1 / 43

!mk_Emerging_Markets

Investment Workshop Series: “The Expanding Credit Universe – Avoiding Black Holes and Supernovas” August 2004. !mk_Emerging_Markets. Presenters. Agenda. Credit Research Process Global Credit Global High Yield. Credit Research Objectives.

arnon
Download Presentation

!mk_Emerging_Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Investment Workshop Series: “The Expanding Credit Universe – Avoiding Black Holes and Supernovas” August 2004 !mk_Emerging_Markets

  2. Presenters

  3. Agenda • Credit Research Process • Global Credit • Global High Yield

  4. Credit Research Objectives • Identify and communicate investment actions that generate measurable excess return through specific investments made or investments avoided. • Identify, quantify, and manage credit risk in specialist and generalist portfolios.

  5. Credit Research Functions Objective Description Measurement • Avoid black holes • Avoidance of defaults • Tracked and included in year-end evaluation • Review of new issues and new idea generation • New issue calendar dictates pace of review • Every addition to the portfolio requires note from the analyst • Cooperative effort between PM‘s & analysts • Quantitative performance of recommendations • Qualitative review of responsiveness to PM requests and clarity of recommendations • Credit monitoring • Monitor issuer performance with written responses to earnings reports & headline events • Regular company visits and meetings with management • Quantitative measurement of productivity by number of notes written • Qualitative review of note content and clarity • Model portfolio alpha • Analyst prepare quarterly model portfolios for their sectors with recommendations for sector weightings, issuer weights, and security selection • Alpha generated versus benchmark Focus on accountability, investment performance, and productivity.

  6. Coverage Universe ($millions except for issuer data, € at 31-Mar-04) Merrill Lynch Merrill Lynch Lehman Merrill Lynch euro investment euro 3% high investment grade high yield grade yield corporates master corporates corporates total Market Value $1,241,234 $404,564 $912,626 $58,872 $2,617,296 Risk Dollars $1,455,273 $958,153 $495,793 $89,244 $2,998,463 Parent Issuers 621 909 393 134 1,914 Market Value 47% 15% 35% 2% 100% Risk Dollars 1. 49% 32% 17% 3% 100% 2. Parent Issuers 32% 47% 21% 7% 107% 1. Risk dollars = (bond exposure x beta corp)/ (beta corp for total holdings) 2. 7% of issuers in the universe have both USD and Euro issues outstanding. Coverage Universe • Coverage universe represents roughly €3 trillion of corporate assets: 2/3 U.S., 1/3 Europe; 80% investment grade, 20% high yield. • Pimco has rated over 40% of issuers in the coverage universe, which accounts for 60% of market value and 66% of risk dollars. Source: PIMCO, Lehman & Merrill Lynch index data

  7. PIMCO’s Internal Rating System Fundamental Credit Analysis Rating System Implications for Analysts • No bond may be purchased for client portfolios prior to research from our credit analysts • Credit selection a two-stage process • Fundamental analysis • Relative value • Credit opinions include five elements • Independent credit rating (BBB, BB, etc.) • View on company outlook (positive, neutral, negative) • Risk rating (red, yellow, green) • Analysis of relative value • Buy/sell recommendation • Color system used to assess credit risk, not relative value Criteria Green Light risk relative to rating is stable to improving or where any credit deterioration is unlikely to have any significant impact on price • Ongoing review • Initial warning if exposures become too large Yellow Light • Close monitoring of up/downgrade potential presence of significant current or prospective risk Positive Red Light viability of the issuer as a going concern in serious question • Investigate & communicate the firmwide risk position in the credit • Estimate recovery rates Goal: Select the best credits and avoid defaults credit_phil_06 red green light

  8. Issuer and Security Selection Start with the definition of credit: what is credit? • Credit is the risk associated with an issuer’s ability to repay obligations as they come due. • Credit is not asset coverage, credit is not relative value, but both play an important role in the analysis of credit. Risk profile of credit differs markedly from other fixed income asset classes • Linkages between credit risk and broad macroeconomic trends are indirect and complex • Granularity of different types of credit risk is high and the relationships between those risks are complex and unpredictable • Risk at the level of individual credits is virtually unhedgable

  9. Issuer and Security Selection Principals of Credit Analysis • Articulate assumptions that support our judgments on which outcomes are most likely for an individual credit. • Marry granular analysis of individual credit with broader secular industry view to develop investment action. • Seek credits with the strongest foundations of balance sheet, cash flow, management, and industry position. Three tests for an investment recommendation • Does the investment thesis make sense? • Do we as an investor have an edge and what is that edge? • Can we control our risk through collateral value and structure?

