“While all cycles differ, the sheer size of this cycle is what stands out.”
Jason Mudrick is the Founder & Chief Investment Officer of Mudrick Capital Management, an investment firm that specializes in long and short investments in distressed credit. Jason began his Wall Street career in 2000 as an associate at Merrill Lynch’s Mergers & Acquisitions Investment Banking group.
Jason’s focus on the middle market and taking advantage of smaller opportunities has differentiated Mudrick Capital Management from other shops. One notable position is with e-Cigarette company, N-Joy. With 70% of smokers wanting to quit, “you have a preventable problem if these people make the switch from traditional cigarettes.” The COVID-19 pandemic has only served as a catalyst for those looking to make the switch.
Gold is another commodity in which Jason has confidence, making a recent investment in Hycroft.
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SPEAKER
Jason Mudrick
Founder
Mudrick Capital Management
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global, thought leadership forum, and networking platform at the intersection of finance, technology, and geopolitics. And we've been doing these SALT Talks, which are a series of digital interviews in lieu of our physical conferences, during this work from home period. And what we've really tried to do is expose our audience, and let them into the minds of leading subject matter experts that are investors, creators, and thinkers.
John Darsie: (00:35)
And then what we also try to do is provide a platform for a big world changing ideas. And we're very excited today to welcome Jason Mudrick to SALT Talks. Jason is the founder and Chief Investment Officer at Mudrick Capital Management, which is an investment firm that specializes in long and short investments in distressed credit. So, this is obviously a very rich environment for his investment style. So, we're looking forward to that conversation. Mudrick Capital was founded in 2009 with just $5 million under management, but, as of this month, the firm has grown to manage approximately 2.4 billion, primarily, for institutional clients.
John Darsie: (01:11)
Jason began his career on Wall Street in 2000, advising on mergers and acquisitions as an associate in Merrill Lynch's M&A department, in their investment banking group. And in 2001, he joined Contrarian Capital Management where he began his focus on distressed investing. In October of 2002, Jason launched the Contrarian equity fund, which was an investment vehicle focused on purchasing distressed debt. And that would be restructured into equity, post-bankruptcy equities, and other event-driven, deep value, special situations.
John Darsie: (01:41)
Jason has served on multiple creditors committees, and served on the board of directors of numerous public and private companies. Jason also spent two years in graduate school, teaching economics classes to Harvard University undergrads. Jason has a BA in political science from the University of Chicago, and a JD from Harvard Law School. And he was also admitted to the New York State bar. And hosting today's interview is going to be Troy Gayeski, who is a co-Chief Investment Officer, and senior portfolio manager and partner at SkyBridge Capital, a global, alternative investment firm.
John Darsie: (02:12)
And just a reminder to everyone watching. If you have any questions for Jason during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And with that, I'll turn it over to Troy for the interview.
Troy Gayeski: (02:23)
Yeah, thanks John. Thanks everybody for joining us. We have a real pleasure to have Jason on today. Jason and I go way back to 2002 in his Contrarian days. So, before we get in the meat and potatoes of the strategy, and the opportunity now, Jason, let's talk a little bit about your backgrounds, and what it was like to get involved at Contrarian back in '02, and '03, and run that successful, post-reorg equity opportunity fund. And how it makes you feel to be sandwiched not only between Josh Freeman, the legendary distressed investor at Canyon, but coming up tomorrow we have Dan Loeb as well. That must make you feel pretty good, right?
Jason Mudrick: (03:03)
Yeah. Troy, good to see you, and thanks for having me. And yeah, you guys get an incredible lineup of speakers. This is great. I've been watching some of the series, and it's been very informative. So, in terms of background, as John mentioned, I'm a lawyer. I never practiced law but went to law school, as a lot of people in this business did. Got my degree, joined Merrill Lynch in their M&A group as was mentioned. And then we went into recession. It was the dotcom bubble. It burst in the summer of 2000. We went into that recession. And then I met the team up at Contrarian, as you mentioned. Joined them in 2001, and it was off to the races.
Jason Mudrick: (03:47)
I started at Contrarian the day Enron filed for bankruptcy, which at the time was the largest bankruptcy ever. And I left two weeks after Lehman filed, which, currently, holds the title as the largest bankruptcy ever. So, great time to be in the business. The hedge fund industry was about 200 billion in '01, it got up to 2 trillion. So, I got to see the institutionalization of the industry. Got to see two great recessions leading up to this one, this one being the third. And then when the great financial crisis happened, left Contrarian to set Mudrick up. Brought a couple of guys with me. I hired a bunch of folks. And that was 11 and a half years ago.
