Monday, 26 September 2016
Last updated 32 min ago
Mar 5 2014 | 2:45pm ET
The Eyck European Tactical Distressed Opportunities Fund recently won The AIF Factor, a competition for alternative investment funds organized by ABN AMRO Clearing, and Khing Oei said he hopes the win will add to the positive fundraising momentum Eyck Capital is currently enjoying.
Oei launched his Eyck European Tactical Distressed Opportunities Fund in 2013 but his interest in distressed European debt was born a decade earlier.
The Netherlands-born Oei began his career with Goldman Sachs in London in 2001, first in investment banking then in the European Special Situations Group, a new group at the time. He then joined Fortress Investment Management, where he worked at the firm's European corporate distressed group, and from there moved to the U.S. multi-strategy firm Halcyon, which was expanding its European credit side.
“I had a phenomenal time there,” Oei told FINalternatives in a recent interview. “[W]e were involved in a lot of restructurings and credit committees in the crisis of '08, '09. It was very much a mixed mandate between distressed debt, stressed debt and special sit[uation]s, which is very similar to how we’re set up at Eyck Capital.”
Oei said what distinguishes his new fund, which generally holds 40-50 positions at any one time, is that all his plays—distressed, stressed, special situations equities—have a credit angle.
On the distressed side, Oei first describes what Eyck is not interested in: primarily, the illiquid space now occupied by large, private equity-style funds:
“I don't want to be too negative about it, but we think that space is crowded. We think a lot of funds are focused on distressed for control, or buying portfolios from banks, etc.—so we're staying away from that side.”
“We have a bit more of an opportunistic approach to distressed, which includes shorting individual names. We've seen two types of trade in our book so far. One is names that are widely traded where we have an edge. The second set are our original ideas that are typically not on the sell-side lists from banks and have included, for instance, writing CDS on restructuring situations where we think the market is overly concerned about their prospects for completing a process.”
An example of the latter, he said, was their investment in Italian bank Banca Monte dei Paschi di Siena—the third-largest bank in Italy and one of the oldest in the world. The bank announced last fall it had to restructure and raise capital roughly equal to its market capitalization. The market was worried the fundraising would fail and that, due to a new EU regulation, sub-debt holders would be subject to an impairment should the bank be a recipient of state aid. As a result the sub-CDS widened to as much as 1200 basis points.
“One important factor was in relation to a state aid package that MPS had already received through a subordinated bond called a Monti bond, after then-prime minister Mario Monti. A specific feature in the bond’s document, which was in Italian, said that the bond is convertible to equity at the option of the bank. This was a key clause for us to build our thesis around, because in our conclusion, that meant that the bank had a Plan B—Plan A being raising equity through a rights issue; however, should that fail, by converting that bond to equity which would shore up their core tier-one capital, which is what they had to do.”
The CDS had widened “indiscriminately,” said Oei. Not long after, the bank, on a conference call about its restructuring plan, announced that their Plan B was in line with what we had figured—to convert the Monti bond to equity. As a result the CDS tightened in and we closed it significantly lower.”
Eyck's approach to stressed debt is “more opportunistic,” said Oei.
“This area has had a short bias in the last year because credit spreads have been very tight. What we have seen is that the market has over-reacted to negative events, whether it's a ratings downgrade, bad earnings or the loss of a contract.”
In order to capitalize on such events, Oei said they try to short the names they feel might fall precipitously, or sell CDS which has widened.
“We build a thesis around a potential ratings downgrade, for instance, going long if a name we know well drops 10 or 15 points, if we think that the market is overreacting.”
On the equities side, investments have included shorting Nyrstar. Oei said the Belgian zinc miner came to their attention while they were researching a different investment—a bond issued by Talvivaara, a troubled Finnish zinc miner. They discovered that Talvivaara had a significant obligation to Nyrstar and, after additional analysis of their operations, placed a successful short against the Belgian company.
Oei declined to give Eyck's current assets under management, saying simply that his firm is an emerging manager. Minimum investment in the fund is $5 million.
Eyck is constantly looking for new investment ideas:
“The distressed side is clearly supply-driven, you cannot just make up a distressed name. A company defaults, loans start to get volatile, banks start selling, etc—that is supply driven. The shorts are clearly our own sourcing because we go against the market. Stressed is again more of our own idea generation trading around events.”
“The same applies to special situations equities, where much of what we trade is driven by events such as de-leveraging rights issues or other leverage angles.
“A lot of idea flow from the sell-side is less interesting for us,” said Oei, “which is actually fine, it means that we have to come up with our own ideas and therefore our positions are off-the-run and, as such, uncrowded.”