bank Loan team, AEGON's corporate credit research group, external restructuring and legal advisors as well as sell-side special situations analysts.
The key to our distressed analysis is establishing the value of assets available to creditors at various parts of the capital structure. This process incorporates all industry and company-specific information which determines the enterprise value and a critique of how that value might be enhanced or compromised in an asset sale, restructuring, bankruptcy or liquidation situation. This valuation then serves as the primary input in determining recovery value/asset coverage of particular securities within the capital structure and subsequently to the relative attractiveness of those securities. This fundamental analysis looks at both risk adjusted return potential within the company's capital structure as well as amongst different credits.
An overlay of top-down economic, business cycle and sector trend analysis is applied to investment candidates; these steps will impact the Team's reluctance to take credit risk associated with certain credits and rating categories. Finally, the investment is considered within the parameters of the underlying benchmark. After initial investment, the Team does not hesitate to sell positions where prices have reached their thresholds or when changes in fundamentals or prices make the risk-reward trade-off unattractive.
Portfolio Construction Methodology
AUIM's Credit Opportunities Strategy is focused on fundamentals, technicals and valuation at each step of the investment process, with concentration on fundamentals. The process begins with idea generation and multiple stages of screening, followed by decision making based on credit analysis and evaluation as outlined above and finally, continuous monitoring. The Strategy maintains a longer-term view, with no use of leverage. The Team structures portfolios to be diversified; however, the extent of diversification tends to be somewhat limited due to the nature of the asset class. Distressed credit prospects typically exist in a select number of industry segments that are experiencing some form of financial or operating distress that characteristically affects the entire industry segment. Following the nature of the investment, the Strategy focuses extensively on credit fundamentals, specifically on identifying discrepancies between intrinsic value and market value which provide an opportunity to contribute to total out performance of the underlying benchmark.
This rigorous fundamental analysis is then collaboratively reviewed by the Team. The Team's general view of the economic outlook, market conditions, current credit cycle and overall distressed credit trading levels determines the final portfolio construction. The portfolio is actively monitored by both the portfolio managers and analysts, who actively communicate and conduct regular meetings, which include AEGON global counterparts. After the initial investment, the Team engages in additional meetings with company management to better assess potential changes in the direction of the credit or our investment thesis. In doing so the Team is able to conduct extensive back-up plans for each individual credit for situations such as bankruptcy and liquidation.
Buy/Sell Discipline
The Firm's buy and sell discipline is a combination of relative value analysis with heavy emphasis on fundamental credit analysis. The distressed credit portfolio typically invests in credits rated from B all the way to D; including investments in reorganized or special situation equities.
Once a credit has been selected the team establishes extensive downside scenario plans for instances of restructuring, bankruptcy and liquidation. These plans are enhanced by the Team's membership and leadership roles on ad hoc and official creditor committees.
At AUIM, we view trade decisions in one of two respects:
Change in credit
This situation would include any new information that would alter the risk or return profile for the company. Credits are constantly monitored by our research group for new information. As circumstances arise, decisions can be made and enacted quickly based on a review by portfolio managers, analysts, and the Distressed Debt team if necessary.
Relative value trade
This situation would include trades driven by movement in security values, general market conditions, or a shift in the overall portfolio strategy company.
Trading Execution Strategy
AUIM distressed credit trades are executed directly by the Team, as we believe this allows them to react quickly to any information that causes a change in company-specific views or investment strategy. In addition, we believe this improves overall performance by keeping the Team in constant communication with Wall Street trading desks and in the center of information flow. The Team's knowledge of market technicals is particularly important in the distressed credit asset class, so the Team's trading strategy allows them to be abreast of these technicals regularly. The Team receives quotes from Wall Street firms on a regular basis and then establishes the best plan of execution based on price and ability to execute trade in the necessary size with the smallest market impact.
Additional Comments
In summary, AUIM's Credit Opportunities Strategy is a fundamental, value-driven approach for stressed, distressed and defaulted securities. The Strategy is focused on leveraging a seasoned group of investment, restructuring and risk management professionals complemented with all the resources of AUIM's world class capabilities.