Jason Mudrick: (04:32)
And as John mentioned, today, we manage about two and a half billion. We have 30 people here in New York, a couple of people that sit in London. And this will be the third cycle, and it's the biggest one that we've ever seen. And I'm sure we'll talk a lot about that today.
Troy Gayeski: (04:48)
Jason, that's great to hear more about your backgrounds. Look, given your rich history both in the 2001 to 2004 total distressed cycle, and really '07 through, even as a distant or as 2010, 2011, how that informs your view on the current cycle. And could you touch upon some of the similarities and differences between this cycle and the last two?
Jason Mudrick: (05:14)
Sure. Well, look, all of these cycles are different in their own ways. I think what stands out about this one is the sheer size of it. If you think about what led up to the cycle, we had the longest period of time between recessions, literally, since like the 1850s, right? You had 11 years between cycles. And that long period of time was characterized by reasonable growth, but probably most, importantly, it was characterized by very low interest rates. And when you have a long period of time of good economic growth, and low interest rates, companies borrow a lot.
Jason Mudrick: (05:54)
And what we saw was the levered credit market, which are the companies that are most likely to get distressed. These are high yield issuers, levered loan issuers. That market was about 1.2 trillion in a weight during that last cycle, which was a huge market, right? It was up six-fold from the 2000, 2001, 2002 recession, but today it's 2.8 trillion. So, it grew, 120% over the last 11 years. And then, we had this very steep downturn. So, while there's a ton of differences, what stands out to me as the most unique thing about this cycle is there's almost $3 trillion of high yield bonds and levered loans outstanding. And we now have a recessionary type economy with a whole bunch of industries that are going through rapid, secular change brought upon and accelerated by COVID. So, huge supply of distress.
Troy Gayeski: (06:50)
Yeah. And coming into this cycle, leverage levels were meaningfully higher than they were going into the financial crisis for corporate America. Correct, Jason?
Jason Mudrick: (06:58)
Yeah. So, over the last six years, average debt to EBITDA multiples of new issue were over five times. The last time we had an average debt to EBITDA, multiple, it started with a five, was 1998. And we had over five turns of debt to EBITDA, add new issue for six years leading into this. And by the way, as everyone knows, EBITDA is an adjusted EBITDA, right? Most of these are our LBOs, and there's various generous add backs to EBITDA. So, if you're thinking about EBITDA as a proxy to operating cashflow, and you take away the questionable add backs, those five, five and a half times debt to EBITDA was really like six, six and a half. And that was average.
Jason Mudrick: (07:44)
Those were multiples for companies that expected to continue to grow, and nobody expected this recession. So, not only do you have a lot of debt outstanding, but you have very high leverage multiples, which has exacerbated the supply of distressed credit.
Troy Gayeski: (08:00)
Great. So, stepping back from the current opportunity for a second, one of the things that you've stood out from the crowd in the last three to five years is despite the fact that there is fairly low supply of distressed debt to invest in, you still made very attractive returns. Whereas, unfortunately, most of your competitors struggled to make, mid, single digit returns. Can you talk about the style that led to that? Was it being smaller? Was it being more active? Was it being more opportunistic? What do you think drove those outstanding returns vis-a-vis your competitors the last three to five years?
Jason Mudrick: (08:35)
All three of those. One thing that we've seen since the great financial crisis is most of the investment firms that specialize in distressed credit are very large. Okay? So, a lot of the folks that you've had on your talks, you can think about Canyon, Aries. And I saw Mark, spoke a couple of weeks ago, so, Avenue, Anchorage, Davidson Kempner, Centerbridge. Go down your list, pick your top 20 firms known for distressed investing. And they manage, 10 billion, 20 billion. Oaktree is 80 or 100 billion, or however big they are. And so, by our estimates about 85% of the capital dedicated to distressed investing sits in $5 billion in larger firms. But if you look at the corporate credit market, that's not what it looks like.
Jason Mudrick: (09:28)
85% of the corporate credit market is not large cap. It's actually 60% of it is small cap, and mid cap. And we define mid cap as one to 5 billion of enterprise value. So, most of the market is less than 5 billion of enterprise value. Yet most of the players in the market sit in firms that manage more than 5 billion. So, that has a whole bunch of implications. A lot of those folks really need the Lehman Brothers, and Enrons, big situations, the Pacific Gas and Electrics, where they can go put hundreds of millions to work. And that's not where most of the opportunity set has been, one.
