Up to date on April twentieth, 2021 by Nikolaos Sismanis
Knighthead Capital Administration is a long-short hedge fund that makes a speciality of the next funding sorts:
- Occasion-driven
- Distressed credit score
- Particular conditions
The corporate was based in 2008 by Ara Cohen and Thomas Wagner. Since that point, Knighthead Capital Administration has grown to over $5.8 billion in managed belongings.
Traders following the corporate’s 13F filings over the past 3 years (from mid-February 2018 by mid-February 2021) would have generated annualized complete returns of -6.55%. For comparability, the S&P 500 ETF (SPY) generated annualized complete returns of 12.50% over the identical time interval.
Be aware: 13F submitting efficiency is completely different than fund efficiency. See how we calculate 13F submitting efficiency right here.
You possibly can obtain an Excel spreadsheet with metrics that matter of Knighthead Capital Administration’s present 13F fairness holdings under:
Maintain studying this text to study extra about Knighthead Capital Administration.
Desk Of Contents
Knighthead’s Household of Corporations
Knighthead Capital Administration invests the ‘float’ from its associated firm, Knighthead Annuity & Life Assurance Firm. This firm relies within the Cayman Islands and has greater than $2 billion in belongings.
Knighthead additionally advises for Jazz Re, a captive reinsurance firm owned by Sentinel Safety Life Insurance coverage Firm with the aim of reinsuring choose blocks of life insurance coverage insurance policies. Sentinel Safety merged with Benefit Capital Holdings in 2016.
As well as, Knighthead advises for Equitable Life & Casualty Insurance coverage Firm, a life, and casualty insurance coverage firm. Additional, Knighthead advises for Trinity Life Insurance coverage Firm.
Knighthead Capital Administration can be associated to actual property mortgage originator Knighthead Funding.
Knighthead’s Holdings
Knighthead’s public-equity portfolio may be very concentrated, holdings simply 9 shares in 4 completely different industries. In the course of the quarter, the fund executed the next notable fairness Buys and Sells.
New Buys
- Wynn Resorts (WYNN) (new PUTs bought place)
- Sysco Company (SYY) (new PUTs bought place)
- Mercer Worldwide Inc. (MERC) (new PUTs bought place)
New Sells
Knighthead’s largest holding is PG&E, which accounts for greater than half of the portfolio. The overall portfolio contains the next equities:
Supply: 13F Filings, Writer
1.PG&E (PCG)
Knighthead Capital Administration has guess closely on California electrical and fuel utility PG&E. This funding definitely falls beneath the ‘particular conditions’ banner.
PG&E was accountable for a number of California wildfires from 2015 by 2018. The corporate was levied with an enormous $15 billion wonderful. In consequence, the corporate filed for Chapter 11 chapter reorganization in January 2019.
Knighthead, along with Abrams Capital Administration and Redwood Capital Administration, proposed a restructuring plan for PG&E in a detailed letter.
Knighthead’s PG&E funding has but to repay, and administration doubtless loses endurance contemplating it trimmed its PG&E place final quarter by 25%. The corporate’s newest 13F submitting reveals it now holds 24,567,349 shares, price almost $290 million at present costs.
It’s not possible to know precisely when Knighthead bought the majority of its shares, however the common share value in Q1 2019 – when Knighthead loaded up on shares – was $16.34. In its latest submitting for This fall 2020, Knighthead’s stake accounts for 52.6% of its complete holdings. Which means the fund’s high-conviction thesis stays alive, regardless of the underwhelming outcomes up to now.
This lopsided risk-reward ratio will not be one thing that occurs usually. If PG&E finally ends up failing – and that’s one thing Knighthead has not less than some management to forestall – then Knighthead could have an entire loss on its place. That’s the worst-case situation. However the upside is that PG&E may find yourself prospering, leading to multi-bagger returns for Knighthead.
This type of investing may generate stable returns in a diversified portfolio. The inventory’s ahead P/E is at present solely round 11.4, reflecting the underlying dangers.
This stage of focus is probably going because of the affect that Knighthead has on the scenario. Having some stage of management warrants a extra extremely concentrated place, all different issues being equal.
It’s essential to notice that Knighthead doesn’t make investments solely in equities. The agency is much extra diversified than the outsized fairness place in PG&E would appear to indicate at first look. Certainly, their 13F submitting reveals put and name choices as effectively. Moreover, the agency invests closely in debit/credit score markets. General, the PG&E place is price round $290 million proper now. That’s solely ~5% of the agency’s belongings beneath administration.
2. Sabre Company (SABR)
Knighthead’s latest funding in Sabre Company additional reveals its capital allocation in the direction of equities going through vital strain. Each little bit of the corporate’s operations is instantly associated to the journey and tourism business, which have been hit with an enormous disruption of its operations throughout the pandemic. Sabre’s quarterly gross sales dropped from round $1B, to only $83 million throughout Q2-2020, an enormous 92% plunge.
