Q&A: Maglan Capital’s CIO Talks Distressed Investing, Is Bullish On FairPoint Communications

Jun 10 2015 | 3:30pm ET

Steven Azarbad is chief investment officer of Maglan Capital, an event-driven hedge fund with a focus on the liquid instruments of companies approaching, in, or exiting bankruptcy. Based in New York, Maglan typically carries a concentrated portfolio of high-conviction investments, with 80% of positions in single-name, largely unlevered core long positions across the capital structures of small- and mid-cap companies. The fund is up 19.97% through the first four months of 2015.

FINalternatives' Steven Lord recently spoke with Azarbad about the firm’s approach to investing, its current portfolio and more.

Tell us a bit about Maglan

David Tawil and I started Maglan Capital in 2011. David is the president and I am the chief investment officer. We are both trained as lawyers, and started out in the bankruptcy department at Skadden Arps before David moved to Davis Polk and I went to clerk for Judge Walrath in the Bankruptcy court in Delaware and then moved to Weil Gotshal. After our various stints on the legal side we both wanted to get over to the business side, and through different paths, ultimately ended up both working together at Credit Suisse on the high yield and distressed desk.

Following the financial crisis, we decided to go into business for ourselves. Between our legal training and experience at Credit Suisse, we felt it was time to hang our shingle. We ran separately managed accounts through 2010, gained some traction, and rolled everyone into the hedge fund starting in January 2011.

What is your approach?

Maglan is a bit unique in that we operate in all phases of the distressed cycle and across the capital structure of a company. When we come across an interesting situation, we find where the best upside potential/lowest downside risk exists within the capital structure, and then determine when it makes the most sense to take a position (or positions) within that structure. The result is a portfolio with 12-14 positions, each with high conviction and usually representing at least 5% of the portfolio.

Our core philosophy is contrarian by nature. We want to buy something when no one else wants it. It is hard to catch a falling knife, as the old saying goes, so we try to be as thorough as we can on the diligence side, and patient enough to see our investment thesis through to fruition. If we’re right, we get to sell our investment when everyone else wants it. Our average hold time on our core positions is 2-3 years and we target a 2-3x return over that time frame. Some positions in the portfolio today were started when the fund began. If our thesis is correct, we have no intention of leaving early.

Steven Azarbad and David TawilSteven Azarbad and David Tawil

Can you give us an example?

Sure. A good illustration of how we play the lifecycle of a turnaround is our position in MGM Studios. It was a very large position for us for a long time. We initially got into the company via bank debt we purchased prior to the 2010 Chapter 11 filing for $0.40 on the dollar, which in turn got converted into equity through the bankruptcy process at $20. Now it is in the high $70’s.

Are you a long-only fund?

No. We will also short the equity when a company looks like a bankruptcy waiting to happen. But we do have a long bias by nature, because whether we buy before a bankruptcy or after, what we’re really after is the long run equity appreciation of a recovered company. In other words, a real turnaround. And if we’ve structured it right, that’s also the more tax efficient approach.

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