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Fairholme's Debt Picks

Michael Breen

Michael Breen: Speaking of capital allocation, last fall you took positions in debt in a lot of firms, a lot of senior debt. Maybe you can explain that. Was it a one-time opportunity? What type of deals you were getting. A lot of them overlap with the equities you own, same names.

Bruce Berkowitz: We like the ideas of mixing the debt and the equity of a company, especially a company that is levered. Because we thought the equity quite good, and when the company shrunk its business, let's say in the case of a rental company, or a...

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Michael: United Rentals.

Bruce: United Rentals URI, or say a Hertz HTZ, which is a better example. We'll shrink the business down, de-fleet, cash starts coming in fast, pay off some debt, everything is fine, the economy recovers, moves on. But really, if you can find the senior debt of companies that you believe in, and that senior debt, in the case of Hertz at one point, was yielded close to 30% per annum yield to maturity, what more can you want from life?

If we can get a senior credit position for our shareholders and achieve 20%, 30% yields...

Michael: Better than equity-like.

Bruce: Excess equity returns in a senior position in the company. Of course the implications of that, if we are right about the company, then Hertz's stock is going to go up multiples. So we like that package play. We can't find it that often. We're involved in a lot of companies now, we'd love to build up that part of the portfolio. It's a unique environment. I don't know how long it's going to last, but as long as it is we'll try and take advantage of it for our shareholders.