David Chu and Igor Lotsvin, of Soma Asset Management, spoke Tuesday at the Value Investing Congress entitled The U.S. Banking Sector: Chaos and Opportunity. The following are our unedited notes from their presentation:
- Wave of foreclosures is beginning to pick up and we will see a massive wave of foreclosures over the next several months.
- Next shoe to drop is commercial real estate (more alarming than subprime). Size of commercial market in US is $3.5 trillion vs. $1.5 trillion subprime. Banks have exposure to $700 billion in construction loans (the most combustible portion of the CMBS market). Total bank capital is about $1 trillion.
- The worst of the banking crisis is ahead of us. Banks are not lending. There is a massive reduction in all lines of credit, which will suffocate growth. By 2011, cards capacity will be down by $2 trillion. SBA loans are down 60%. Deposit insurance fund will run out shortly.
Investment Idea: Short-Sell Zions Bancorporation (ZION)
- ZION focuses on the Southwest (bubble states), and is the 22nd largest bank in the US. 7x tangible equity in RE loans and 2x tangible equity in commercial. The company’s credit is deteriorating fast, reserve coverage ratio is dropping quickly (reserves taken so far are inadequate)—holds true for the entire industry. AZ and NV are responsible for about 50% of chargeoffs.
- Bottom Line: This is a banking crisis unlike anything seen before - there is deleveraging on a massive scale, disconnect between credit and equity markets, extreme correlation and volatility, banks are a proxy for all credit markets, and there will be no recovery until banking function is restored. Remain concerned and very bearish. They believe you should position your portfolio with this macro lens.
About Soma Asset Management
- Investment philosophy (foundation of the firm): 1) Value Investing Bias (limited downside) 2) Investing (Looking) Across The Capital Structure, 3) Long Term Bias
- 2008 performance, net, was 26%. Returns driven by focus on credit markets. Saw structured products as a leading indicator (RMBS, CDOs, CLOs, etc). The collapse in ABX preceded the fall in banks. It took very large short positions in LEH, BSC, FNM. Says the recovery rate for many loans issued by banks is 35 cents on the dollar—the carrying value on most bank balance sheets is above this level.
About the Speakers
David Chu. Prior to co-founding Soma Asset Management LLC, Mr. Chu was most recently with Scion Capital, LLC, a fundamental analysis, deep-value hedge fund with over $500 million in assets under management (AUM). While at Scion, Mr. Chu launched that firm's Asia office and served as the company's Executive Director responsible for overseeing the day-to-day operations in Asia. Mr. Chu also worked extensively on Scion's large credit default swap portfolio. Mr. Chu began his career as an investment banker at Goldman Sachs & Co. (GS) in New York in the Leveraged Structured Finance Group, where he completed high yield securities offerings and project finance transactions across numerous sectors. Additionally, Mr. Chu was a private equity executive both domestically and internationally, specializing in bankruptcy and distressed opportunities, and worked in financial operations for a technology company. Mr. Chu graduated magna cum laude from Georgetown and earned an MBA from Harvard Business School.
Igor Lotsvin. Prior to co-founding Soma Asset Management LLC, Mr. Lotsvin was a portfolio manager with Symphony Asset Management, LLC, a multi-strategy hedge fund and an asset management firm with over $7 billion in AUM. While at Symphony, Mr. Lotsvin was part of the portfolio management team working on the firm's flagship long/short equity hedge funds (with over $1 billion in AUM) and was lead portfolio manager on several long-only strategies. Mr. Lotsvin was instrumental in building Symphony's long-only strategies, having helped develop this business from concept to over $1.2 billion in AUM. Prior to joining Symphony in 2003, Mr. Lotsvin was a High-Yield and Distressed securities analyst at Franklin Templeton, where he was responsible for coverage of multiple sectors including financials, media and real estate. Mr. Lotsvin represented Franklin in numerous high profile bankruptcies and restructurings and served on several creditors' committees. Mr. Lotsvin began his career in public accounting with Arthur Andersen, LLP. Mr. Lotsvin is a Certified Public Accountant, a Chartered Financial Analyst and earned an MBA degree from Harvard Business School.
Disclosure: No positions