  10. Issuer and Security Selection • Identify and prioritize by relevance the 4-5 factors tha determine success of an investment. • Factors are different for every credit, every industry, and every phase of the industry cycle. Key Factors in Credit Selection Business Model • Strength & profitability of competitive position • Pace of technological innovation • Access of capital through the cycle • Return on assets • Management track record and accessibility • Transparency of financial reports Cash Flow • Size • Stability • Visibility • Growth Balance Sheet • Leverage • Liquidity • Financial flexibility • Asset coverage Structure • Seniority • Covenants Credit_phil_16a

  11. Analysis of Telecom Italia Net Balance Sheet (Є millions) Net Assets 30-Jun-03 Net Capital 30-Jun-03 Accounts Receivables 17,405 31% Inventories 636 1% Accrued income and prepaid expenses 1,891 3% Accounts payables (5,436) (10%) Other payables (7,427) (13%) Short-term debt 4,378 8% Accrued expenses and deferred income (2,344) (4%) Current portion of LT debt 2,969 5% Advances (454) (1%) Due to banks 6,857 12% non financial working capital 4,271 8% Debentures 25,970 46% Convertible debentures 5,677 10% PPE, net 18,737 33% Cash and Cash Equivalents (5,957) (11%) Investments 2,864 5% ST Financial Assets (3,430) (6%) 36,464 Intangible assets 6,511 12% net debt 64% Goodwill 31,666 56% Other 4 0% Minority interests 4,098 7% Reserves (7,473) (13%) Shareholders' equity 16,018 28% Net Assets 56,580 100% Net Capital 56,580 100% Source: PIMCO, Company reports Issuer and Security Selection: balance sheet PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

  12. Issuer and Security Selection: cash flow Analysis of Tyco Cash Flow ($millions) Source: PIMCO, Company reports PIMCO may or may not own the securities referenced and, if such securities are owned, `no representation is being made that such securities will continue to be held.

  13. Analysis of Dynegy Inc. Relative Value ($millions) 2002 credit Market 16-Apr-03 ebit ebitda cfo/ debt/ company rating issue EBV debt ebit ebitda cvg lev debt cap px ytw oas TXU Energy Baa2/BBB 7% Sr. Nts. '13 3,829 4,863 1,171 1,600 3.92x 3.0x 17.7% 56% 103.88 6.46% 249 IPALCO (AES) Ba1/BB- 7.625% Sr Nts '11 52 1,392 299 411 3.11x 3.4x 15.4% 96% 104.50 6.92% 323 Williams Cos Caa1/B 8.125% Sr Nts '12 5,049 12,979 790 1,565 0.64x 8.3x (4.2%) 72% 95.63 9.59% 573 Dynegy Inc. Caa2/CCC+ 8.75% Sr Nts '12 2,590 6,681 531 1,096 1.16x 6.1x 9.0% 72% 83.00 11.91% 818 Calpine Corp. B1/B+ 8.5% Sr Nts '11 3,851 14,099 781 1,241 1.89x 11.4x 7.6% 79% 65.63 16.47% 1,296 Mirant Caa2/BB 8.3% Sr Nts '11 5,231 9,569 1,085 1,450 2.50x 6.6x 9.4% 65% 55.63 19.43% 1,585 NRG Corp. Ca/CC 7.75% Sr Nts '11 2,237 9,176 570 840 0.92x 10.9x 6.0% 80% 37.63 23.00% 1,814 Dynegy 2003E pro forma new bank line Issuer and Security Selection: comparable security analysis Source: PIMCO, Company reports PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

  14. Analysis of Invensys plc Collateral Value (million sterling) ltm 30-sep 03 multiple net value EBITDA low high low high Process Systems £51 7.8x 8.8x £400 £450 Eurotherm 22 8.0x 9.1x 175 200 APV 41 7.9x 9.1x 325 375 Rail Systems 64 11.7x 13.3x 750 850 Climate Controls 92 7.9x 9.0x 725 825 Appliance Controls 76 6.9x 7.9x 525 600 Powerware & LHB 23 5.4x 6.5x 125 150 subtotal 369 £3,025 £3,450 add/deduct Pensions (786) (786) Tax (126) (126) Litigation/environmental (111) (111) Factoring (180) (180) Minority Interests, Earnouts (225) (225) Escrow 586 586 Cash 489 489 Enterprise Value 2,672 3,097 coverage low high debt Term A 184% 214% (350) (350) Term B 184% 214% (450) (450) Revolving Credit Facility 184% 214% (250) (250) Bonding Facility 184% 214% (400) (400) 2nd Lien Facility 815% 1098% (150) (150) Senior Notes 165% 230% (650) (650) total debt (2,250) (2,250) Equity Value £422 £847 Source: PIMCO, Company reports Issuer and Security Selection: asset valuation PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