Jason Mudrick: (10:05)
Two, you get very overdiversified portfolios. I think it's very hard to concentrate when you're running multibillion dollar portfolios. It's hard to take five or 10% positions. And in a world where there's few great opportunities, I'm talking about pre-COVID, we're in a cycle now. But when we were in the late stages of the last cycle, there was very few differentiated positions. If you can't take big positions in them, it's just really hard to put up good numbers in this asset class. So, our focus on middle market, being able to do the smaller stuff has differentiated.
Jason Mudrick: (10:44)
You mentioned active involvement. We sit on 12 boards of directors today. And we're on five active creditors committee. It's been defining part of our strategy to be very involved in these situations. And particularly, in some of the small, and middle cap situations, you really can drive the boat. You really can change the trajectory. There's not a lot of other distress players in these situations. So, we found that that's helped differentiate as well.
Troy Gayeski: (11:06)
Yeah, that's really interesting. We had Jerry Pascucci on from UBS yesterday, and he talked at length about there is a trend towards larger managers, but there are still those like yourself that are demonstrating that smaller size works to your benefit. It can help you put a better risk adjusted return. So, assuming you would agree with Jerry's conclusion.
Jason Mudrick: (11:25)
Yeah, no, 100%. I mean, look, it's a double-edged sword. I mean, it is a very resource intense investment strategy. So, you can't do this with three people on a Bloomberg. So, there is an optimal size. Particularly, today, there's a lot of new money opportunities. It's very advantageous to get to 51% in a lot of these documents, which are very covenant lite. You've heard about, I assume, the situation at J.Crew, or at Travelport, which were very involved in. PetSmart where assets are being stripped out. It's hard to be small. It's hard to be very large. And I know I'm self-serving when I say that, but there is an optimal size where you have the resources, you can own enough of this stuff to drive the boat. You can have a seat at the table, yet, you're not so big that you're lethargic, and can only be involved in large cap situations.
Troy Gayeski: (12:21)
Great. So, before we get into some of the distressed opportunities you look at today that were created by the pandemic, you have a very large investment in e-cigarette company. And we know you think it's going to lead to tremendous upside, but before we get into the upside, can you talk about the societal impact, and the positives that these companies can bring in terms of lowering morbidity and mortality rates to smokers?
Jason Mudrick: (12:46)
Yeah. I'm glad you asked about that. I mean, the e-cigarette industry has gotten a bad rap, over the last couple of years, because of a couple of bad actors. The most notorious of which is Juul. There's been a rise in youth use, underage use of the products, but it is not across the entire category, and it's not across all products. It really is a Juul phenomenon. And that has made this category talked about in a very negative light, but if you put that aside, smoking-related illness is the number one preventable healthcare problem we have in society. I know that's difficult to talk about given that we're dealing with this COVID situation, but 500,000 people in the U.S. die every year from smoking-related illness, and 6 million people die every year, globally, from smoking. And 70% of smokers want to quit, right?
Jason Mudrick: (13:42)
So, you really have a preventable problem. If you could give smokers an alternative. Obviously, quitting would be the best alternative, but if they can't quit, and they've tried over and over and over again, which a lot of them have, to give them a reduced risk product to continue to consume nicotine could be more impactful to society than almost anything else that you can imagine. So, it has gotten a bad rap, and I get it with youth use, and that has to be arrested. But if you could figure out a way to switch smokers from combustible to vapor or heat not burn over the next 10 years, it's an incredibly socially responsible investment.
Troy Gayeski: (14:18)
Yeah. This is a global problem as well, obviously, right Jason? It's like 14% of U.S. smoke. Mainly a working class problem, but in terms of China, and Germany, and other countries is far more prevalent, no?
Jason Mudrick: (14:30)
Yeah, I mean, in emerging markets, smoking rates are as high as 50%. We have one of the lowest smoking rates in the world, at around 14%, but there's still almost 50 million Americans that smoke cigarettes. I mean, I think in the investment world, we don't see it as regularly because as you mentioned, it is primarily a blue collar ... It's very prevalent in our minority communities, and our military communities. It's not necessarily something that is as salient to us on Wall Street anymore. I mean, we all have grandparents that died of lung cancer. Certainly, I did. But it's out of sight, out of mind, but that's not right. I mean, if you look at the actual numbers, $300 billion was spent last year on healthcare-related costs associated with smoking illness. So, it is a massive problem still.
Troy Gayeski: (15:24)
Yeah. So, now, that you've touched upon how it can help society, how about some of the return potential? And if you could talk through realistic return versus risk profile.
Jason Mudrick: (15:34)
Yeah, sure. So, I mean, it's very unusual to have a market as large as this that's highly regulated, that's being disrupted, right? Usually, you need very high barriers to entry. The barrier to entry in this industry is regulatory-driven, right? These products, there's good products, and there's bad products, but the science behind them, the technology, is pretty commoditized. There's nothing that unique about these products. What's unique about it is it's very hard to get a license. And the way the U.S. regulatory machine is attempting to regulate this business is going to create very few players. It's going to create effectively an oligopoly.
