Where we are in the credit cycle according to contest winning credit analyst/mom

Published: December 19, 2016 | Be the First to Comment

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Jen Ganzi has a knack for spotting key investment opportunities. As the recent winner of SumZero’s Corporate Credit/Preferred Stock Challenge, Jen has worked at firms of all sizes and has built an eye-popping resume. We sat down with Ms. Ganzi to talk about her views on credit investing and the current credit environment, as well as what it’s like to balance a demanding career path in finance with perhaps the most demanding career of all: being a mom.

SumZero: How is credit investing different from equity investing? Do you follow different processes when looking for opportunities?

Jen Ganzi: I think the biggest difference in credit investing vs. equity investing is that you usually have a limited upside, i.e. par, or 100 cents on the dollar. While in equities, the upside is theoretically unlimited. Of course, there are always exceptions – specifically, if a company files for bankruptcy, and creditors wind up owning the equity after the company emerges from bankruptcy, then they can have the same equity-like upside.

Speaking of bankruptcy, another key difference is the creditors are ahead of equity holders to be paid back if a company files for bankruptcy. For example, say a company with $50 of debt files for bankruptcy. If it can be sold for $40, then equity holders get nothing while creditors get 80% of their principal back; however if it can be sold for $60, then creditors are paid in full while equity holders receive $10 for their ownership stake.

In terms of looking for opportunities, when I look at companies, I try to first value the business on an enterprise value basis, using multiples of comparable companies on an EV / EBITDA basis. After getting a valuation, I look at the capital structure and determine where value breaks. For example, if there was a company that had secured debt of $50 and unsecured debt of $50, and I determined the value was $40, I might want to buy the secured debt if it was trading at a significant discount to 80% of par value. However, if I determined that same company was instead worth $75, then I may want to buy the unsecured debt if it was trading at a significant discount to 50% of par value.

SumZero: What is the credit cycle? Where are we in it now? How do you account for it in your research?

Jen Ganzi: According to formal definitions, the credit cycle is the expansion and contraction of access to credit over time. It tends to closely follow the economic cycle. In other words, when the economy is good, banks and other lender feel confident, and are willing to lend at lower interest rates and higher amounts of debt as a multiple of a company’s EBITDA. However, when there is a downturn in the economy, or some other shock, then lenders can get spooked, and will thus charge higher interest rates and not allow as much debt as a multiple of EBITDA. Debt that was underwritten during the expansionary part of the credit cycle will thus see its price (as a % of par) fall such that the yield to maturity increases and market leverage (i.e. price of debt as a % of par times amount of debt) to EBITDA decreases. This took place during the Great Recession, where we saw large sell-offs of debt securities and steep price declines, as the credit cycle followed the economic cycle and went from expansionary to contracting. Some companies that had debt coming due were unable to refinance that debt, as less debt per amount of EBITDA was tolerated by the market, forcing some of those companies to file for bankruptcy. As the credit cycle has become more expansionary since the Great Recession ended, companies once again were able to incur more debt as a multiple of EBITDA, with the market once again comfortable with higher leverage.

SumZero: As a credit investor, what technicals do you use to reveal investment opportunities? What catches your eye?

Jen Ganzi: I try to find opportunities where debt is trading below enterprise value and offers attractive annualized returns until the proper valuation is realized. This means I usually look for some sort of catalyst or event that will drive the price of the debt back up to the level that I think is fair value. In general, I try to find companies that generate enough cash flow to avoid a liquidity crunch (which could lead to a fire sale of the business) and have a sustainable business model within the industry in which they operate (i.e. either one of the top players in the industry or having significant market share in particular niches).

SumZero: How do you make your predictions? What figures / events do you look for?

Jen Ganzi: I try to model out a company’s revenues, EBITDA, and cash flows over several years to get a sense of the trend of the business and what I think it could be worth longer term. The events that I look for to drive value include are near-term debt maturities that will necessitate a refinancing ahead of that maturity date, a likely sale of the business in the near-term that would trigger a change of control provision on the debt (meaning it would need to be refinanced upon completion of the sale or merger), and potential covenant breaches which could lead to a renegotiation of and/or improved economics on the existing debt issues.

SumZero: After investing, what company events do you watch for that could impact your projections?

Jen Ganzi: I always follow earnings to make sure the business does not go off the rails, as well as all other company news that I can find (either on Bloomberg or company press releases) to keep abreast of any potentially significant changes to the business. Likewise, I try to follow industry trends as well to see how the company is performing versus the industry as a whole. That way, if the company is under or over-performing, I can dig deeper to get a sense of why that may be the case.

SumZero: Will the results of this election alter any of your forecasts?

Jen Ganzi: It is still too soon to say at this point. In general, the protectionist measures proposed by the incoming Trump administration could benefit smaller companies, which tend to be in the high yield space, so that could be a positive. And the pro-growth measures likely to be passed by a Republican-controlled legislature and executive branch could benefit the economy as a whole. However, protectionists measures and pro-growth policies could cause the dollar to rise versus other currencies, and these growth initiatives will also likely need to be funded with debt, both of which could increase borrowing costs. Thus, the absolute cost of high yield debt is likely to rise (even if it stays constant or decreases when quoted as a spread to Treasuries), which could adversely impact the cash flows of sub-investment grade companies. So it is unclear what the net effect will be at this point, and thus I am not materially changing my forecasts based on the election results.

SumZero: For those unfamiliar with credit investing, do you recommend any learning resources?

Jen Ganzi: I never read any books particularly focused on credit investments per se. Probably the closest thing would be my bootleg copy of Seth Klarman’s Margin of Safety, which goes into some credit-related investing scenarios. Also Graham & Dodd’s Security Analysis is a must for anyone who wants to invest in any sort of financial instrument.