Throughout This fall, the corporate confirmed indicators of restoration, posting revenues of $313.7 million. Regardless of the slight restoration in gross sales, nevertheless, these ranges are nowhere close to their pre-COVID ones. On account of an absence of economies of scale, the corporate will not be in a position to but produce income, therefore nonetheless posting quarterly losses of round $300million.
Knighthead has structured its bullish place in Sabre by each buying shares and promoting places. The fund trimmed its place by round 7% throughout the quarter, nevertheless it’s nonetheless price almost $84 million, or 15.2% of the portfolio. Throughout its most up-to-date submitting, for This fall, Knighthead bought $450K price of places as effectively, strengthening its bullish place. The remainder of the market appears to agree with Knighthead, as shares have rallied again to $15.30, indicating returns of round 132% primarily based on the fund’s common buy value of round $6.72.
Whereas Sabre’s gross sales could take some time earlier than utterly recovering, Knighthead may find yourself massively benefiting, amid normalization. The corporate would generate greater than $330 million in web income beneath a standard monetary yr. At its present valuation of simply $4.8 billion, the inventory is buying and selling round 16 instances its under-normal-conditions profitability. The market is forward-looking, probably anticipating that restoration to such excessive web earnings ranges could take a very long time if it even materializes within the first place.
In consequence, whereas Knighthead’s fairness and choice positions may pay massive bucks amid a rebound, administration’s capital allocation in Sabre may additionally find yourself being a considerably dangerous transfer.
3. Wynn Resorts, Restricted (WYNN)
Knighthead’s place in Winn Resorts is model new, because the fund bought round $60 million price of name choices simply this earlier quarter. The inventory matches the fund’s standards of distressed companies, as Wynn suffered massively because of the continuing pandemic.
Regardless of the corporate’s revenues barely recovering in This fall, Wynn remains to be dropping cash, and is but to stabilize financially. Nevertheless, traders have been assured sufficient to trigger a powerful rally over the previous yr, sending the inventory value to its pre-Covid ranges.
Knighthead’s option to buy name choices signifies that the fund believes the inventory has nonetheless some fuel within the tank, to advance additional going ahead.
4. Marathon Petroleum (MPC)
One other one in every of Knighthead’s heavy bets on distressed equities is its latest, new place in Marathon Petroleum. Knighthead initiated a place throughout Q2, buying 1,450,555 shares, at present price round $57 million as a result of the fund trimmed its place by round 300K shares throughout the quarter. Marathon Petroleum was a Marathon Oil Company (MRO) spinoff, which occurred in 2011 to unlock shareholder worth.
Marathon Oil is at present buying and selling close to all-time lows, as COVID-19 adversely impacted its oil exploration and manufacturing actions, forcing administration to droop the dividend throughout 2020. In distinction, whereas Marathon Petroleum’s operations have been additionally negatively impacted, its petroleum refining, advertising and marketing, retailing, and transportation have carried out higher throughout the pandemic. In truth, throughout Q2 2020, the corporate broke even and by This fall it returned to profitability, showcasing its resilient logistical operations.
In 2020, the corporate had introduced closing the sale of its Speedway comfort retailer and fuel station chain to Seven & I Holdings’ (SVNDF) 7-Eleven subsidiary, for $21B in money. The divestment has considerably boosted MPC’s liquidity. This has helped with sustaining its dividend in addition to staying solvent whereas demand for its refining and transportation operations steadily picks up once more. Because of present process a extra manageable scenario than its former dad or mum firm, Marathon Petroleum has retained its quarterly dividend, which at present yields round 4.4%.
On account of a better-than-expected efficiency to this point popping out of the pandemic, Marathon Petroleum’s shares have rallied pretty notably. At a latest share value of ~$53, Knighthead has recovered its early losses, and is now holding shares with unrealized features. Knighthead’s common buying value is round $37.
5. Sysco Company (SYY)
Sysco Company markets and distributes a spread of meals and associated merchandise internationally, together with frozen meals, corresponding to meats, seafood, totally ready entrees, fruits, and extra.
Sysco has elevated its dividend for over 50 consecutive years, inserting it on the unique listing of Dividend Kings. You possibly can see the total listing of all Dividend Kings right here.
Sysco has been rising its revenues comparatively constantly; nevertheless, its web margins are razor-thin at under 3% even in favorable enterprise environments. COVID-19 additionally elevated the corporate’s prices, leading to losses. The meals distribution business sometimes has low margins, so the corporate must be anticipated to see its backside line within the crimson at any time when main points come up.
Nonetheless, revenues ought to stay principally resilient as effectively because of the defensive nature of the meals business. Knighthead’s place is solely new, buying 500K name choices just like its Wynn transfer.
