Kieran Goodwin, Consultant, Saba Capital Management

Apr 2, 2024

Guest Kieran Goodwin, distressed debt investing expert, discusses alpha decay, option characteristics of distressed investing, and the challenges of creditor-on-creditor violence in the distressed market. He also explores the CLO business, credit widening cycles, and the potential consequences of market dynamics on default rates.

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INSIGHT

Alpha Decay in Distressed Debt

Distressed debt investing alpha has decayed over time.
Increased expertise and information access reduced the edge of specialized investors.

ANECDOTE

Early Distressed Investing Experience

Kieran Goodwin applied credit derivatives knowledge to distressed investing by being short via CDS.
He joined King Street in 2004 to learn more about distressed investing alpha.

INSIGHT

Distressed Investing and Volatility

Margin of safety is crucial in distressed investing due to uncertainty and high costs.
The viability and obsolescence of the company are key considerations.

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Kieran Goodwin’s roots go back to the early days of both distressed debt investing and the credit default swap market, two classes of risk he has seen experience significant change over the last 25 years. Our conversation gets underway by exploring the notion of alpha decay in the distressed market, a diminishing opportunity set that has resulted from smarter capital entering the space, equipped with an understanding of the often complicated process around bankruptcy and reorganization. Kieran frames out the option characteristics of distressed investing in an interesting way, suggesting that the short or long profile of the exposure is about whether time is on your side or not while also arguing that it is arming yourself with a margin of safety in price that creates this runway, leaving the trade with more long vol attributes.

Distressed investing today, in Kieran’s view, is an adult swim only business, rife with creditor-on-creditor violence and requiring a large balance sheet to be in the room as indentures are changed or portions of a capital structure are being primed. We spend the remaining part of the discussion on the CLO business and the potential for a credit-widening cycle. Kieran describes the CLO machinery as a captive buyer base for loans that has served effectively as a quasi-index product that has facilitated market growth. While noting that the product has indeed been effective over the years, he points to concentration risk that can lead to a rapid rise in correlations and spreads. He also points to at least some early signs of an uptick in defaults.

Lastly, we touch on the electronification of credit trading and the factorization of credit exposure that technology has increasingly enabled. Involved as an investor in some of the initiatives to facilitate electronic trading, Kieran sees further growth here, accompanied by more continuous trading and price discovery.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Kieran Goodwin.