Flash Update: Short HY Case Study - Mirabela Nickel - MBNAU 8.75% 4/15/18

Mirabela Nickel Ltd is a Brazilian mining company with significant nickel and other related assets.  With nickel prices under pressure in recent years due to overproduction, the price of the stock (MRBAF) has fallen from $7 in 2008 to essentially $0 this year.  Capital proceeds reinvestment from the $375 MM debt issuance in 2011 did not stem the losses in 2012; in fact, they accelerated.

Nevertheless, with profitability and other financial ratios signaling red flags for the company throughout 2012 and with the equity trading at $0.50 as recently as February 2013, the bonds continued to trade near par.  In fact, Moody’s and S&P upgraded the credit rating of the company on December 13, 2012 and March 27, 2013, respectively.  On September 26, 2013 the company announced that it would miss its upcoming debt payment and the bond price dropped by 50% in one day (see chart below). 

Mirabela Nickel Ltd has seriously deteriorating fundamentals, in addition to nickel losing more than 20% of its value this year.  This mispricing of the bonds and the Q1-2013 upgrade was further evidence of the disconnect between financial assets and the ‘Main Street’ economy.  Please contact Tradex Global to further discuss our short high yield strategy.

Business Overview:                        Mirabela Nickel Ltd is a Brazilian mining company with significant nickel and other related assets.                                                                                        

Rating:                                               Moody’s:       Ca – “Highly speculative and are likely in, or very near, default with some prospect of recovery of principal and interest.”

S&P:                D – “Payment default on financial commitments.” 

Rating Agency: Moody’s	From:	To:
12/13/2012	Caa1	Caa1 (upgrade from Negative to Stable)
10/2/2013	Caa1	Caa3 (downgrade to Negative)
10/22/2013	Caa3	Ca (downgrade to Missed a Payment)

Rating Agency: S&P	From:	To:
3/27/2013	CCC+	B- (upgrade to Stable)
10/2/2013	B-	CCC+ (downgrade)
10/23/2013	CCC+	SD (downgrade to Selective Default)
11/18/13	SD	D (downgrade to Default)

Issue Size:                                         $375 MM

Use of Proceeds:                             “Repay/Refinance Debt” and “General Corporate Purpose”

Call Prices/Dates:                            4/15                104.3750

4/16                104.1875

4/17                100.0000

Financial Highlights:                       Income Statement:  ($millions, except per share data)

Period	12/31/2012	12/31/2011	12/31/2010
Revenue	343	303	210
Net Income	(452)	(51)	(48)
Earnings Per Share	(0.3)	(0.1)	(0.1)
Total Debt	450	402	263
Leverage (Total Debt/EBITDA)	12.1x	71.0x	8.7x

         

Recent Prices:                                  99.375            (2/12/13)

35.000            (11/26/13)

Yield to Worst:                                 43.5%

Company Outlook:                        The company’s  difficulties have mimicked the long secular decline in the price of nickel.  In addition to being concentrated within a single commodity, it also was dependent upon having only 2 prime customers.  When one of those customers (Votorantim Metals) announced it was closing its nickel smelting facilities, the price of Mirabela’s debt dropped 50% on September 24, 2013.  The Company has delisted from the Toronto stock exchange and entered in waiver and standstill arrangements with its major creditors.  

Source: Bloomberg and Tradex Global Advisors

* The above trade case study may not be an investment in an existing stand-alone investment entity.  The information for the trade case study was gathered from various sources.  No representation is being made that any vehicle managed by Tradex Global Advisors will or is likely to have this position in any of its Portfolios.  This trade case is neither a recommendation to buy nor a recommendation to sell the referenced security or securities.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Bloomberg Brief: Ex-James Alpha’s Libby Joins Tradex as Portfolio Manager

Ex-James Alpha’s Libby Joins Tradex as Portfolio Manager

K. Daniel Libby, a former senior portfolio manager at James Alpha Management LLC,
joined Greenwich, Connecticut-based alternative asset management company Tradex
Global Advisors LLC, he said in a telephone interview.

