The Morning Brief: Mudrick Makes Hay in Distressed Market

Jason Mudrick’s Mudrick Capital Management is up 17.6 percent for the year through August, making the New York–based distressed specialist one of the best performing hedge funds this year, let alone among the best performers in its strategy. The fund, which has not suffered a losing month this year, reported a net exposure of 36 percent at the end of August, down from 47 percent the previous month and between 52 percent and 59 percent the other six months of the year. Performance has been driven by North American distressed credit investments including Lee Enterprises term loans, EFIH unsecured bonds, Verso secured bonds and Dex Media term loans, among others, according to people familiar with the fund’s portfolio. Launched in July 2009, the fund has suffered one down year, when it lost just 3.7 percent in 2011. Earlier this year, Mudrick told Alpha he expected to find good opportunities in U.S. corporate debt in 2014, mostly among middle-market companies. Of the largest companies, he said: “A lot of liquidity and relatively decent economic growth is not a good recipe for defaults. There are a handful of names that everyone knows about.”


Jeffrey Smith’s Starboard Value sent a letter to shareholders of Darden Restaurants from his 12 director nominees explaining why to vote for them at the upcoming annual meeting. “Our collective backgrounds, skill sets, and leadership experiences have prepared us well for the important opportunity at Darden,” they state in the letter. “Among us are restaurant industry veterans who have achieved extraordinary results, having been founders, CEOs, CFOs, executives, and board members of Darden, Olive Garden, Brinker, T.G.I. Friday’s, IHOP, Smith & Wollensky, Burger King, Romano’s Macaroni Grill, Taco Bell, Pizza Hut, Cosi, Corner Bakery, Quality Meats, Maloney & Porcelli, and Tim Horton’s. Additionally, we have valuable experience in real estate, turnarounds, and corporate governance.”

Earlier in the week, Darden denounced Starboard’s nominees, saying that the hedge fund firm’s proposed slate “has significant experience gaps and numerous ties to Starboard and to each other, which raises further concerns in our view about allowing a single minority shareholder – Starboard – to take control of Darden.”


Peak6 Investments, an options trading and clearing firm, said it will sell its 50 percent interest in its hedge fund business, Peak6 Advisors, to Joseph Scoby, who launched the $2.3 billion business, according to the Wall Street Journal. It will be renamed Achievement Asset Management and plans to grow its London office, where it will trade European stocks, corporate bonds and bank loans, according to the paper. Scoby, who will own 100 percent of the business when the deal closes, reportedly plans to sell some ownership stakes to employees in the Chicago-based firm.


Sears Holdings’ $400 million secured short-term loan received last week from Edward Lampert’s ESL Investments “is a temporary and short-term fix to a much larger need for liquidity infusion,” asserts Fitch Ratings, citing the embattled retailer’s “significant cash burn.” In the report Fitch estimates EBITDA (cash flow) will be negative $1 billion in 2014 and potentially worse in 2015. Fitch thinks the company needs to generate a minimum EBITDA of $1 billion per year from 2014 through 2016 to service cash interest expense, capital expenditures and pension plan contributions.

At the same time Fitch expects Sears to burn $2 billion or more in cash annually. Fitch also estimates the retailer needs roughly $600 million to $700 million in liquidity to fund seasonal holiday working capital needs. The debt rating company says Sears’ remaining choices for raising capital include selling Sears Canada, issuing additional second-lien debt, further cutting working capital and issuing real estate-backed debt.

“Given the high rate of cash burn in the business, should Sears even be able to execute on a number of these fronts” these actions would take them through 2016, Fitch states in the report. The upshot: “Fitch expects that the risk of restructuring will be high over the next 12-24 months.”

Dmitry Balyasny’s Balyasny Asset Management disclosed that a number of its investment entities combined own 5.17 percent of Spansion, which makes flash memory-based products.