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Dan Loeb Third Point Q4 Letter
Dan Loeb Third Point Q4 Letter
Dan Loeb Third Point Q4 Letter
March 1st, 2010
Dear Investor:
During the Fourth Quarter of 2009 and for the year, Third Point produced the following net
returns:
Third Point
Offshore Fund, Ltd. S&P TR CS Event Driven
The top winners for the quarter were Delphi Corp, Dana Holding, Chrysler, Health Net Inc.,
and General Growth Properties. The top losers for the quarter were Barclays, PHH, Fortis,
Short Financial A, and Punch Taverns.
Firm assets under management at January 1, 2010 were $2.5 billion.
Quarterly Results
Performance for the quarter was driven primarily by gains in post‐reorganization equities,
distressed credit, mortgage bonds, and equity investments in health care companies.
The following is a brief discussion of selected positions that impacted the portfolio during
the fourth quarter.
Credit Investments/PostReorganization Equities
CIT Group Inc. filed a “pre‐arranged” Chapter 11 reorganization plan on November 1, 2009
after several months of planning and negotiations with key creditor constituents. The
bankruptcy filing was necessitated by CIT’s inability to fund significant debt maturities due
to the dislocation in the credit markets and the lack of government support via TLGP, which
the company had hoped in vain would be forthcoming in July 2009. We had been
monitoring the situation, and the Chapter 11 filing provided us with an opportunity to
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purchase senior unsecured debt at what we believed to be a 25%+ discount to the asset
values that could be realized in an orderly wind‐down.
A restructuring of a $53B non‐bank financial completed within six weeks (plan
confirmation was December 8, 2009) was virtually unprecedented. Through our initial
sizeable November debt investment in senior unsecured bonds, we received as
consideration $0.70 of a strip of 7% Second Lien Notes (2013‐2017), and our pro‐rata
ownership of 77% of the new common equity of the company via the December emergence.
We created our equity position at approximately 0.4x plan book value (~$3B), which
quickly traded up to 0.7x plan book value upon listing on the NYSE.
CIT is currently one of our largest positions because we believe it presents a compelling
option on the potential revitalization of one of the country’s largest middle‐market lenders
as it transitions (according to our thesis) to a lending institution which will be funded
eventually via a retail deposit base. This path will require regulatory approvals, but the
company has already reduced debt by some $10B and has extended maturities so that it
has time to attempt this transition to a bank‐centric model while optimizing the value of its
non‐bank eligible businesses (e.g. transportation finance) as the economy stabilizes and
asset values recover.
Since the beginning of the year, CIT shares have appreciated approximately 32%,
significantly exceeding the results of the S&P 500 (flat) and the BKX KBW bank index
(+10.5%).
Mortgage Securities
Mortgage securities contributed significantly to our returns during the fourth quarter, and
have also performed strongly so far in 2010, both in terms of bond appreciation and pre‐
payments.
Most of our current portfolio is composed of single‐name, senior RMBS positions with an
average size of $10M. However, we have invested opportunistically in mortgage indices as
event‐driven trades from time to time, starting with a short of the ABX in the spring of
2007.
Late in the third quarter, we entered the CMBX index of commercial mortgages as a means
of expressing our conviction that the government’s Public‐Private Investment Partnership
(first announced in the fall of 2008) would in fact be funded during the fourth quarter of
2009. The Legacy Securities component of the Public‐Private Investment Program (aka P‐
PIP) is a joint initiative between Treasury, the Fed, and the FDIC that was developed to
return liquidity to markets for previously issued CMBS and non‐agency RMBS by providing
government equity co‐investment and favorable debt financing. As mentioned in previous
letters, we were not interested in participating in P‐PIP, but saw the opportunity to trade
around it as enticing.
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As the manger selection and subsequent private capital fundraising process wore on, the
market pulled back its conviction that P‐PIP would be funded, giving us the opportunity to
buy the CMBX at a price that translated to a 17‐18% levered return for eventual P‐PIP
participants. The bonds we purchased were the top 70% of the capital structure and we
believed that they were covered by their underlying asset values and that, over time, they
would return par. Based on the low risk nature of the asset and our conviction that the
government partnership was imminent, we thought these securities would tighten. Our
thesis proved correct, and we profited in the fourth quarter as P‐PIP starting buying bonds
and they tightened, though not as quickly as we had anticipated.
Equity Investments
Health Net
In the midst of the chaos during last summer’s healthcare debate, we established a position
in Health Net common equity when the stock sold off following the announcement of the
company’s loss of its Tricare contract with the US Department of Defense and the sale of its
Northeast assets to United Health. We believed this contract loss was not a fait accompli
and that the prevailing price did not reflect the residual value in the business. We also felt
that the resolution of healthcare reform legislation would remove the current valuation
overhang across the managed care space. Health Net’s high quality management team is
focused on maximizing shareholder value, and CEO Jay Gellert is a significant shareholder
in the company.
We expect Health Net will increase profitability over the next several quarters as
management focuses on reducing costs. Post health care reform, the benefits of scale will
become increasingly important as the industry focuses on wringing costs out of the system.
The Company has significant cost reduction opportunities and is well positioned to take
advantage of consolidation in the healthcare industry once the regulatory environment
stabilizes.
Risk Arbitrage Investments
Mead Johnson Nutrition
As we mentioned in our Third Quarter 2009 letter, we primarily focus on mergers and
acquisitions as fertile ground for compelling fundamental investment opportunities as
more often than not, we find unlevered arbitrage spreads uninteresting.
