Stacey Muirhead Captial Management


Distressed Credit Investments

Commitments to high yield and distressed positions have also been an important part of our investment activities over time.

High yield commitments involve purchasing a security that is meeting its interest or dividend obligations at the time of purchase and is likely to continue to do so with a reasonable probability. However, because of some perceived or actual difficulty with the company or overall market weakness, the security is available for purchase at a distressed price that provides us with an extremely attractive annual yield. Perceived or actual difficulties affecting a company that can lead to an investment opportunity include reduced access to credit markets, poor short term operating performance, deterioration in the value of assets or an unexpected increase in on or off balance sheet liabilities. The key consideration in any high yield commitment lies in making a determination that the company will continue to be able to meet all of its obligations over time in all likelihood.

Distressed position commitments involve the purchase of a security in an issuer that has already defaulted on one or more of its obligations. In these situations, the primary concern is purchasing the investment in question with enough of a margin of safety to ensure an attractive return when the issuer reorganizes its affairs, whether formally or informally. Such reorganization usually results in the issuance of a package of cash and one or more new securities to replace the defaulted obligation. A key consideration in the purchase of any distressed position is its seniority in the capital structure as senior obligations are almost always more favourably protected than junior obligations.

While our preference is to make high yield commitments because of the attractive yields generated, we believe it is important to remain flexible and consider any high yield or distressed opportunity that presents itself. As with Event Driven Investments, the returns from Distressed Credit Investments are to a large extent irrespective of the course of stock market averages. We also believe that the ability to make such investments results in an improved overall discipline in allocating the capital we manage for our investors. Having another page in our investment playbook gives us an extended universe for attractive investment selection.

“A great business at a fair price is superior to a fair business at a great price.”

Charlie Munger


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