Stockholm (HedgeNordic) – Michael Falken and his team at Tidan Capital, which includes ex-Goldman Sachs capital structure veteran William Wilson, are setting their sights on the credit landscape within the capital structure. This pursuit is backed by their experience of running a capital structure relative value strategy, initially at Brummer-backed Carve and presently at Tidan Capital. Their expertise is further bolstered by the arrival of Serge Houles, previously the Managing Director and Chief Client Officer at the now-closed multi-billion dollar systematic manager IPM Informed Portfolio Management. His arrival coincides with the launch of Tidan’s new venture – an active long-only high-yield bond strategy.
In his new role, Houles will be responsible for business development and investor relations, leveraging his extensive experience in the field. Houles’ addition comes at a pivotal time for Tidan, as the firm experiences increased demand for its credit expertise. This strategy represents a balanced risk approach, designed to meet the specific demands of clients by combining core investments in high-yield bonds with shorter duration as well as opportunistic investments in special situations.
Under the Surface
In an environment marked by high interest rates and spreads oscillating in the 400-450 basis point range, high-yield bonds emerge as an enticing prospect for investors. However, Falken emphasizes that the narrative goes beyond surface-level observations. “If one just looks at CDS indices, you get the completely wrong picture about what is going on under the surface,” underscores the founder and CIO of Tidan. Over the past 18 months, rates have surged after a decade of dormancy, resulting in significant market dispersion.
“If one just looks at CDS indices, you get the completely wrong picture about what is going on under the surface.”
On one side, short-duration securities in the global high-yield bond space are priced at high single digits, offering solid returns for their associated risk. Simultaneously, special opportunities with yields in the double digits are often disregarded as they are “misunderstood and thrown out because investors don’t want to own something that has perceived risk,” says Falken. “However, if you dig deeper beneath the surface, you can find high-reward special opportunities.” The combination of high returns from relatively safe securities and the prevalence of even higher-reward special opportunities creates a unique investment landscape.
“If you dig deeper beneath the surface, you can find high-reward special opportunities.”
With 28 years of experience in the credit market, including mentorship from distressed credit investor Randall Smith, Michael Falken possesses a profound understanding of where these pockets of opportunities lie. Serge Houles, primarily experienced in systematic strategies, acknowledges the skill and experience required to run a relative value capital structure strategy and a high-yield bond strategy in today’s market environment. “The mentorship from Randy Smith has been instrumental in cultivating a generation of successful credit investors with the like of Marc Lasry of Avenue Capital and including Michael,” remarks Houles. “This lineage of knowledge is crucial for credit investors to not only identify the harbingers of corporate distress but also to execute strategies that restore financial health.”
“Investing in a bond involves more than just recognizing its undervalued price.”
Tidan’s flagship strategy involves understanding a company’s entire capital structure to capture attractive relative-value opportunities. “This process is unique in the sense that there are not many people who know and understand the whole capital structure of a company,” says Houles. “In the investment community, you are either good at equity analysis or credit analysis. Tidan’s team has to excel at both,” he emphasizes. “Investing in a bond involves more than just recognizing its undervalued price. You have to understand covenants, comprehend how different types of clauses kick in, and what can explain why a particular bond or instrument is mispriced.” Michael Falken will leverage accumulated experience to manage the soon-to-be-launched long-only credit strategy.
Expanding on the Barbell Strategy
Tidan’s credit opportunities strategy will follow a high-yield long-only approach seeking global opportunities that are mispriced relative to their risk. Employing a so-called barbell strategy, the team will invest globally across the high-yield spectrum, handpicking opportunities but avoiding distressed situations. “On one end, we will invest in the short-end of the high-yield bond market, where you get very well paid for disproportionately little risk,” explains Michael Falken. “The other end of the barbell involves exploring special opportunities, which require much deeper fundamental research,” he elaborates.
With the yield on high-yield bonds composed of the risk-free interest rate plus a credit spread of 400-500 basis points on average, this space offers great opportunities for investors. “Without going down into the seniority and credit debt rating, the yield of a portfolio we are contemplating for the launch sits in the double-digit range,” explains Houles. On top of that, Tidan’s new strategy will strive to capture special opportunities with even higher-risk, higher-reward prospects.
“There is a debt refinancing wall that is awaiting us in 2025.”
According to Falken, triggers for these special opportunities can be company-specific and more broad-based, such as the aftermath of the COVID-19 pandemic. More importantly, however, “there is a debt refinancing wall that is awaiting us in 2025,” says Falken. “Companies failing to address refinancing within the next twelve months will face challenges and their existing debt will be harder to refinance,” he elaborates. “Companies that were able to finance themselves at very cheap rates historically are now facing a completely different environment.”
Assessing whether a company will survive is crucial, and finding the fulcrum security where value breaks is paramount in credit investing, according to Falken. “In credit investing, the number one thing is to find that fulcrum security, as one usually calls it, where value breaks,” he explains. If the value breaks at the top of the capital structure in secured debt, “you want to own that piece of capital structure at an attractive valuation. Everything below is short-able,” elaborates Falken. “There are going to be a lot of such situations going forward.” Tidan’s extensive experience in the capital structure relative value space positions the firm uniquely to identify lucrative opportunities within the high-yield sector. By navigating the complexities of various financial instruments and assessing their relative worth within the capital structure, Tidan has developed a keen insight into discerning good opportunities from bad ones.
“In credit investing, the number one thing is to find that fulcrum security, as one usually calls it, where value breaks.”
With experience in the systematic asset management sector at what was once one of the Nordic region’s largest managers, Serge Houles identifies elements of systematic thinking within the discretionary approach at Tidan. “While Tidan operates with a discretionary approach, where decision-making is centralized in Michael’s and the team’s expertise, the strategy incorporates a highly disciplined methodology,” says Houles. The team consistently applies systematic thinking in sourcing and evaluating opportunities, selecting securities, and implementing risk management. “This commitment to consistency, discipline, and effective risk management aligns with a quantitative process, creating an approach I am familiar with and that investors will appreciate.”