Jason Mudrick: (16:16)
And that process is ongoing as we speak. And the total addressable market is just huge. I mean, there's $100 billion, just in the U.S., $100 billion spent every year on nicotine-related products. And 70% of smokers want to quit, or 80% of that 100 billion is still combustible cigarettes. So, 80 billion is spent every year. So, if you believe as I do that half the market will go the way of reduced risk products over the next 10 years, you're talking about $40 billion of revenue on top of the 10 billion or so that's already spent on vapor products. You're going to have a $50 billion market over the next 10 years.
Jason Mudrick: (16:56)
That's probably going to be accessible for four, five, six, seven type of players. I mean, literally, the regulatory environment is creating ... Like we just applied for our license. It's called a PMTA, a Premarket Tobacco Product Application, in March. And to complete our application, we had to spend over $20 million. And a lot of the data that we had to show the FDA, they're the regulatory body in charge of this, a lot of the data that we had to show the FDA was historical population-level data, survey work. And if you're not an incumbent, if you're not an existing player, you can't show that.
Jason Mudrick: (17:36)
So, even if we could round up the money from venture capital firms, or collectively, to come up with a new product and go try and get a license, we wouldn't be able to show any of that historical data. And the risk would be very skewed to the downside for a new launch. So, I think, unintentionally, but it's the reality, they're creating a market where only incumbent players are going to get licenses. And a lot of the smaller players aren't going to be able to afford to put together a comprehensive application.
Jason Mudrick: (18:07)
If you fast forward 12 months from now or 18 months now, and this regulatory approval process is through, I think you're going to have five to seven players in a market that, like I said, I think could be on the scale of 100 billion in size over the next 10 to 20 years.
Troy Gayeski: (18:24)
Has the pandemic slowed down the rate of crossover from those addicted to cigarettes to vaping?
Jason Mudrick: (18:32)
Interestingly, there's a lot of noise in the numbers, so it's difficult to make too many concrete differences, but we believe we've seen an acceleration of the switch. I think there's a lot of folks just given how COVID attacks the lungs in the most severe cases, I think we've seen an acceleration of people trying to get off of combustible, either quitting entirely, which is obviously the best option for them, or switching to a vapor product, which is a reduced risk product.
Troy Gayeski: (19:03)
We were talking about this before, but somewhat, surprisingly, the FDA hasn't slowed down its application processing during this pandemic, which I think you found to be a positive surprise. No?
Jason Mudrick: (19:14)
Yeah. So, all of the applications were due May 12th. We were fortunate ... I say we, the company is called NJOY. NJOY was fortunate, and then they got their applications in March, and then COVID happened. And Juul, in particular, went to the FDA and said, "Look, we need more time because we can't complete our application with all the labs closed, with all the population survey firms closed." And that deadline was extended until September 9th. So, the current deadline is September 9th, and we'll see if that gets extended again or not. But there was a concern amongst those that had gotten their applications in like NJOY that the FDA would go pencils down given that they have a lot of other areas they're focused on, and the realities of just a work from home environment.
Jason Mudrick: (20:01)
But what we've seen is that that's not the case, that they're plowing through applications. And my belief is that they want to get the applications that did get in before COVID shut everything down off their plate, because they realize that they're going to get a whole nother batch of applications September 9th. So, last week or the week before, but very recently, Philip Morris got what's called an MRTP for their IQOS product, which is a modified risk label. So, they can actually make statements like this product is not as harmful as cigarettes. And the fact that that was approved during this COVID time shows that the FDA is still plowing through these applications. And that's a good thing.
Troy Gayeski: (20:43)
Yeah. Thanks for that summary on your largest investment. And Jason, just to shift gears, when you look at the gold market today, there's obviously a lot of buzz based on QE infinity rates at zero for pretty much as far as the eye can see. And gold's finally starting to catch a bid. But one of the interesting positions you have is in the gold miner Highcroft, which was a classic post-reorg equity. So, you want to walk people through where we are in that life cycle, and how you think it's a better way to play a continued bull run in gold than just being long, buoyant, or the futures.
Jason Mudrick: (21:16)
Yeah. Look, Highcroft's an interesting one. We bought Highcroft about five years ago out of bankruptcy, us and a couple of other firms. We basically made the company a debtor and possession loan. So, it's a priming loan you can make in bankruptcy to help them get through their restructuring. And we added a convertibility future. So, we were secured by all the assets that the company had, which we thought covered the loan. But if gold were to move materially higher, and gold miners are about as levered away as possible to play gold price appreciation. We would participate in that upside through the convertibility feature.
