Theta Capital Management. Distressed Investing - Deep value opportunities through the cycle

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1 Theta Capital Management Distressed Investing - Deep value opportunities through the cycle VBA Wouter ten Brinke 19 May 2010

2 2 Theta Capital Management Products Product Investment style Target return Target volatility Liquidity Management fee Performance fee Theta Multistar Medium Volatility Fund Diversified portfolio of single-strategy funds (25+ funds) Euribor+5% 5 7% Monthly 1.25% 10% (Hurdle rate Euribor+2%) Theta Deep Value Fund Concentrated portfolio of single-strategy funds (< 15 funds) 15-20% None Quarterly 0.50% 15% (Hurdle rate 8%) Theta Legends Fund Concentrated portfolio of multi-strategy funds (5-10 funds) 10% None Monthly (Daily trading) 0.50% 5% (Hurdle rate Euribor+2%) Theta Select Hedge Fund Platform Customized by strategy, number of managers, risk profile and liquidity terms Minimum investment amount: EUR 10 million

3 3 Theta Capital Management Performance Product March April* 2010 YTD* Theta Multistar Medium Volatility Fund +2.4% +1.1% +2.7% Theta Deep Value Fund +3.8% +2.1% +7.5% Theta Legends Fund +3.1% +1.6% +4.7% HFRX Global Hedge Fund Index +1.3% +0.7% +2.3% * Manager estimates. Source: Bloomberg, Theta Capital Management

4 4 Theta Deep Value Fund The proposition Portfolio of managers in often less liquid strategies Return target: 15%-20% per annum over a five-year period Capture illiquidity premium and significant upside potential Core consists of outstanding managers with whom Theta has long-standing investment relationships Reduced management fee and profit sharing only above 8% hurdle

5 5 Theta Deep Value Fund Outperformance versus HFR fund of funds universe (704 funds) Theta Deep Value Since inception: +45% +45% Cumulative performance % Top 25% FoFs 25-50% FoFs 50-75% FoFs Bottom 25% FoFs +4% -4% Jun-06 Aug-06 Oct-06 Dec-06 MSCI World Index HFR Fund of Funds Index Theta Deep Value Fund (net of fees) Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Source: Bloomberg, Theta Capital Management, HFR FoF database. FoF peer group comprises all FoFs from HFR Hedge Fund Database, adjusted for duplicate share classes (704 FoFs in total). Outliers of top 5% and bottom 5% FoFs are omitted for illustration purposes. Aug-09 Oct-09 Dec-09 Feb-10 Apr-10

6 Feb-09 Apr-09 Dec-08 Theta Deep Value Fund Stable risk profile during the financial crisis 30% 25% Theta Deep Value HFR Fund of Funds MSCI World 20% 15% 10% Ann. Standard Deviation 5% 0% 6 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08

7 7 Theta Deep Value Fund Strategy allocation May 2010 Theta Deep Value Fund - Strategy Allocation Fixed Income - Corporate & ABS 34% EH: Activist 10% EH: Energy/Basic Materials 9% ED: Special Situation 13% MA: Discretionary Commodity 8% MA: Discretionary Thematic 10% EM: Global Emerging Markets 16% Portfolio is highly diversified across regions, markets, asset classes and investment strategies Average X-correlation between underlying hedge funds in portfolio = 0.11

8 8 Theta Capital Management Selected investment themes Recovery financials Post-reorganisation equity Distressed opportunities: Corporate bonds & bank loans Asset-backed securities Sovereign debt

9 9 150 years of corporate defaults Source: NBER Working Paper 15848, March : 7%

10 10 Distressed market returns through the cycle Total return on Altman-NYU Defaulted Bond Index 14% Default Rate (% of US High Yield Market, trailing 12-months) 12% 2002: -6% 2003: +85% 2004: +19% 10% 8% Average return: +12% p.a. 1990: -17% 1991: +43% 1989: -23% 1992: +15% 1993: +28% 2008: -55% 2009: +96% 2010:? 6% 4% 2% 0% Source: Dr E Altman, NYU Salomon Center

11 11 Recovery in financials Financial sector faces a wall of refinancing 2000 Bank debt rollover my maturity date Euro Area United Kingdom United States Other 1200 $ billion Source: IMF GFSR

