Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Vulture circles indebted tech companies

Steven Tananbaum, GoldenTree Asset Management
Patrick T. Fallon | Bloomberg | Getty Images

Silicon Valley may still be chasing the proverbial unicorns of technology, but at least one big Wall Street investor is thinking more like a vulture.

Steve Tananbaum, a leading investor in the bonds of troubled companies, said the technology arena is one of the most interesting opportunities in the market today, given the high debt load carried by mediocre companies.

"One sector that hasn't gotten as much attention in the press but we think is very vulnerable is the technology sector," the chief investment officer of $23 billion GoldenTree Asset Management said Tuesday at the Milken Institute Global Conference in Los Angeles.

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Tananbaum noted that the tech sector represented about 8 percent of all "CCC" rated bonds in 2014, one of the worst ratings for a business' ability to pay back money. That's up from just under 4 percent in 2012 and slightly more than 5 percent in 2013.

"Technology is a devil in terms of CCC issuance," Tananbaum said on a panel moderated by event namesake Michael Milken, himself a pioneer of so-called junk or high-yield bonds.

Bonds with a "C" rating or below are generally considered junk, versus many "B" or higher ratings, which are usually called "investment grade."

The hedge fund manager also noted that leverage for tech firms has shot up. Tananbaum noted the amount companies have borrowed compared to assets: more than 7 times as of 2014, up from about 5.6 times in 2011.

"This seven-times leverage as a lot of aggressive pro forma assumptions," Tananbaum said. "These are not the types of companies that would be displaying the types of results of Apple. These are the types of companies that often have revenue that's not growing."

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Tananbaum did not provide any specific examples of companies. He also did not say whether he was actively betting against such securities—shorting—or simply waiting for more distress in the market. Instead he said it was a good sector to be "looking at" and to be "fishing in."

The GoldenTree CIO similarly noted opportunities in the energy sector, a better-known play for investors in beat-up bonds.

Tananbaum said he liked energy markets subsectors such as companies that focus on oil and gas, coal, and metals such as copper and gold.

In coal, he gave the example of Murray Energy, which is called a "great company" with a "very low cost structure."

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