6. Mercer Worldwide Inc. (MERC)
Mercer is Knighthead’s solely publicity to fundamental supplies. The Canadian firm makes a speciality of manufacturing and promoting northern bleached softwood kraft (NBSK), which is the paper business’s benchmark grade of pulp. As a result of area of interest and small market, Mercer has a market cap of simply $1 billion.
The belief’s place is sort of distinctive in that it’s its oldest holding, with its first place courting again to This fall of 2010. Knighthead has commonly traded its shares, because the cyclical demand for its merchandise permits for normal inventory swings.
Knighthead trimmed its place by 37% throughout the quarter, prone to guide some income off of the inventory’s extended rally. It additionally bought round 350K places, which implies that the corporate stays fairly assured in Mercer’s future. Contemplating that Knighthead has been buying and selling the inventory for almost a decade, we imagine that Mercer doesn’t point out a long-term place.
As an alternative, it’s a automobile used for opportunistic trades, primarily based available on the market’s cyclicality. The corporate’s initiation of a dividend over the previous few years, nevertheless, ought to present Knighthead with optimistic returns whereas it holds its shares.
The inventory is at present yielding round 2.57%, because of the latest dividend reduce. Nonetheless, Knighthead stays assured within the inventory, which makes for round 1.7% of its public-equities portfolio.
7. Equitrans Midstream Corp (ETRN)
Equitrans operates, acquires, and develops pure fuel transmission, storage, and water companies belongings within the Appalachian Basin. The midstream firm occupies round 1.3% of Knighthead’s complete holdings. The place in Equitrans is comparatively new, initiated in Q2-2020 for round $8.5 million. Throughout Q3 the fund elevated its stake within the firm by 33%, whereas in the newest quarter, the place was held regular.
The corporate had a tough 2020, present process dividend cuts and steep share losses because of the opposed results of the pandemic. Regardless of going through challenges currently, like the remainder of the businesses within the sector, the corporate beat its outlook for FY2020 EBIDTA at $1.20B-$1.22B. The inventory can be buying and selling at a really cheap valuation a number of, round 9.7 instances its ahead EBITDA.
8. Genesis Power (GEL)
Like lots of the midstream firms that have been compelled to chop their distributions, one such case is Knighthead’s subsequent holding, Genesis Power. The fund initiated a place by buying 266,378 price just below $2 million throughout Q2 when the inventory was buying and selling at round $6-$7. The corporate’s operations have been adversely impacted throughout the first half of 2020, as home and worldwide prospects of sodium hydrosulfide and caustic soda have been consistently canceling orders throughout the peak months of the pandemic.
In consequence, administration was compelled to chop its quarterly distributions by 72%, to $0.15. This has doubtless contributed to the inventory buying and selling at fairly a reduction, at solely 8.9 instances its ahead EBITDA.
It’s additionally price noting that Genesis had reduce its distributions once more in 2017. Shares are at present buying and selling barely greater from Genesis’ buying ones, whereas the fund collects a fats 8.45% yield on value because it waits for a possible appreciation. The place was held regular throughout the quarter.
Regardless of Knighthead’s enthusiasm, we see Genesis’s operations fairly riskier than the remainder of the midstream sector. Commodities corresponding to sodium hydrosulfide and caustic soda are extra cyclical than oil and pure fuel, providing much less predictable money flows. With shares close to a 23-year low, we imagine that Knighthead’s new place was principally executed in hopes of a fast commerce amid a possible swing and never as a long-term funding place.
9. Enterprise Merchandise Companions L.P. (EPD)
Enterprise Merchandise Companions is our top-ranked Grasp Restricted Partnership, or MLP. You possibly can see our full MLP listing right here.
Knighthead initiated a wholly new place in Enterprise Merchandise Companions final quarter (Q3), additional betting on a fast restoration within the midstream area. The fund purchased its stake at a median value of round $15.70, which has already been a profitable choose now that shares commerce round $22.84.
EBITDA technology remained extremely steady throughout the quarter, regardless of the general challenges. The corporate additionally has a distribution protection ratio of over 1.5x, leaving room for distribution will increase and unit repurchases. Enterprise Merchandise’ high-quality belongings are in a position to generate sturdy money flows, even in recessions.
In consequence, Enterprise Merchandise has been in a position to elevate its distribution to unitholders for 22 years in a row. EPD is likely one of the few firms within the sector to have maintained their distributions, which is a testomony to their high-quality belongings.
Closing Ideas
Knighthead Capital typically appears to speculate the place different capital is scarce, probably resulting in greater returns. That is evident within the firm’s distressed credit score investing. The technique could be seen with the PG&E instance particularly, in addition to its latest picks in Marathon Petroleum, Genesis Power, and Equitrans.
You possibly can obtain an Excel spreadsheet with metrics that matter of Knighthead Capital Administration’s present 13F fairness holdings under:
Further Assets
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