A common question I am asked when meeting with investment consultants and prospective clients is: “what is it that you do differently to other investors?” Given the price action of some high yield bonds, it could be argued that reading the documentation is a key factor which separates Kames Capital from our rivals in the business of managing high yield bond portfolios.
In February 2016, Onorato Armatori S.p.A. (also known as Moby), issued €300m of 7.75% senior secured notes due 2023. Moby is an operator of roll-on, roll-off ferry services in Italy, primarily serving Sardinia, but also Sicily, Corsica and the Tuscan archipelago.
The prospectus for every new bond issue includes a section entitled “Risk Factors”, wherein the company highlights potential challenges that the business could face in the future. Two in particular stood out from the Moby prospectus:
- “Our revenue is concentrated in certain routes and the loss of any of these routes (or lower sales from these routes) could lead to significantly lower revenue”.
- “The European Commission is investigating [subsidy] payments from Italian public entities to determine whether such payments constitute state aid subject to recovery. We believe it is more likely than not that the EC will conclude we received incompatible state aid”.
On 14th May 2018, Moody’s downgraded Moby’s corporate family rating to Caa1, citing: (1) “an intense competitive environment, notably in Sardinia”; and (2) “liquidity concerns as the company faces potentially significant cash outflows over the next 12-18 months on the back of an Italian anti-trust fine and an ongoing investigation by the European Commission”. Despite these being issues already disclosed to the market, Moby’s bonds fell in price by 4pts to 86 following the release of the Moody’s report.
Sometimes in portfolio management, investments perform poorly as unexpected turns of events impact companies in ways which couldn’t easily be predicted. However, in this case the causes of the losses were so obvious that even the company wrote about them in advance.
At Kames Capital, our due diligence process includes reading the prospectus in order to understand obvious risks such as these.