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Third Point Q4 Letter

Third Point Q4 Letter

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Published by: DistressedDebtInvest on Mar 06, 2010
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07/10/2013

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 1
 
Fourth
 
Quarter
 
2009
 
Investor
 
Letter
 March 1st, 2010Dear 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
 
2009 Annual Performance
38.6%
 
26.5% 20.4%2009 Fourth Quarter
8.0%
 
6.0% 4.9%Annual Standard Deviation
 
13.7%
 
16.4% 6.4%Monthly Correlation to S&P
 
0.4
 
1.00 0.6
 
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 duringthe fourth quarter.
Credit 
 
Investments/Post 
-
Reorganization
 
Equities
 
CIT Group Inc. filed a “pre‐arranged” Chapter 11 reorganization plan on November 1, 2009after several months of planning and negotiations with key creditor constituents. Thebankruptcy filing was necessitated by CIT’s inability to fund significant debt maturities dueto the dislocation in the credit markets and the lack of government support via TLGP, whichthe company had hoped in vain would be forthcoming in July 2009. We had beenmonitoring the situation, and the Chapter 11 filing provided us with an opportunity to
 
 2
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 (planconfirmation was December 8, 2009) was virtually unprecedented. Through our initialsizeable November debt investment in senior unsecured bonds, we received asconsideration $0.70 of a strip of 7% Second Lien Notes (2013‐2017), and our pro‐rataownership 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), whichquickly 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 compellingoption on the potential revitalization of one of the country’s largest middle‐market lendersas it transitions (according to our thesis) to a lending institution which will be fundedeventually via a retail deposit base. This path will require regulatory approvals, but thecompany 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 itsnon‐bank eligible businesses (e.g. transportation finance) as the economy stabilizes andasset 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 SecuritiesMortgage securities contributed significantly to our returns during the fourth quarter, andhave 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 anaverage size of $10M. However, we have invested opportunistically in mortgage indices asevent‐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 meansof 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 toreturn liquidity to markets for previously issued CMBS and non‐agency RMBS by providinggovernment equity co‐investment and favorable debt financing. As mentioned in previousletters, we were not interested in participating in P‐PIP, but saw the opportunity to tradearound it as enticing.
 
 3
As the manger selection and subsequent private capital fundraising process wore on, themarket pulled back its conviction that P‐PIP would be funded, giving us the opportunity tobuy the CMBX at a price that translated to a 17‐18% levered return for eventual P‐PIPparticipants. The bonds we purchased were the top 70% of the capital structure and webelieved that they were covered by their underlying asset values and that, over time, theywould return par. Based on the low risk nature of the asset and our conviction that thegovernment partnership was imminent, we thought these securities would tighten. Ourthesis proved correct, and we profited in the fourth quarter as P‐PIP starting buying bondsand 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 positionin Health Net common equity when the stock sold off following the announcement of thecompany’s loss of its Tricare contract with the US Department of Defense and the sale of itsNortheast 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 valuationoverhang across the managed care space. Health Net’s high quality management team isfocused on maximizing shareholder value, and CEO Jay Gellert is a significant shareholderin the company.We expect Health Net will increase profitability over the next several quarters asmanagement focuses on reducing costs. Post health care reform, the benefits of scale willbecome 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 takeadvantage of consolidation in the healthcare industry once the regulatory environment stabilizes.
Risk 
 
 Arbitrage
 
Investments
 
Mead Johnson NutritionAs we mentioned in our Third Quarter 2009 letter, we primarily focus on mergers andacquisitions as fertile ground for compelling fundamental investment opportunities asmore 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). MJNis a global leader in infant formula and pediatric nutrition and is most well‐known for itsflagship product, Enfamil.We like the MJN story for two reasons. First, the company has a highly attractive earningsgrowth profile. It generates almost 60% of its sales from emerging markets in Asia and

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