Gateway Credit is a value-based corporate credit investor providing discretionary fixed income investment management services.
Gateway Credit Partners (“GCP”) is a division of B. Riley Capital Management, an SEC Registered Investment Advisor and wholly-owned subsidiary of B. Riley Financial, Inc. (NASDAQ: RILY). GCP holds a focused mandate to identify and acquire undervalued securities in the non-investment grade corporate credit market. We believe the optimal vehicle for delivering alpha to our investors in this asset class is via securitization inside Collateralized Debt Obligation (“CDO”) structures. This is intended to allow us to focus on maximizing yield and spread per turn of leverage, seeking to minimize concern for constant liquidity and mark to market risk.
We believe that the non-investment grade bond and loan markets are inefficient and lend themselves to active management. We are ratings agnostic and our focus is on companies and industries, not on duration, subordination, or maturity. While it is popular to emphasize management style, we believe true value comes from discipline.
At GCP, we intend to let our portfolios dictate optimal CDO structures versus trying to maximize leverage, which sets us apart from the competition. The “equity” in our structures is often issued in the form of bonds with warrants, which will allow us to pay out a competitive yield while trapping significant cash inside the portfolio to strengthen credit metrics via additional collateral purchases and/or immediate debt paydown.
GCP is comprised of an experienced management team whose track record includes investment processes in the high yield bond market where investors have historically been unsecured. This type of investing requires a detailed analysis of both the industry in which the prospective company operates and the specific idiosyncratic risk of the business. We believe our fundamental analysis gives us a significant competitive advantage versus other structured managers who place too much reliance on ratings, the use of leverage and so-called “secured” term loans to drive returns.
Central to our core philosophy is a belief that the credit ratings process employed by the main rating agencies is flawed. We believe their algorithms favor large enterprises with long histories. This process tends to punish issuers who are perceived as “small” or “new” and who issue debt tranches under $500 million. Not setting artificial constraints based on size or history is intended to allow us to view the entire leveraged loan and high yield bond universe as our investment set and capture true alpha. For us, alpha is defined as capturing yield/spread per turn of leverage well above those of the widely used indexes.
Our focus is on the future prospects of the business regardless of size or longevity of the enterprise. We are most interested in the future free cash flow generating ability of the businesses we invest in. Our belief is that a business that can generate a true economic profit after all expenditures (free cash flow) creates a margin of safety for our investment. This free cash flow is not the popular “EBITDA” or earnings before interest, taxes, depreciation and amortization. We define free cash flow as cash from operating activities less capital expenditures. “EBITDA” is a useful comparative valuation tool, but it is not cash flow. While this process by itself is reasonably common among value investors, the key for us is in identifying and acquiring securities with very low price to expectations, not just higher yields.
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