Jason Mudrick: (21:55)
So, when I bought it I really looked at it as almost a contrast. I mean, contrast, that is the wrong description, but I really looked at it as a hedge, even though it was a long. It wasn't a short, but it was a long. But I thought, if things ever went south on the economy or something very bad happened, there's always a flight to safe havens. And gold is usually one of those. And because of the convertibility feature, and the DIP loan, we would benefit materially from that. So, this has sat on our books. And I know I've talked about it with you, and your team in the past, but it's basically been dead money for a long time, and then COVID happened.
Jason Mudrick: (22:33)
And now, what we were able to do earlier this year is get the company public. So, it's now listed on Nasdaq. So, we merged it into a SPAC to get it publicly-traded. The ticker is HYMC. So, it's now listed as of last month, and it is a very large gold deposit sitting in Nevada. So, we have almost 20 million proved and probable ounces of gold. The NAV five using $1,300 gold is over $2 billion. And if you plug in current spot prices, so we produce silver as a byproduct too, but with silver at $19, and gold at 1,800, I think the NAV is close to $5 billion.
Jason Mudrick: (23:17)
And what's, particularly, interesting about it today is we took it public through a SPAC. Investors in SPACs tend to not care about companies that are merging, not necessarily. They tend to be more doing the arbitrage around the SPAC, and also, mining assets are very unique assets. A lot of the people that invest in gold assets, don't know about Highcroft. So, as I think about the next six to 12 months, no comment on what gold is going to do. Gold's obviously been very well-bid. As we sit here today, it's out of pie of this cycle at 1,808. But no comment on gold.
Jason Mudrick: (23:58)
This stock is very illiquid. It's not covered by any sell-side research. It's not on any exchange. And what I expect to happen over the next 12 months is we'll see five to 10 sell-side research shops pick up coverage. More liquidity will come back to the name. And if it trades in line with where its competitors trade, there's meaningful upside, potentially, two to three times where it's trading today. So, we're pretty bullish on Highcroft.
Troy Gayeski: (24:24)
Yeah, that sounds like a great way to play marketing gold. But we're running out of time. So, I just want to segue back into the classic distress cycle that we're in. You mentioned before there's still two to 300 billion of distressed companies. Because what we hear from people quite often is, "Hey, liquid IG's rallied, liquid high yield's rallied. The opportunity is not going to be as big as people thought maybe at the end of March." But there's still ample supply to go after, and defaults are only going one way, which is higher. So, can you talk to us about the broader opportunity then we can get into some specific sectors you're focused on?
Jason Mudrick: (25:00)
Yeah, no, I mean, you're absolutely right. I mean, you just call any restructuring lawyer, or any restructuring financial advisor that you know, and ask if he or she is slowing down. I mean, we're in the first inning of the actual restructurings. What happened to the markets in March, and then, subsequently, in April and May as they rallied back is different than what we do. I mean, we focus on the de-leveraging events. So, the fact that some IG bonds traded from 105 to 95, and right back to 105, or some higher grade, high yield traded down 15 points and is right back to par. That's not really what we do. I mean, I think that was a great opportunity for those that do it. And I think guys made a lot of money, but that was the trade.
Jason Mudrick: (25:46)
It was the trade of the cycle. And we'll see how that plays out. What's going to drive to faults is economic activity. And we are in a slower economy, right? The world was priced for perfection, as we talked about earlier, in terms of debt to EBITDA, multiples being very high. And we are in a slower economy now. Now, some industries are doing fine, and some industries are going to come back a lot faster as everything reopens again, and we recover, but some industries are never going to come back. Think about department stores, they were probably going away over the long period of time, Lord & Taylor's is a store that I shopped at growing up, and that was going away over the next 10 years, but it went away in 10 days when COVID started. Right?
Jason Mudrick: (26:38)
So, COVID, has really been an accelerant of change. And think of business travel. We were talking about this before we went live just now. I mean, business travel, I don't know when it gets back to 2019 levels. I think people have just realized that video conference technology is pretty good. It's not the same as being in the same room as someone, but it's 90 or 95% there. So, I expect that there's going to be a long period of time. Even once there's a vaccine and COVID is a thing of the past, I don't think people are going to travel for business the way they used to.
Jason Mudrick: (27:17)
And that's a good segue into what industries we're looking at, but we are in a slower economy. There's massive disruption in industries, all at a point in time where there was maximum amount of corporate credit, and those two ingredients are a good recipe for having a lot to do. So, what I've told folks is I think this is a three to five year cycle. We're in the first inning of it, in terms of the actual defaults, not what's going on with the SP or the Nasdaq, or higher grade, high yield, the triple C stuff, the stuff that really needs to equitize. We're very early in this game.