  15. Agenda • Credit Research Process • Global Credit • Global High Yield

  16. Benefits of PIMCO’s Global Credit Process • Our global resources and expertise – portfolio managers and research • Unique credit philosophy, multiple sources of added value in portfolio construction • Consistent outperformance – with a focus on risk-adjusted returns Global resources, multiple sources of alpha, and risk controls lead to consistency of performance Global_credit_orga_01a

  17. Global Credit Portfolio ManagementDrawing on Regional Expertise Global Credit Portfolio Management Team Hinman/Kiesel/Mewbourne • Defines global themes • Serves as risk regulator • Portfolio construction and monitoring EmergingMarket High Yield Continental Europe U.K. U.S. Australia Asia Sovereign & Supranationals Lead Portfolio Manager: Mead Bentley Kiesel Palghat Masanao Mariappa / El-Erian El-Erian Kennedy • Focus on credits within region/sector • Handle local execution • Monitor daily credit developments Global_credit_orga_02

  18. Global Credit Research Team Organizational Structure Charles WymanExecutive Vice PresidentDirector of Global Credit Research Oversees global credit research effort Ivor SchuckingSenior Vice PresidentDirector of European Credit Research Oversees European research Reports to Director of Global Credit Research Credit Analysts U.S. 14 U.K. 2 Germany (dit)* 5 Australia 1 Financials Utilities Consumer Non-Cyclical Consumer Cyclical Auto Michael Chang Greg Gore Brian Kim Rolando Rodrigues Bob Sahota Ivor Schucking Elissa Johnson Murphy McCann Tim Shaler Sofia Ramos Bob Sahota Greg Gore Brian Kim Murphy McCann Monika Nemeth Rolando Rodrigues Marion Scherzinger Adam Borneleit1. Dhruv Mallick Greg Gore Brian Kim Rolando Rodrigues Marion Scherzinger David Andrews Michael Chang Industrials Energy Communications Basic Industry Workouts David Andrews Michael Chang Juergen Dahlhoff Elissa Johnson Bob Sahota Juergen Dahlhoff Donna Riley Adam Borneleit1 Cyrille Conseil Greg Gore Brian Kim Richard Mak Dhruv Mallick Christian Wild Monika Nemeth Elissa Johnson Juergen Dahlhoff Donna Riley David Behenna Charles Wyman * Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH 1 Adam Borneleit covers emerging market corporates with the support of the industry specialists in addition to gaming, lodging, broadcasting as the primary analyst. Global_HY_Orga_01

  19. Portfolio Managers and Credit Research Interaction The importance of good and timely communication Global credit phil 05

  20. PIMCO’s Alpha Generation Process Relative Value Portfolio Construction • Bottom-up research • Onsite visits • Financial modeling and forecasts • Active trading • Other credit markets: • European High Yield • Bank Loans • High Grade • Convertibles • Emerging Markets • Investment Committee • PIMCO’s Risk Controls • Cyclical / Secular Forum alpha Credit Selection global_credit_phil_06

  21. Global Investment Grade Credit Portfolio Construction BB / Crossover-Corporates, EM, Sovereigns • Higher Yielding Sectors • Modest exposure in a diversified fashion Bank Loans, ConvertibleBonds, Asset-Backed and Credit Derivatives • Non-traditional instruments/sectors • Use tactically (relative value) versus comparably rated corporates/sovereigns • Middle tier • Improving credit fundamentals with compelling a structure and good yields Middle Tier Corporates/Sovereigns • Core holdings • Strong credit profiles • Liquid instruments Upper Tier Corporates/Sovereigns/Agencies Our focus is on upper and middle tier – most clients permit us to use, tactically, other areas of the credit spectrum Global credit phil 03

  22. Portfolio Construction Taps Multiple Sources of Added Value Top Down Strategies • Diversified industry and issuer exposure constitute the core risk position • Only moderate risk is taken ineach area • No one or two positions will drive overall portfolio returns Duration/Curve Quality Sector Industry Correlation with Quality US Treasuries % of Index AAA AA 0.93 0.93 19.71% 14.75% US Credit A BBB 0.88 0.78 36.02% 30.12% Industry Legal & Covenant Issuer Capital Structure Bottom Up Strategies Global credit phil 02