12 12 Recovery in financials No short-term play Citibank stock price $3.50 $3.00 Price % Change Low $ year $ % 2 year $ % 3 year $ % 1 year: +85% $2.50 $2.00 $1.50 $1.00 Jan-90 Mar-90 May-90 Jul-90 Sep-90 Nov-90 Jan-91 Mar-91 May-91 Jul-91 Sep-91 Nov-91 Source: Bloomberg

13 13 Distressed opportunities for years to come Significant refinancing shortfall as CLO s are out of the game US leveraged loans maturing Expected CLO demand (source: LSTA) Expected refinancing shortfall bank loans 150 $ billion Source: S&P/LCD, LSTA, JP Morgan, calculations Theta Capital

14 14 Wall of supply meets constrained demand 31% of the global bond market will be refinanced in next 5 years 8,000 7,000 6,000 US, UK, EU HY bonds maturing US Synthetic CDOs maturing EM debt maturing US, UK, EU loans maturing US, EU, UK, JP Sov Debt Financial sector debt maturing (global) 5,000 $ billion 4,000 3,000 2,000 1, Source: S&P/LCD, LSTA, JP Morgan, IMF, GS, calculations Theta

15 15 Distressed ABS opportunities Supply-demand imbalance similar to corporate credit Apart from the government-supported ABCP market, private securitized issuance is practically dead Refinancing is not available like in investment grade and high yield corporate bonds in 2009 In the absence of new buyers, losses will be realized and debt structures resolved Of the $500 billion in ABS CDO s, $350 billion (70%) have already defaulted but only $120 billion has been liquidated so far great pipeline of opportunities ahead

16 16 Value in distressed ABS Deep value opportunities backed by real cash flows ABX Tranches Market Price per 17 May 2010 (%) Exp Avg Recovery by Moody s (%) ImpliedGainin? Years (%) ABX 06-2 Aaa (Pen) 75% 95% 20% ABX 06-2 Aaa (LCF) 54% 87% 33% ABX 06-2 Aa2 16% 33% 17% ABX 06-2 A2 5% 7% 2% ABX 06-2 Baa2 4% 0% -4% Source: Moody s. Recoveries are based on nominal principal payments, while market prices are based on time value of future principal and interest, credit risk and liquidity premia, and many other factors. Assumed weighted-average life of ABX Index is 5 years (matures in July 2011) US house prices seem to stabilize around a cumulative decline of -35% Complexity of instruments has prevented ABS from joining the momentum rally in corporate credit Not just projections, but actual experience of defaults Realized write-downs on subordinated tranches divert payments to senior tranches Strong fundamental credit & structuring skills allow managers to cherry-pick individual bonds with recovery potential, intermediate cash flows and structural protection features

17 Sovereign opportunities Public sector debt on unsustainable trajectory? 17

18 18 Sovereign opportunities This time is different? Source: From Financial Crash to Debt Crisis, Carmen Reinhart & Kenneth Rogoff, March 2010

19 19 Sovereign opportunities Time to separate the boys from the men Greece CDS Spread Widening Jan-May Norway Switzerland China Sweden Denmark New Zealand Finland Belgium Netherlands Spain Germany Austria Italy Portugal France United Kingdom Japan United States Iceland Ireland Sov Risk Index (source: RBS) Source: RBS, Bloomberg, Theta Capital Management

20 20 Sovereign opportunities Time to separate the boys from the men... Source: Bloomberg

21 21 European banks are vulnerable to PIIGS Contagion within PIIGS countries is a problem 70% 60% 64% Banking sector exposure to 'troubled countries' (as % of GDP) 50% 46% 40% 30% 40% 35% 30% 30% 25% 20% 17% 10% 11% 10% 3% 2% 0% Austria Ireland Netherlands France Portugal Switzerland Germany UK Italy Spain Japan US Source: Berlin vs. Athens, Stephen Jen, February 10, 2010

22 Sovereign opportunities: European divergence Short positions in PIIGS provide hedge on portfolio level 700 Greece Portugal Italy European Divergence Fund (right axis) % 120% % % 60% 40% 20% 100 0% 0-20% % Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 Source: Bloomberg, Theta Capital Management Source: Bloomberg 22

23 23 Contact Details Theta Capital Management B.V. Johannes Vermeerstraat DK Amsterdam The Netherlands Telephone: +31 (0) Fax: +31 (0) info@thetacapital.com Website:

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