We believe there are specific and persistent inefficiencies in the corporate credit markets offering opportunities to generate true alpha. Central to our core philosophy is a belief that the credit ratings process has inherent bias. 

Ratings agencies methodology favors large enterprises with long histories.  This process tends to punish issuers who are perceived as “small” which today includes almost everything under $600 million in tranche size.  Not setting artificial constraints based on size or history allows us to view the entire leveraged finance market as our investment universe.

For us, alpha is defined as capturing yield per turn of leverage well above those of the widely used indexes. We focus on delivering sustainable yield and controlling default risk.

We believe most investors place too much reliance on credit ratings and feel rating agency algorithms are not the best risk proxy as they over-weight the size of a company. 

We are most interested in the future free cash flow generating ability of the businesses we invest in. 

Our belief is that a business that can generate a true economic profit after all expenditures (free cash flow) creates a margin of safety. This free cash flow is not the popular “EBITDA” which is a useful comparative valuation tool.  Our definition of free cash flow is cash from operating activities less capital expenditures. 

While this process by itself is reasonably common among value investors, the key for us is in identifying mispriced securities.  Our objective is not to avoid risk but to manage and price it effectively.