  23. Investment Grade Corporate Fundamentals

  24. How Would We Construct A Global Credit Portfolio Today? • Duration • US: Under • Euroland: Over • UK: Neutral • Asia: Under • Sector • Underweight Mortgages • Underweight Corporates • Overweight International • Overweight Emerging Markets • Quality • AA / A * Average weighted as of May 31, 2004. The structure of the portfolio is subject to change. The credit quality of the investment in the portfolio does not apply to the stability or safety of the fund. Stru_1270_01

  25. Agenda • Credit Research Process • Global Credit • Global High Yield

  26. Founded in 1971 Formed PIMCO Advisors in 1994 Majority interest acquired by Allianz in 2000 Firm History and Assets High Yield Experience PIMCO High Yield Background As of June 30, 2004 • Global high yield portfolio management team in Newport Beach, London, and Munich (Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH) with extensive experience • 22 dedicated credit research analysts Past performance is no guarantee of future results. * Does not include CDO business assets. high_yield_asst_09d

  27. High Yield Mandates Specialty Products Euro High Yield $ 1.25 B* U.S. High Yield $ 16.2 B* Global High Yield$ 0.5 B* Bank Debt $ 5.1B* Convertibles $ 0.2 B* Mark Hudoff Portfolio Manager Yuri GarbuzovPortfolio Manager Ray KennedyPortfolio Manager Mark HudoffPortfolio Manager Jason RosiakTrader Jason WilliamsAssistant Trader Mark HudoffPortfolio Manager Yuri GarbuzovPortfolio Manager Alex StrucAssistant Trader Jason RosiakPortfolio Manager Greg MillerTrader Bob BoydAssistant Trader Yuri GarbuzovPortfolio Manager Axel PotthofPortfolio Manager Alex StrucAssistant Trader U.S. Credit Team European Credit Team Product Management Charles Wyman Director of Global Credit Research Ivor SchuckingDirector of European Credit Research Jurgen Dahlhoff Elissa Johnson Sofia Ramos Rolando Rodrigues Marion Scherzinger Christian Wild Craig Dawson Nicolette Beyer Richard Mak Dhruv Mallik Murphy McCann Monika Nemeth Donna Riley Tim Shaler David Andrews David BehennaWorkout Consultant Adam Borneleit Michael Chang Cyrille Conseil Greg Gore Brian Kim Australia/Asia Credit Team Bob Sahota PIMCO’s High Yield Product Breadth As of June 30, 2004 Ray Kennedy Head of High Yield Products Charles Wyman Director of Credit Research Mark Hudoff Portfolio Manager * Based on strategic mandates. High_yield_products_aum

  28. Benefits of PIMCO’s Global High Yield Process • Focus on risk adjusted returns • Credit selection process that emphasizes credit fundamentals, but which incorporates PIMCO’s macro views • Extensive experience in credit analysis and portfolio management • Ray Kennedy has more than 17 years experience in credit research and portfolio management* • Mark Hudoff has more than15 years experience in credit research and portfolio management, including 4 years of experience focused exclusively on European high yield * • Global research team in the U.S. Europe and Asia with 24 analysts • Resources and experience to migrate among multiple sectors • High yield track record • Consistent outperformance relative to the benchmark of the broad high yield universe • Low tracking error / high information ratio • Focus on risk controls and processes that help to limit downside risk and reduce volatility • Unparalleled global platform * Years of experience include firms other than PIMCO. Global_HY_phil_01

  29. Global High Yield Outpaces U.S. & Non-U.S. Equity In Performance Per Risk • Over the long run, high yield provides attractive risk-reward versus most asset classes • Globalization of the high yield market should reinforce these results Diversification does not ensure against loss. Global_HY_Review_11

  30. Global High Yield Has a Low Long-term Correlation With Other Asset Classes • Non-U.S. High Yield issuance is the fastest growing segment of the Global High Yield market • Global High Yield provides compelling correlation advantage when combined with other asset classes SOURCE: Merrill Lynch & Co., J.P. Morgan, Morgan Stanley, Lehman Brothers Past performance is no guarantee of future results. The chart does not reflect any PIMCO product. Global_HY_review_09a

