Saturday, May 1, 2010

Beware of market manipulation, don't believe all you read: Highland Capital

DON'T believe everything that's been reported on the sovereign debt crisis in Greece, or any other macro issues. 'There is a lot of market manipulation that happens in the derivatives and debt markets that is not illegal,' says James Dondero, co-founder of Highland Capital Management, which manages assets worth US$24 billion.

'There are a lot of articles coming out of Greece saying it might not be a US$40 billion to US$50 billion problem. By the time you roll in the unfunded liabilities, it might be US$150 billion, or US$300 billion, or maybe US$400 billion. Why not US$1 trillion, and make it unsolvable? Where does all this information come from?' said Mr Dondero, who was in town to promote the investment thesis of his firm, which focuses on below-investment-grade corporate debt.

'There is market manipulation that happens in the derivative and debt markets overall which is not illegal. But it is illegal in the equity market - you can't buy positions in stocks or have short positions and then spread rumours or innuendoes.'

Mr Dondero wondered who came up with all these estimates, and what their incentives are.

'The world has a vested interest in not ending,' he said. For example, the unfunded pensions can be handled by delaying the retirement age. And people will take the 'austerity sandwich' when they absolutely have to, and that would be when 'socialism hits the wall', like when government employees' pay cheques start to bounce, and middle-class housewives start to storm the supermarkets.

Mr Dondero and his partner Mark Okado founded Highland Capital in 1990. The Dallas-based company is today one of the largest managers of below-investment-grade credit. It has some 80 per cent of its assets in structured products, mainly collateralised loan obligations.

'Distressed debts are a part of below-investment-grade debts. In the US, that segment is still very attractive. You can make a 15-20 per cent return there,' said Mr Dondero. For example, MGM Studio's debts are trading at 50 cents on the dollar. 'There is a real chance to buy that asset attractively and reposition it.'

Paul Adkins, managing director of Highland Capital in Singapore, said now is an opportunity for Asian investors to pick up good assets in the US via distressed debts, turning the tables on the West when the US and European investors picked up key Asian assets on the cheap during the Asian crisis of 1997.

'Today, we have loans trading at 50 cents on a dollar. The recovery rate historically for companies that go through bankruptcy is 70 cents on a dollar. It provides tremendous opportunities for investors to effectively buy the loans, go through the restructuring and conversion, and come out at the end of the restructuring owning those companies, having those assets, whether it is a film library, heavy machinery or power generation equipment,' said Mr Adkins.

Back in 1997, Asian investors were selling their equities on the way down, cashing out and taking the losses, and then watched as the European and US investors swooped in and picked up key assets that recovered their value very quickly. 'We are thinking the same opportunity exists on the other side, and we hope to translate this current distressed opportunity into effective returns for investors in the region in the next 2-3 years,' he said.

Mr Dondero, however, conceded that bankruptcy proceedings in the US now take longer. Courts, he said, are unwilling to close down a company as long as it can keep jobs.

Another reason why Mr Dondero is on his Asian tour is to put across the message that investors are overly complacent with their renminbi deposits, which have gone off the chart. 'They are assuming that these deposits will always appreciate and be convertible. Prudence would argue that if they have obligations in US dollars, they should keep a certain amount of investments or deposits in dollars.'

Mr Dondero's other views include:

Real estate in the US will be a buying opportunity in a year's time, only after the new tax policies have been announced. 'You don't know what your returns will be until you know what the new tax policies are.'

The yuan will appreciate by 3-5 per cent in June/July, and currencies of the rest of China's Asian trading partners will rise in sympathy.

Highland is not a buyer of Greece at this moment, but then it does not dabble in sovereign debts.

Source: Business Times, 1 May 2010

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