A few investments made during the Fourth Quarter highlighted the value in this approach,
one of which was a new long position in the shares of Mead Johnson Nutrition (MJN). MJN
is a global leader in infant formula and pediatric nutrition and is most well‐known for its
flagship product, Enfamil.
We like the MJN story for two reasons. First, the company has a highly attractive earnings
growth profile. It generates almost 60% of its sales from emerging markets in Asia and
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Latin America, where structural tailwinds like increasing middle class births, greater levels
of consumer education, and higher female participation in the workforce are driving
sustainable double‐digit sales growth. Once birth rates normalize in the developed world,
the company will generate one of the fastest long‐term sales and profit growth rates in the
large cap consumer staples universe.
Second, we believe the company represents a compelling acquisition target for multiple
parties following its complete separation from Bristol‐Myers Squibb in December 2009.
MJN’s geographic footprint (high market share in North America and key emerging markets
around the world and low market share in Europe) is highly complementary to that of
Nestle or Danone. Additionally, both companies are focused on health and wellness, have
acquired infant nutrition assets in the past (Nestle paid 15.7x EBITDA for Gerber and
Danone paid 21.7x EBITDA for Numico), and are currently large enough to swallow MJN.
Now that MJN is fully independent, Bristol‐Myers Squibb’s low tax basis in the asset no
longer complicates a potential transaction. Though the timing of such an event is of course
difficult to predict, and several tax, legal and regulatory hurdles may first need to be
overcome, we are content to wait for a buyer to emerge, knowing we paid a fair price for a
truly best‐in‐class asset with a long runway of emerging markets‐led growth.
Investment Outlook
We are relatively constructive about markets generally in light of modest valuations,
accommodating monetary policy and economic data which suggest growth from the pre‐
crisis lows. However, against this backdrop remain numerous issues that weigh on
sentiment, creating opportunities for investors, but presenting real risks to robust
economic recovery. Among the issues we track that have the potential to create market
dislocations are:
• US government deficits at the municipal, state and federal levels, including
entitlement liabilities, and their impact on inflation, interest rates, and growth
• Unwise US regulatory intervention
• European sovereign default risk weighing on the Euro
• Middle Eastern defaults
• Japanese fiscal/demographic crisis
• Chinese economic growth, credit quality and currency volatility
• “Peak Oil” impact on geopolitical stability and economic welfare
• Climate change
Accordingly, since it is difficult to predict which of these "monsters in the closet" will reveal
themselves and when (just as it was difficult to predict when the sub‐prime crisis would
come home to roost), it is important to continually monitor each of these risks, even as
event‐driven, bottom‐up investors. Unlike the subprime debacle, where it was possible to
set up bearish bets even after the market started to fail, I am concerned that many of the
issues we monitor today could unravel quickly in a step function. We have begun to set up
various trades to hedge against "fat tail risk", as we did early in 2009. While we have only a
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small percentage of capital at risk in such protective trades, we expect to increase the
amount of protection purchased to about 2% per annum over the coming weeks and
months – capital we would be very pleased to lose should such protection prove
unnecessary.
Notwithstanding a challenging start to the year, with markets flat as of this writing, we
have found ample opportunity within our investment framework to exceed market returns
and to meet our partners’ capital gains needs. In particular, distressed credits and post‐
reorganization equities, special situations and certain short positions are doing well. We
have also avoided many consensus trades, including cyclical and commodity stocks, gold,
Chinese and other emerging markets, all of which were terrific performers for other funds
last year but do not meet our framework or qualify as part of the knitting we do best and to
which we are sticking.
While immediate opportunities in corporate performing credit have waned, we are seeing a
strong surge in corporate M&A activity, which produces investment possibilities directly in
risk arbitrage investments and sometimes around the fringes, as noted above. While we
have taken down our exposures since their peak in mid‐January, we like our portfolio and
remain excited by the new event‐driven situations we are seeing every day. Capital inflows
to the funds suggest that our existing and new investors share these sentiments, and we are
ever grateful for the votes of confidence that so many of you have shown.
Please feel free to contact Investor Relations or me directly with questions or thoughts.
Sincerely,
Daniel S. Loeb
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The performance data presented represents that of Third Point Offshore Ltd. All P&L or performance results
are based on the net asset value of fee‐paying investors only and are presented net of management fees,
brokerage commissions, administrative expenses, and accrued performance allocation, if any, and include the
reinvestment of all dividends, interest, and capital gains. The performance above represents fund‐level
returns, and is not an estimate of any specific investor’s actual performance, which may be materially
different from such performance depending on numerous factors. All performance results are estimates and
should not be regarded as final until audited financial statements are issued.
While the performances of the Funds have been compared here with the performance of a well‐known and
widely recognized index, the index has not been selected to represent an appropriate benchmark for the
Funds whose holdings, performance and volatility may differ significantly from the securities that comprise
the index.
Past performance is not necessarily indicative of future results. All information provided herein is for
informational purposes only and should not be deemed as a recommendation to buy or sell securities. All
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investments involve risk including the loss of principal. This transmission is confidential and may not be
redistributed without the express written consent of Third Point LLC and does not constitute an offer to sell
or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation
may only be made by means of delivery of an approved confidential offering memorandum.
Information provided herein, or otherwise provided with respect to a potential investment in the Funds, may
constitute non‐public information regarding Third Point Offshore Investors Limited, a feeder fund listed on
the London Stock Exchange, and accordingly dealing or trading in the shares of that fund on the basis of such
information may violate securities laws in the United Kingdom and elsewhere.
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