Steve Tananbaum on Calpine Equity: Invest For Kids Chicago Presentation ~ market folly

Friday, November 6, 2015

Steve Tananbaum on Calpine Equity: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is GoldenTree Asset Management's Steve Tananbaum who talked about Calpine equity.

Steve Tananbaum's Invest For Kids Chicago Presentation

•    $24B AUM – credit manager formed in 2000.
•    Credit market discussion – HY defaults increasing, many leading indicators.
•    High transaction multiples and leverage increasing – debt to ebitda around 5.2x. Increase in default rates, just about to begin over the next 12-24 months.
•    Would get 1000 bps, think were halfway there at 500 bps spread.
•    Is HY cheap now? Now its ok, closer to fair value.
•    2/3 bonds trading below par. 90% of loans trading below PAR
•    Now a bond/loan picker market.
•    June 14 – 90% of bonds above par
•    In bonds – 2/3 of what is trading below 95 isn’t energy. Loans its 80%.
•    Looking at triple C credits, many funds who owned them did great in FY09-13, and then 14/15 something went wrong. What occurred is the lowest part of the market had a significant reversal (i.e. CCC) underperforming by almost a 1000 bps. Expect it to continue.
•     Triple C headwind.
•    Oil futures $52 for dec 15, hy market/stock market pricing in a $65 price. Performance in energy/commodity function where oil is.
•    Problematic sector? Technology. Leverage is around 7x currently for Tech LBOs. What enters LBO tech market is slow to no growth tech companies (i.e. Compuware although no mentioned by name). Went from 4x to 8x. Technology is 8% of CCC issuance.
•    Illiquidity in HY market? More where it is in the 90s, 05 was an anomaly.
•    Finding some value in structured products. Greater issuance versus corp bonds a decade ago. 2x1 structure vs corporate. Now it is 20% of issuance. Less eyes on structured products.
•    Adjustable rate feature in structured rate products aren’t being priced in.

•    Idea is Calpine equity (CPN) –an independent power producer trading at low multiple, trough earnings and strong cash flow.
•    Half of cash flow is locked in for 3 years. Stable earnings outlook even in a low commodity price environment.
•    Young reliable efficient gas and geothermal fleet.
•    Texas – currently at trough earnings/depressed margin (25% of cash flow)
•    Buying back stock aggressively – 20% over last two years.
•    Significant NOL to shield free cash.
•    Will buy back another 15% of stock.
•    $22.3 by FY17 or a 20% FCF yield today.
•    Create gas assets at $477kw less than half of replacement costs.
•    Risk is increasing renewable supply such as wind/solar, potential new gas supply if prices recover and high leverage at 5.4x or 6.4x including major maintenance.
•    Bonds trade above par at spread basis, credit markets benign view.
•    FCF conversion currently 33%. 
•    Trades for ~8.25x EBITDA.
•    Price target includes 298 shares, $3.16 per share of FCF and implies a 12% fcf yield.
•    Down 32% YTD – market thinks price will be priced off $2 gas. Half of cash flows already locked in.

Check out the rest of the presentations from Invest For Kids Chicago 2015.

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