Gabelli100 | Nov 02, 2020 | Michael Benigno
Michael Gatto: Opportunities in the Credit Markets Emerge at Times of Crises
By Claire Curry
Like other financial crises over the past quarter-century, the COVID-19 pandemic created tremendous opportunities, according to Michael Gatto, partner of Silver Point Capital, a credit-focused hedge fund, and adjunct professor at Columbia Business School and the Gabelli School. Gatto participated in a fireside chat with Dean Rapaccioli on Oct. 27 as part of the Gabelli School’s Centennial Virtual Speakers Series.
“Market turmoil can present great opportunities for investors with capital who can pull the trigger and buy,” he said about the current crisis as well as those in 1998, 2002 and 2008.
“I don’t want to make like the coronavirus is a good thing,” said Gatto. “The human toll is staggering. There are 9 million infected in the U.S. alone, 250,000 dead, and we haven’t gone through the winter yet. We have never seen a global pandemic [like this].”
However, the sudden economic downturn created incredible opportunities for lending funds with dry powder and the ability to analyze risk quickly. Gatto talked about emergency financing, where private credit funds lent money to companies with a liquidity crisis driven by the quick shut-down of the economy in March. He also discussed buying both performing loans and distressed debt in the secondary markets.
Gatto discussed some sectors that were particularly hard hit by the COVID-19 crisis, including retailers.
“Revenues going down by 20 percent is a disaster, but revenues going down 100 percent is unheard of,” Gatto said, referring to earlier this year when retail stores were completely shut down.
“In certain situations investors could buy debt at a deep discount to par, say 20 or 30 cents on the dollar,” he said, adding that even if the business doesn’t make it, there’s “downside protection”: inventory could be liquidated and distribution centers, which are in very high demand now, could be sold. And those investors could reap tremendous upside if the business could be successfully restructured around a core set of its strongest performing stores.
COVID-19 vs. the Global Financial Crisis of 2008
Asked about how the current financial crisis compares to 2008, Gatto said that the latter was far worse. In 2008, the financial sector was on the verge of insolvency, while the banks came into the COVID-19 emergency with much stronger balance sheets.
“This is nothing compared to 2008,” he said. In 2008, there was real panic selling as investors worried about the solvency in the banking sector and the global economy’s risk of going into a depression. In contrast, the market was very orderly during this year’s crisis. While they sold off hard from February peak levels, fast forward to today, and they’ve stabilized. The financial markets started recovering in literally 90 days with the promise of a vaccine on the horizon.
The Evolution of the Credit Markets
Two events have changed credit markets as an asset class, according to Gatto. The first was in the 1980s when famed financier Michael Milken created the junk bond market that fueled the leveraged buyout industry. The second was in the 1990s when Robert O’Shea, a Fordham alumnus, built out the leveraged loan trading markets when he became one of Goldman Sachs’ youngest partners at the age of 29.
“Those two events over the last 30 years turned what was a boring asset class into an extremely exciting and lucrative asset class,” he said.
Yet Donna Rapaccioli, dean of the Gabelli School, pointed out that young professionals often overlook credit as an asset class, focusing on equity instead. “Why should someone choose to invest in debt versus equity?” she asked. Gatto explained that because the loan markets were less liquid and less efficient than the equity markets, those investors who focused on credit could create real Alpha for their clients. Alpha being excess returns relative to the risk of the investment.
Asked about the future of credit and how young professionals can prepare for a career in the field, Gatto advised them to learn as much as they can, get their foot in the door with a good company, and not worry about how much they earn in the first few years.
To connect Gabelli School students with new opportunities in the credit market, and to expand the school’s curriculum related to credit, Dean Rapaccioli announced the launch of Fordham’s O’Shea Center for Credit Analysis and Investment. Gatto will have an active role in creating the new Center and its curriculum.
The Center, he said, would have a direct impact on the careers of students interested in entering that field. “If you are good at your craft in credit, that opens the world to you,” he said.