Canyon Partners readies war chest for when pricing and risk align

Canyon Partners' top executive says the hedge fund has a large cash position waiting on the sidelines, ready to be put to work after a sell-off.

The Los Angeles-based firm is "significantly underinvested" with capacity to deploy capital when prices become more reasonable, Canyon's co-CEO Joshua Friedman said in an interview with Bloomberg TV's Erik Schatzker in Davos, Switzerland. In the current environment where rates and spreads are low, the new issue market is "particularly unattractive," he said.

Mr. Friedman, who correctly projected the sell-off in 2018 amid rising rates, said this year will bring more volatility, a "sawtooth of ups and downs" in credit. When there's an adjustment in the market that's sudden and sharp, "you want to have a shopping list and cash ready to go to take advantage of it," said Mr. Friedman, who is also a co-founder of Canyon. "Sometimes the best names produce the biggest discounts or the best discounts for the risk" you're taking, he said.

Market panic

Canyon invested $1.5 billion to $2 billion in bank debt and equities in December. That money was deployed not only in the secondary market, but directly to help banks relieve themselves from obligations at a discount or with issuers to close a deal, Mr. Friedman said. In a volatile credit market, bank debt is more resilient, but high-yield bonds give investors a better total return opportunity when you find a forced seller, he said.

At the top of Mr. Friedman's list of concerns is the adverse market reaction that can occur when the Federal Reserve raises rates again, creating panic and an imbalance between supply and demand, he said. He also worries about the "mountain" of BBB-rated debt that could get downgraded and affect the high-yield universe.

Canyon started to invest in utility giant PG&E, which is making preparations for a bankruptcy filing as soon as next week. The situation is interesting for debt holders, but still in early stages, Mr. Friedman said. It's going to be "a very long ball game," similar to multibillion-dollar bankruptcies like Lehman Brothers and the ongoing restructuring of Puerto Rico. "We've dipped our toe" in PG&E, Mr. Friedman said, declining to comment further on the extent to which the firm is involved. We'll have to wait and see as it takes place, he said.

The fund has also spent time looking at General Electric but finds the story is difficult to fully unpack. "It's very hard to look at the debt and see enough return in it today to pay for the opacity of the situation," Mr. Friedman said. The debt isn't cheap enough to be "particularity interesting at this point," he said.

Canyon hasn't been involved in Sears Holdings, which is going through a Chapter 11 restructuring, but there may be opportunities down the road, Mr. Friedman said.