Challenges and Manipulations in Credit Markets

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The chapter discusses the challenges investors face in credit markets due to time constraints in conducting thorough due diligence, emphasizing the manipulation tactics used by companies to appear less leveraged than they are. Examples from Enron and a casino showcase how financial structures can be exploited for inflated profits. The importance of transparency, management's behavior, and the risks associated with opacity in financial reporting are highlighted, with real-life cases like Creative Artists Agency illustrating potential issues in the credit market.

Carson Block is not an unfamiliar name, at least in the equity markets. He and his short-activism fund Muddy Waters Research have been at the center of many notable trades in recent years — so notable, in fact, that the SEC began investigating him last year.

He’s talked publicly about the covert techniques he and his colleagues use to uncover fraud, and about the impacts of short selling on his health. Amongst his successes have been some setbacks, like when Chinook was acquired by Novartis just after Muddy Waters doubled down on its short position.

But shorting credit is a different ball game, and one that doesn’t get as much visibility as public stocks.

Muddy Waters has experience in that arena too, with short bets on names like Casino and Vivion, so we wanted to know what advice Block had for debt investors trying to spot which names to stay away from. Welcome to the short seller’s guide to credit!