Libby, who started at Tradex as senior portfolio manager in September, will manage a
short-biased high yield fund that will start before year end, he said in a telephone interview.
Libby also plans to start a liquid mortgage hedge fund strategy in the first quarter of 2014
that will focus on mortgage basis and prepayment arbitrage, for which the firm is targeting
$50 million to $100 million, he said.

Before Tradex, from 2011 to 2013, Libby was a senior portfolio manager at James Alpha,
the family office for Dennis Nayben, the former chief executive officer of General Electric
Capital Corp., Libby said. Prior to that, he was a senior portfolio manager at Sands Brothers
Asset Management LLC from 2005 to 2011, where he managed the Vantage Point Partners
Mortgage Credit Fund and the Select Access fund of funds, he said. He was also a director
at BlackRock Inc. in its risk management services bureau from 2001 to 2003.

“There’s tremendous opportunity in high yield from the short side because the market is
late in the credit cycle due to all the liquidly the Fed has put into markets,’’ Libby said. “High
yield will be the first asset class that will show signs of cracks and distress. We have a
bearish view in fixed income in general – mortgage basis trading and prepayment arbitrage
trading are well positioned to take advantage of the bearish backdrop in the markets.’’

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

FLASH UPDATE: WILMAAAAAA, The High Yield Models are BROKEN!

It is very clear that the models used to determine the ability of a HY company to repay its debts are severely broken.  There have been many instances of incorrect recommendations made based on historical data and criteria.  In numerous cases, a Buy or Hold recommendation was just wrong.  (See the case study on Mirabela Mining Ltd. that we are putting out this week on our blog.  The bonds were still trading at par earlier this year after the equity had fallen 93%! The company is now in bankruptcy.  Clearly someone’s model was wrong.) 

As in the late stages of the housing boom, underwriting standards in the corporate credit markets have loosened as the offer continues to get lifted at higher prices for CCC credits.  Today more than 50% of the new issuance for senior bank debt is cov-lite, approximately double what we saw in the previous cycle’s peak (2007).  In such a lax underwriting environment, with high yield issuance near record highs and spreads near all-time tights, the only question that remains is ‘When?’   When the liquidity stops (or even as it “Tapers”), the weak underwriting and excessive leverage in “specific” HY companies (150-200) will force a wave of defaults, potentially larger than the normal 50% ratio.  We have a structure in place that allows us to wait for the music to stop. 

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Tradex Global Advisors Announces Daniel Libby as Senior Portfolio Manager

Greenwich, CT, November 20, 2013 – Tradex Global Advisors, LLC, an alternative asset management company, announced today that K. Daniel Libby, CFA has joined their investment team as Senior Portfolio Manager. Mr. Libby will play a significant role across all of Tradex's internally managed Hedge Funds and Fund-of-Hedge Fund Portfolios.

"We are delighted that Dan has joined us. We’ve known him by reputation and have followed his performance for many years. Dan is a seasoned portfolio manager who has stellar records in fixed income and mortgage products in all market cycles, including during the most stressful periods in recent memory.” said Michael Beattie, one of the firm's founding partners and its Chief Investment Officer. “We are particularly excited about leveraging Dan’s skills in building out our internally managed product offerings in the mortgage and high yield space." said Jeff Trongone, President of Tradex Global, who also recently joined the firm having previously served as CEO of Malbec Partners, a hedge fund platform sponsored by BNP Paribas, and CFO of JP Morgan's asset management business.

"Tradex's focus on providing the highest quality investment program to investors with a significant emphasis on managing both operational and investment risk was an important factor in my decision to join the firm, as was the opportunity to help continue to build a world class investment business. I look forward to working with the Tradex team to provide excellent investment capabilities for our investors," said Mr. Libby.

Mr. Libby has nearly 30 years of investment experience at leading Wall Street and buy side firms such as Goldman Sachs, Nomura, IBM Pension and BlackRock. For the past 10 years, he has managed several successful hedge funds. His investment performance track records include “core plus” fixed income, distressed mortgage-backed securities, long/short high-grade mortgage-backed securities and multi-strategy portfolios. He is a graduate from Columbia University with both his BS and MS degrees in Mathematical Methods/Economics and Mathematical Methods/Finance respectively.