Troy Gayeski: (27:53)
And which sectors in particular, Jason, are you looking for good company, bad balance sheet? Because it seems like there's more prevalence of that than just dying retail, for instance.
Jason Mudrick: (28:01)
Yeah. We're doing a lot in travel, not surprisingly. We own a company called cxLoyalty, which administers loyalty points for financial institutions. So, that's been impacted a lot by the shutdown in travel. We're involved in travel port. I can't really talk about that one because we're restricted in it, but that's an Elliot portfolio company. One of the three GDs globally. We're involved in some inflight connectivity companies, Gogo Global Eagle. So, there's a lot to do around travel. And we don't own airlines or cruise ships per se. But a lot of the companies that provide services to the industry are very distressed right now. But away from travel, very diversified across industries. I mean, the theme, if anything is LBOs.
Jason Mudrick: (28:49)
I mean, to your point about good business, bad balance sheet, most LBOs are reasonably good businesses that have predictable cashflows that can be levered, but they have a bad balance sheet because they financed the purchase price with a lot of debt. And there's a lot of first lien debt trading at 80 cents right now, some of which is going to go to 60 because the company is not going to make it. And some of which is going to go to par because the company is going to make it. As long as we have a ton of situations like that to look at with debt trading at 80, there's ways to make money.
Troy Gayeski: (29:26)
Well, Jason, it's a fantastic summary of the opportunity set as well as some of your key investments going forward. And we just want to thank you for being on today. I'm going to turn it over to my partner, John Darsie, who's going to ask you some questions from the audience. There are things people are eager to hear about how much money you're going to make the next two to three years, which is what it's all about after all, right, my friend?
Jason Mudrick: (29:45)
Thanks Troy. Good to see you.
Troy Gayeski: (29:46)
Good to see you too.
John Darsie: (29:48)
Jason, you mentioned Gogo, and we had an audience question about that. So, you talked about how you don't think business travel is maybe ever going to get back to 2019 levels, and is very challenging. So, what's your investment thesis on something like Gogo that likely relies a lot on revenue from business travelers?
Jason Mudrick: (30:05)
Well, look, I was specifically talking about business travel. The recovery in the business travel world, I think there's a secular change there. And that will take much longer. Vacation travel, so, personal travel, we're actually seeing some early green shoots that that's going to come back strong. There's a lot of pent up demand for travel. And I think as soon as people feel safe getting on airplanes, again, you're going to see a lot of pent up demand there. So, I think you have to think about the two categories differently. What's interesting about Gogo, in particular, is they effectively have a monopoly on private jets. So, the business aviation, that business alone, they're in 95% of inflight connectivity is Gogo.
Jason Mudrick: (30:58)
So, it's effectively a monopoly. And private jet travel, we've actually seen for July 4th week, and 5% year over year increases. So, you're already seeing that business come back. It is a safer way to travel, or at least perceived to be for a lot of folks that have the ability to access that luxury. And what's more interesting for us as financial analysts is most of those contracts are subscription-based, they're not usage-based. So, even when people weren't traveling, a lot of people were continuing to pay their monthly costs to have Gogo active. So, we actually think that the cashflows from the aviation side of the business, they'll be down year over year, but not down that much.
Jason Mudrick: (31:39)
If that business did 140 of EBITDA last year, we think it's going to do like 120 this year or something in that neighborhood. And that business alone is probably an eight to 10 times business, and covers the lion share of the senior debt. It actually covers all of the senior debt, and even some of the junior debt. So, our thesis is really about personal travel and business travel being different, but also business aviation being a much sturdier business model than commercial aviation.
John Darsie: (32:05)
All right. Thank you for that. The next question is around investment structures. So, you recently raised a longer lockup private equity style vehicle. Are these types of structures going to be necessary for distressed investing in a cycle?
Jason Mudrick: (32:19)
I think they are, for a couple of reasons. First of all, as I mentioned earlier, distressed credit focused investment firms have gotten so large relative to the last couple of cycles. It's very common to have a very concentrated ownership of companies when they emerge from bankruptcy. And what that means is that the post-reorg equity can be very illiquid. It's very common for five or six funds to own 80% of a company. And it's hard to just re-list that company, which is what we used to do in the '01, '08. You would take the company through bankruptcy, and just re-list it on the New York Stock Exchange. And liquidity would come back to the name, and you would exit. Today, the holding period is much longer. Usually, come out of bankruptcy as a private company, you continue to fix things, and then you go do an IPO.