  31. The “breakeven spread over treasuries” is the spread needed to offset a given level of default losses* Actual spreads** over treasuries have exceeded breakeven levels on average over the entire period Higher quality segments, within high yield, offer the most compelling risk versus reward Upper Tier Spreads Are More-Than-Compensating Investors for Defaults As of June 30, 2004 SOURCE: Moody's Investors Service, Salomon Smith Barney and PIMCO. * Breakeven spread = 1 + average 10-Yr. Treasury YTM 1 - (average price – recovery rate) (default rate) + (average coupon x 0.5) (default rate) Assumed Recovery Rate = 35% ** Average month-end absolute spread over 10-Year Treasury according to Salomon Smith Barney. Past performance is no guarantee of future results. - (1 + average 10-Yr. Treasury YTM) Global_HY_Review_14 UPDATE ANNUALLY (Hinman updates)

  32. Qualitative Improvements in European High Yield Markets As of June 30, 2004 • Bankruptcy regimes have matured and been preliminarily tested in most countries • Structural subordination have been reduced through industry moves to improve unsecured creditor positions • Transparency has improved as issuers provided investors with more information and maintained ratings • Cross-border M&A has yet to develop, but we’ve seen a strong surge in solid industrial and other first time issuers that adds to diversity and depth of market However, European high yield remains too heavily concentrated on a stand-alone basis. As such, we like the global high yield alternative. SOURCE: Merrill Lynch INDEX: Merrill Lynch European Currency High Yield Index (HP00) Global_HY_Review_07

  33. PIMCO’s High Yield Philosophy – “Buy the Best High Yield Bonds” • Bottom-up credit research incorporating top-down economic framework • Broad opportunity set resulting from expertise in all global credit fixed income sectors • Core high yield approach with a total return orientation • Upper tier quality focus • Limit risk through issuer and sector diversification The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Strategy subject to change without notice. Diversification does not ensure against loss. high_yield_phil_01

  34. Capital Structure Senior Secured Investment GradeFocus is Here PIMCO Operates Here IssueRating BBB BB B Most High Yield Managers Operate Here Junior Subordinated PIMCO Operates in a Unique Market Niche • Upper / Middle tier of the high yield market • Higher quality than typical high yield manager • Result: Better risk/return trade off potential 1 January 1986 – June 2004. The chart does not reflect any PIMCO product. 2 Return per unit of volatility is calculated by dividing annualized return by annualized monthly volatility of return. * Upper / middle tier is a market weighted blend that is rebalanced annually. Past performance is no guarantee of future results. SOURCE: Credit Suisse First Boston Corporation, Salomon Smith Barney, PIMCO.As defined by CSFB, Upper Tier includes split BBB, BB and split BB; Middle Tier includes B and split B; Lower Tier includes B-, CCC, split CCC and defaulted as rated by Moody's and/or S&P. The S&P 500 Index is an unmanaged index of U.S. companies with market capitalizations in excess of $4 billion. It is generally representative of the U.S. stock market. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Strategy subject to change without notice. Diversification does not ensure against loss. high_yield_phil_07

  35. PIMCO’s High Yield Portfolio Construction Process Emerging Markets Bank Loans Convertibles 5-15% Out of Sector Strategies Attractively priced, improving credits with 0.5%-2.5% overweight 25-35% Tactical Overweights Stable credits with neutral to modest overweight 50-70% Core Holdings Goal: Enhance return with less volatility The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Global_HY_Phil_03

  36. Outlook - Yield Will Be The Primary Driver of Returns For Remainder of 2004 Fundamentals Positive – Continuing to improve Valuation Neutral – Intermediate maturities offer best value with less treasury risk Technical Neutral – Market technicals likely to remain supportive 2cs_HY_outlook_01

  37. Appendix

  38. Current Global Credit Sector Views

  39. Current Global Credit Sector Views

  40. Sample Credit Write-up credit_phil_25

  41. Sample Risk Reports global_credit_phil_07

  42. External Research Supplements Internal Research Short Sellers Views: Behind the Numbers Independent Credit Shops: KDP and CreditSights Credit Research Process Qualitative Models: KMV/Moody’s Risk Metric Industry Publications & Associations: Modern Healthcare, Chemical Week, EEI Industry Experts: J.S. Herold Web Based Tools: Multex credit_phil_23

  43. Risk Monitoring Tools and Approach Spreads/Yields vs. Index Worst Performers Industry Overexposure & Underexposure Risk Control Goals -Actively monitor credit bets -Reduce volatility & tracking error -Reduce account dispersion IssuerOverexposure & Underexposure Duration Outliers Quality vs. Index credit_phil_24

More Related