About Tradex Global Advisors Tradex Global Advisors, LLC (TGA), headquartered in Greenwich, Connecticut is part of The Tradex Group of investment companies. TGA manages Fund of Hedge Funds and internally managed Hedge Funds, including their recently-launched short-biased high yield and a liquid real estate strategies. TGA was founded in 2004 by Michael Beattie and Richard Travia and focuses on innovative and niche investment products and strategies for its investors. With its targeted focus, TGA seeks to identify uncorrelated and sustainable investment outperformance (“alpha”) across market cycles in all of its products.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

HFMWeek Exclusive: Tradex hires industry veteran Libby

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

FLASH UPDATE: The Wall of Worry is Fast Approaching

Savvy investors have long since learned to put something away for a rainy day, because things will not always be so rosy.  Usually, investors tend to have a bias towards being long the market.  Even when investing in a diversified portfolio of long/short alternative investments – typically the net exposure will be a moderately long position.  Today, it is becoming increasingly more difficult for informed investors to ignore certain warning signs, particularly in the US high yield market.  By all signs, this sector appears to be well overextended and we expect it may be the first to fall in the months and years ahead. 

A)  Loan Issuance is Heavily Cov-Lite This Time Around

As we have written previously, the underwriting standards for the alarmingly high percentage of Cov-Lite loans being originated have raised concerns among regulators and industry practitioners alike. 

                                               

B)  Academic Studies Show that Nearly 50% of CCC-rated Issues Default Within 4 Years of Issuance

With the information from the table below, we note that the record pace of high yield issuance has been ongoing for 5 years now.

C)  Next Year (2014) Begins the First of 5 Consecutive Years of Very Heavy Leveraged Loan and High Yield Bond Maturities Confronting Issuers

The maturities rolling over in 2014 are more than 2.5x greater than what occurred in 2013.  This pace of refinancing does not abate for the next 5 years.

                                                                                                                                 

Conclusion:

While no investors are capable of timing the market perfectly, 2014 is shaping up to be the beginning of a very difficult period for marginal high yield investors.  As is always the case, the greatest gains will be available to those investors who get in the trade early.  Today’s data set may predict the future, and we think that there is a certain sense of inevitability in the current HY irrational exuberance.  

 The above charts were compiled from data provided by www.bankruptcydata.com, JP Morgan, Thomson Reuters and the Edward I. Altman-NYU Salomon Center.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

FLASH UPDATE: Mortgage spreads still driven by Fed Policy

Mortgage Spreads for the past year have been driven by outlook for Fed Policy - We expect that to continue and provide ongoing opportunity in the mortgage market 

The key data out last week was Pending Home Sales for September.  It was down a surprisingly large -5.6% in response to recently rising mortgage rates.  With data such as that on top of the Fed’s September 18^th “No Taper” statement (which they reiterated this past week), mortgage rates have been falling once again and spreads have continued their relentless tightening begun in July.  They tightened another -2 bps this past week and we expect this constructive backdrop to continue.

The Fed’s current QE bias will keep a cap on spread volatility and pressure spreads even tighter in the near term until a change in direction by the Fed is evident.  This makes for a strong positive environment for the mortgage basis and relative value trading over the near term.  However, a change in the direction of mortgage spreads is inevitable.  Once the Fed signals a change in course, what we have seen time and again is that the market impact persists for many months thereafter.  As the chart bellows shows, mortgage spreads since the 2^nd quarter of 2012 have been highly directional and driven by the outlook for quantitative easing.  We expect this trend to continue for the foreseeable future and to provide significant trading opportunities in the mortgage market.

To convince yourself that spreads will widen again at some point, one need only understand that the Fed will soon own a third of  the MBS outstanding.  The longer the Fed’s QE program stays in place, the more concentrated their percentage of the agency MBS market becomes.  Once the tapering begins, their exit - or even simple reduction of their presence in the mortgage market - will present a long period of ‘directional’ spread volatility which will represent significant arbitrage-able trading opportunities in the mortgage market.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global