Transcription of Finance News Network Interview with Wiltshire Credit Opportunities Fund CEO and Principal Investment Manager of Wiltshire Capital, John SullivanLelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from the Wiltshire Credit Opportunities Fund, is CEO and Principal Investment Manager of Wiltshire Capital, John Sullivan. John, welcome to Australia.
John Sullivan: Thank you very much, it’s great to be here.
Lelde Smits: Your Fund buys debt securities issued by European corporates. From what we hear the European situation sounds as though it might be a buyers’ market, is that your assessment?
John Sullivan: Yes, that’s right and Wiltshire Capital is definitely a buyer of European credit opportunities. I mean Wiltshire Capital’s strategy is a reasonably straight forward strategy. What we do is we look in to take advantage of essentially the dislocations that are occurring in Europe, as a consequence of the sovereign debt crisis. And we do that by investing on a very fundamental basis in performing stressed and distressed European corporate debt. You know, we’re looking for event situations; we’re looking to invest in leading businesses. And the opportunity that we see here today – I’ve been involved in the European market for almost 20 years now, this strategy has shown to be a very effective way of investing through credit and market cycles.
Lelde Smits: Core Europe appears to be doing better than the rest of the continent. How does your Fund approach the rest of the region, and are there good companies with debt that have been indiscriminately marked down?
John Sullivan: Yes there are. I guess we are very cognisant of the differential between the core and peripheral nations in Europe. I think even within the peripheral nations, there are the good ones and the bad. For example, clearly Greece has got a lot of airplay and it has significant issues which will last for a long time. And then there are degrees of improvements upon that. Within those countries though, there are world-leading businesses that still generate significant cash flows, have demonstrable competitive advantages. You know, offer essentially leading brand names and global products and they’re continuing to perform very well. But they are – the value of their debt has been heavily impacted by the sovereign nation in which they’re present.
Lelde Smits: And John could you list some European names that Australians may recognise?
John Sullivan: Yes of course. Two companies I might mention today, one is Travelex a leading global provider of foreign exchange services. The company had performed exceptionally well because of the sovereign crisis and it’s considered to be a leverage company. The loans were actually trading in the 70’s in the secondary market. We felt there was a lot of value in those loans and that there was an event, and consequently the event occurred. And as a result of that, we were actually able to sell our position or exit our position close to 100, realising returns of 22.5 per cent.
Second case would be TNT Logistics, a world leading freight forwarding and contract logistics business, again an outstanding financial performer. Again because of the sovereign crisis and other reasons, those bonds were trading at very low levels in the secondary market. We again invested there in the 80’s. As a consequence of a very strong performance the bonds were tended in the secondary, sorry - tended in the market and we exited at 105 realising 27.5 per cent IRR (Internal Rate of Return).
Lelde Smits: So why are these companies trading at what appear to be elevated yields, when their underlying businesses are sound and lending rates in the Eurozone are at record lows?
John Sullivan: I think the obvious answer is the degree of sentiment and fear associated with European companies. There is some dislocation in the European sub investment grade credit markets. The risk and fear has resulted in a number of these assets being significantly undervalued.
Lelde Smits: Value can go unrecognised for long periods. What do you specifically look for when investing?
John Sullivan: Yes, I think there are some really key facets to what we look for. One is we look for an outstanding management team and a very supportive sponsor or owner of the business. We look for businesses that are market leaders and have clear competitive advantage, that there are very well understood return opportunities for making that investment. That they’re businesses that have a clear positive credit event, which acts as a catalyst to really drive the value of that debt.
Lelde Smits: More broadly John, what is the level of insolvency among European corporates over the last year?
John Sullivan: I think we focus on the sub investment grade and credit space. What that means generally is they tend to be the larger companies within the European credit space. The default rates in that area have been sort of 2-2.5 per cent, so these are very low. And particularly, when you look at whether the market is pricing default risk, which is substantially above that, we clearly have a wonderful value opportunity.
Lelde Smits: And do you believe this situation is improving or deteriorating?
John Sullivan: Look I think we will see some increase in default attributed to the usual delay that you see between soft economic performance and corporate performance. But I think my earlier point stands for that as well, is that the market is pricing in an anticipated default rate that is far beyond what ever has occurred in history. And you know, Wiltshire’s objective is take advantage of that and be compensated for that risk, which the market is not properly valuing.
Lelde Smits: And what is the investment appetite for European countries from outside of Europe?
John Sullivan: Very strong. Despite this crisis many of the world’s leading investors, corporates and these include some of the largest and most successful emerging market players, have been making substantial investments. I mean China for example, is expected to triple its investment in Europe over the course of the next three years.
Lelde Smits: Finally John. As a manager that knows the region intimately, do you believe the worst of the crisis is behind the continent, or could
shock waves still occur?
John Sullivan: I think we are in the midst, or in the middle, of a wholesale restructuring of Europe Inc. I think we can expect to spend a number of years going through a whole range of political and economic outcomes, which really with the incumbent government that we have in place, will clearly create uncertainty. But I think there is a strong motivating force to provide some further amalgamational consolidation within Europe.
Lelde Smits: John Sullivan, thank you for your insights.
John Sullivan: Pleasure, thank you.
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