Jason Mudrick: (33:06)
We merged Highcroft with a SPAC to get it public. You could merge with another public company that's not a blank check company, a strategic company. You could sell the company in an auction. But if the holding period used to be 18 months, it's now two to three years, sometimes longer. So, when you're dealing with longer hold periods, it's just more prudent to have longer lockup capital. So, we've been focused on private equity-like funds, so not tenure funds, but not quarterly liquidity, something in between, call them hybrid funds, where you have three or four year investment periods, and then you can harvest the investments.
Jason Mudrick: (33:40)
And the second thing is, as I mentioned earlier, we focus a lot on middle market situations. So, those are just going to be inherently less liquid. You get better value. They're less efficient. So, the value that we're looking for is there. The mispriced securities are there, but it's hard to do that with monthly or quarterly liquidity. You really need to know that you're going to be able to be around and see these things out. And that can take years.
John Darsie: (34:08)
So, we have a followup question about your NJOY investment, which is the e-cigarette company. Just talk through, again, your investment thesis, and then how you think the Smores IPO changes or doesn't change the return trajectory for your NJOY investment. And how do you size something like that?
Jason Mudrick: (34:25)
Yeah. Good question. So, for those of you that don't know who Smores is, Smores is the largest manufacturer of these products. So, Juul does their own manufacturing, but British American Tobacco's products, Altria's old product, they've taken it off the market when they made the investment in Juul. Our product, Japan Tobacco's product all produced by Smores, in Asia. They just IPO'd, and I haven't really followed it, but my understanding is it's done very well, and doubled. So, look, it's not the same business. They're producing the products that we're distributing them, and we own the product, and the brand, but, it's obviously a good thing. I mean, if you said, would you rather have Smores trade down 50% or trade up 100%? I would say I'd rather have it trade up 100% because it shows there's demand for this industry.
Jason Mudrick: (35:21)
What's really exciting about NJOY is because of the way the regulatory environment has been set up, there's very few players. And almost all of the players are owned by a big tobacco, right? So, Vuse is the number two product. Vuse and Alto, it's the same family of products, is owned by Reynolds/British American tobacco. They're the same today. Juul is effectively owned by Altria. They have a minority investment in them, and it's effectively owned by Altria. And the current CEO is a former Altria executive. Logic is owned by Japan Tobacco. Blue is owned by Imperial Tobacco, and then there's NJOY, which we control, and is owned by private investors.
Jason Mudrick: (36:09)
So, there's a real scarcity value if you think about the big five players. If you want to invest in the disruption of the combustible cigarette, there's no way to do it, right? If you want to invest in Vuse, you have to buy British American Tobacco stock, and you're getting 80% combustible, or 90% combustible, whatever it is. So, there's really no way to invest in the disruption of the combustible cigarette absent something like NJOY. So, I'm very bullish on, potentially, a public offering. I think it wouldn't be surprising to see one of the strategics acquire NJOY before it goes public. But if in theory, NJOY was a publicly-traded company, it would be the only publicly-traded way in the U.S. to play the disruption of the combustible cigarette.
Jason Mudrick: (36:56)
And I think the scarcity value of that alone, not to mention it's just the sheer size of the market. The [TAM 00:37:03] is $100 billion market. I think the fundamentals would support a very high valuation, but the scarcity value alone is really interesting. And the market's obviously valuing growth right now, and disruptions. I mean, look at Tesla. Look at the fact that the Nasdaq's up 16% year to date, and the Dow is down 8%. There's a real premium placed on growth and disruptions, and NJOY has both of those going for it. So, I'm bullish. I think [Smores 00:37:29] helps, for sure.
John Darsie: (37:33)
Would you use a SPAC to take NJOY public? We had Chamath Palihapitiya on an early SALT Talk, and he took Virgin Galactic public via SPAC. Is that something that you would look at in the case of NJOY?
Jason Mudrick: (37:46)
Yeah. I mean, look, SPACs are interesting because you can do them quickly. They've already gone through the IPO process. So, it's really a merger negotiation, and you can get the company public quicker. There's a little bit more appetite for situations that have hair around them. That being said, there are some negatives. And we were the sponsor of the SPACs. So, I'm intimately familiar with this, but there's a lot of dilution to the upside from the warrants that you need to issue to get a SPAC public. So, we'll consider anything when the time is right.
