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Kyle Bass Invests in Downgraded Mortgage Lender and Fleet Manager

January 18, 2012 | About:
Holly LaFon

Holly LaFon

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Kyle Bass is managing member and principal of Hayman Advisors LP, which he launched in 2005. In his first four years with Hayman, he returned 340%, including a 216% return in 2007 due to his prescient call on the implosion of the U.S. sub-prime mortgage market. He bases his investment decisions on in-depth analysis and judgment of the macroeconomic picture. According to GuruFocus Real Time Picks, his most recent purchase of over 5% was PHH Corp. (PHH), which he bought on January 18.

PHH Corp. is one of the top five retail originators of residential mortgages in the U.S., and its subsidiary, PHH Arval, is a leading fleet management services provider in the U.S. and Canada. Bass, a macro investor, is famous for saying “I think you can see that the pig has moved through the python in terms of U.S. housing losses,” which might have influenced his investment in a housing mortgage company.

PHH recently made some sweeping changes, including changes in top-tier management. In 2011 it named a new COO and CFO. In January 4, it named a new CEO, Glen Messina, the company’s former COO. The board said that Messina was ideal to execute its new priorities. “The prolonged uncertainty and volatility in the global economy and capital markets, along with a U.S. housing market that remains challenging, requires an emphasis on liquidity and cash generation over growth in the near term, said Jim Egan, chairman of the PHH Corporation board of directors.

Additionally, in January 2012 the company announced a $300 million aggregate upsizing in its funding capacity to $1.5 billion, and the total committed financing agreements at the company’s fleet segment to $3.6 billion. The extra funding will allow the company to acquire vehicles to lease to fleet management clients.

However, the company is having some debt issues. It held a $250 million in aggregate principal amount of 6% convertible senior notes due 2017. It will use the net proceeds of the offering to contribute to the repayment of the $250 million aggregate principal amount of its 4% convertible senior notes due April 15, 2012, as well as for general corporate purposes.

On Thursday, December 22, the company’s stock dropped 15% after Standard & Poor’s downgraded PHH’s credit and unsecured debt from “BB+” to “BB-“ on concerns that the company won’t be able to pay its unsecured corporate debt. The ratings agency believes that it will not be able to pay its $423 million of senior unsecured notes due March 2013 exclusively from free corporate cash flows, and believes it does have adequate liquidity to repay its $249 million in convertible notes due in April 2012.

Currently the company has $7.4 billion in long-term liabilities and debt on its balance sheet, with about $1.3 billion in cash. It also lost $1.7 billion in cash flow in 2010, and has generated $1.1 billion in the trailing 12 months. Revenue has wavered, dipping in 2008, and after increasing to $2.6 billion in 2009, it decreased to $2.4 billion in 2010. Earnings were negative from 2006 to 2008, and decreased from $253 million in 2009 to $48 million in 2010.

Bass may believe he has found a company whose stock price is lowered due to debt issues it is likely to be able to resolve, particularly with new management, an uptick in the housing industry, and an enhanced fleet management business.

Find more stocks of gurus as they are purchased at GuruFocus Real Time picks.


Rating: 3.5/5 (13 votes)

Comments

baruch
Baruch - 2 years ago
from 2005 - 2011, what is his compounded annualized return, ex 2007's return?
KelpieCapital
KelpieCapital - 2 years ago
is that a fair question!?

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