SumZero: Tell me about your investing background and investing mentors and heroes. Where do you see yourself in five years?

Jen Ganzi: After business school, I started off in equity investing at Gabelli Asset Management, working for Mario Gabelli. His fundamental research analysis techniques really informed my investing process going forward, despite being focused on equities, because he always looked at the enterprise value of the business (as opposed to just equity value using P/E ratios and the like). It was also the sort of place where you really had to come up the learning curve quickly.

From there on, I focused more on credit investing throughout the capital structure. I spent a few years at a small distressed shop that focused on trade claims, which was interesting but too narrow of an investment mandate to really grow (despite beating all relevant benchmarks during my tenure). I moved on to a CLO where I focused on some workout situations in the portfolio and more stressed loan investment opportunities for four years, and then decided I wanted to get back into the total return credit and distressed investing space.

As mentioned above, I very much enjoyed Security Analysis by Graham & Dodd, as well as Seth Klarman’s Margin of Safety. I always try to keep up with what Warren Buffett is doing, and Howard Marks always has interesting things to say. I’ve always been impressed by Mark Lasry and Sonia Gardner, taking a trade claims business and building it up into a full-service distressed investing shop that is now Avenue Capital. Jamie Zimmerman at Litespeed is one of the few women founders of a very successful distressed / special situations fund, which I also greatly admire.

In five years I hope to be at a fund managing total return credit investments, with at least part of my time spent on distressed opportunities. I actually think it would be really exciting to go to a start-up fund at this point in my career, despite lower initial compensation than at a larger firm, as I would be able to help grow that business by generating superior risk-adjusted returns.

SumZero: How do you balance being a mother, a wife, and working to advance your career?

Jen Ganzi: It’s tough! I went on maternity leave in August 2015, right when risk markets were starting to sell off, which made for a stressful twelve weeks! When I went back to work, I was so worried about leaving my daughter, and was scared that she’d react negatively to her caretakers at daycare. I felt guilty for putting her in a situation where she might not be happy. However, she turned out to love daycare, her teacher, and the other children in her class, so that made me feel like I made the right choice for her.

Motherhood was also very difficult in terms of career development. I had been working at a CLO when I got pregnant. When I started there a little over two years prior, I thought there might be some opportunities to expand my investment opportunity set into the stressed and distressed loan investing space via potential partnerships. However, these partnership opportunities wound up not panning out, and the CLO I was working at was starting to focus on lower-risk, lower-return investment opportunities. Ordinarily I would have looked for a new position at that point in time, but, being pregnant, I didn’t think anyone would be eager to hire someone who was going to go on leave in six months. Once I got back to work, I had no time or energy to pursue potential job opportunities. Finally, this past summer, I decided that I needed to focus on pursuing the next phase of my career, and thus came to a mutual decision with my employer to part ways.

I am lucky in that I have childcare for my daughter during the day that allows me to work on pursuing the next step in my career. After leaving my last position, I started working on various credit trade ideas, and saw that SumZero had interesting contests, so I thought it would be a fun way to get myself re-oriented to total return credit and distressed investing. So winning the Credit Challenge gave me some validation that I was moving in the right direction with my professional development.

SumZero: As a woman, how is it to work in a male-dominated industry?

Jen Ganzi: I try not to think about it in terms of gender issues, male vs. female, but rather focus on talking to smart people about interesting investment ideas. Perhaps it’s because I played Little League baseball with the boys up until 8th grade, and then was in the Engineering school at Princeton as an undergrad, so I am used to male-dominated environments. Sometimes I do wonder if my resume is passed over because of the name attached to it, or if I would have had more opportunities had I been a man. However, I try not to dwell on such things because they are not productive – you can only do your best work and hope that eventually leads to the right opportunities. Plus there are definitely a number of women who have had success in the investing world, so that gives me hope.

I think what’s tougher than gender issues is having to having had my career disrupted by the Great Recession, like so many other people in my age cohort who had not found a long-term seat by the time it struck. In early 2007, I took a credit analyst position at a firm that packaged Trust Preferred Securities, or TruPS, into CDOs. TruPS essentially where hybrid debt and equity financial instruments, which sat structurally between the junior most debt (i.e. subordinated debt) and senior most equity (i.e. preferred equity). I thought I might be getting in on the ground floor of the latest exciting new investment product (like junk bonds in the ‘80s or derivatives in the ‘90s), but it turned out not to be the case. So when the downturn occurred I wound up being on the sidelines for a while, which was frustrating, and I feel like I’ve been trying to battle my way back ever since.

But I am not alone here, as I know of many very smart people who have had similar experiences, and some who have even left the industry. It’s a shame, because a lot of talent, I feel, is being under-utilized, mainly because said talent graduated from school in the wrong year and did not choose the “right” job going into the financial crisis, leading to less impressive resumes than folks a couple of years younger or older who did not face similar issues.

So perhaps not the best answer to the question. But I think it’s something that should to be addressed by the financial industry at large, especially given the lagging performance of actively managed funds versus passive funds.

SumZero: What advice would you give to someone interested in pursuing investing?

Jen Ganzi: I think the most important thing is to first understand the fundamentals of investing and asset valuation, either by reading books and/or taking some classes (either in college, grad school, or as an adult in continuing education). Then figure out what sort of investment strategy you want to pursue (debt vs. equity, fundamental value vs. growth, etc.), and try your best to get experience in that strategy such that you can grow from there. The earlier you can decide what your true calling is, the greater your chances of landing in a good spot and finding success.


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