Jason Mudrick: (38:17)
I think that the size of the market is such that this is probably more likely a regular way IPO, if you had to ask me today, but the landscape is changing very quickly. A lot's changed just in the last 12 months, and I expect things will change over the next 12 months. So, I can't make predictions but NJOY is of the sizable e-cigarette producers that are sold at convenient stores, and gas stations throughout the country, so, nationwide distribution. NJOY is the only one that's independently-owned that has sizeable market share. And that I think is particularly interesting.
John Darsie: (38:55)
Before I get into a couple of the last questions, I want to give you an open forum to talk about any other individual investments that you think are interesting, and demonstrate your investment style. We've talked a little bit about NJOY, Gogo. Are there any others that we haven't covered that you think are interesting?
Jason Mudrick: (39:12)
No, look, we're not here really to talk about our books so much. And I'm glad you asked about, NJOY, and Highcroft, because I think they're unique situations. Look, both of them are actively controlled situations. So, we control the board of NJOY. We don't control the board, it's independent of Highcroft, but we are the chairman of the board, not me, but one of the guys that works here, David Kirsch. And they were both smaller, more off the run deals, and they were also pretty contrarian. Buying a gold mine on a bankruptcy, buying an e-cigarette manufacturer out of bankruptcy.
Jason Mudrick: (39:51)
I think they're interesting trades to talk about how we have differentiated ourselves. It's not Pacific Gas and Electric bonds, which we looked at but hard to really have an edge in a situation like that where every distressed guy on the planet is taking a hard look. Very few people looked at those two situations. And, Highcroft is actionable for those that are watching, that are looking for an interesting way to play gold. And you can't really invest in NJOY outside of our firm, because it's private. But now that we've listed Highcroft, if you're looking for a highly levered way to play gold with a lot of catalysts, mainly liquidity coming back to the name. People just understanding that it exists, it trades at around 0.2 times NAV, and comps trade between 0.6 and one time NAV. If we traded close to comps, it would be a 20 to $30 stock. So, I think that's a particularly interesting one since it was already brought up.
John Darsie: (40:52)
So, we have a question, if you're familiar, what are your thoughts on the recent ruling on Serta Simmons and Apollo?
Jason Mudrick: (41:00)
Yeah. Well, interesting that it happened to Apollo because they're usually the one, pardon my French, but doing the screwing. And tables-
John Darsie: (41:14)
We had Josh Harris on, I'll tell him you said that.
Jason Mudrick: (41:17)
... Tables were turned a bit. Look, since we're talking about Apollo, we were involved in a Canadian oil and gas situation, five or six years ago, where Apollo and GSO did an up tiering. They basically exchange their debt into senior debt, and primed us, and didn't let us participate. And we sued, and we lost, and we appealed, and we lost, and I think we appealed the appealing, and we lost again. And I think we're still suing for D&O insurance coverage. So, I've been on the other end with them, just to see it happen to them was somewhat ironic. But look, we're involved in these situations all the time now.
Jason Mudrick: (42:01)
The fact is, one of the things that we've seen through the cycle is a very loose covenants. And when you have loose covenants, you're going to get companies that are going to be creative, financial sponsors that are going to be creative. And at the end of the day, what's happening in these situations is companies have figured out a way to extend the optionality in their equity. And oftentimes, that involves treating one class of creditors differently than the others, in exchange for liquidity. Right now, liquidity is paramount. So, if you're willing to put money into a company, and the company can move you ahead of similarly situated creditors in exchange for getting that money, the company should do it. I think as an investor, you just need to understand that risk. You need to handicap that risk. And if not, you're going to wake up on the wrong side of a trade like that.
John Darsie: (42:57)
Well, Jason, thanks so much for joining us. I want to give Troy one last word, if he has any more comments or questions for you before we let you go.
Troy Gayeski: (43:05)
Yeah. Thanks, John. Thanks Jason for being on again. Once again, when you compare it to 2001 to 2004 cycle, '07 through let's call it 2010, 2011, do you think the return potential is equal or greater now? Or do you think it's more compressed because of fed policy intervention? How do you see it playing out?
Jason Mudrick: (43:28)
I think this is the mother of all cycles in terms of the size, right? I think, we're in effectively a zero interest rate environment. So, I think the tailwind for equity markets over the next five to 10 years is not going to be what it was coming out of the '01 cycle. But the market is 15 times larger, right? If you asked me, would you rather have a bull market or a lot to do? I would say I'd rather have a lot to do. So, I'm bullish on this cycle because there's $3 trillion of levered credit that not all of it's distressed, but a lot of it's distressed.
Troy Gayeski: (44:12)
Well, thank you so much, Jason. You're a real entrepreneur. Congratulations on all your success. And we look forward to many more years of success in the future.
Jason Mudrick: (44:20)
Thanks, Troy. Thanks, John. Appreciate it.