Fountain Square Asset Management is the English name of the St Pauli street (Brunnenhof) in Hamburg where 32 year-old Meyer resides. Its first fund, FS Colibri Event Driven Bonds Fund, is named after a hummingbird that Meyer first beheld in the Brazilian rainforest, and his philanthropic aspirations include creating a foundation to conserve the bird’s habitat.
Meyer’s preferred habitat is more complex bond structures and corporate events, to find novel ways of generating alpha. European convertibles, other hybrids, subordinated debt, junior subordinated debt, contingent convertibles, and various instruments issued by banks and insurers are closely monitored using innovative quant tools he has developed, newsflow and networks. Trading opportunities arise from various corporate, regulatory and other events, including accounting issues, potential for calls, puts, and tender offers to be exercised, covenant breaches or triggers, and asset sales.
The strategy does clip healthy coupon income but has low interest rate risk thanks to generally short durations below three years, focuses on the idiosyncratic risk of the bonds instead of market beta and can hedge credit market risk. It aims to get paid mainly for company and instrument specific complexity rather than broad credit market risk.
The three main broad strategy umbrellas are recovery and high carry, special situations and opportunistic flipper engagements, though these can overlap: “Technical special situations are expected to be 50% of the book, though some of them can also have recovery elements,” says Meyer.
A more granular breakdown splits the portfolio into different thematic categories including recovery; capital action; inverted curve; M&A; flipper; refinancing; government support; asset disposal or regulatory pressure.
There is also plenty of variety within each of these: “Portfolio diversification comes not only from different geographies and industries, but more importantly from different types of events with different timing. All require some specific catalysts, which could come from the issuers themselves, other firms, governments, regulators or bond features,” says Meyer.
The strategy targets returns of at least 5-7% (incl. costs), though in June 2022 the running yield alone was already 8.1% gross. Hybrids can command a significant yield premium: “Heimstaden was paying 10.18% on its hybrid versus 2.74% on its regular senior bonds and the latest drop may increase the probability for some asset liability management,” says Meyer. Around two thirds of the book is hybrids including banks, insurers and non-financials.
Yet correlation to indices of high yield, subordinated financials and non-financial hybrids, and broader fixed income markets, has only been between 0.05 and 0.35 since inception. It should be low since there is some index hedging, and the unique events traded can also be independent of wider market movements. In the first half of 2022, Meyer has outperformed other special situations UCITS credit funds in the alternative/opportunistic category in the European market.
The strategy does not currently go net short, but hedges market risk. Meyer expects to launch a credit long/short strategy, which could trade single name CDS.
Meyer roves all over Europe in search of alpha, meeting companies at their offices and at conferences, and staying in close contact with traders in London and Paris. He has invested in debt of firms located nearby Hamburg or Lubeck and has also visited Greece twice in 2022, where he views short dated 2024 senior debt of the largest construction and infrastructure company, Ellaktor SA, as an unfairly neglected situation: “Other investors are avoiding Greece, even though construction is the sector that stands to gain most from the Next Generation EU recovery and construction plan, and Ellaktor could make good profits on renewable energy developments. There is a running yield of 10% and optionality from a change of control clause at 101, which might be triggered by a new corporate structure”.
Elsewhere in peripheral Europe, EU solidarity is leading to more tolerance of state aid, and the approval of EUR 2.55 billion restructuring aid for TAP Air Portugal gave Meyer the green light to invest: “We now expect to earn an 8% yield on a short-term bond that matures in June 2023 with EU and Portugal state support as tailwinds to refinance the bond”.
Regulations such as Basel III and CRR2 can force corporate events, as can call options on subordinated financial hybrids. “Legacy paper can be called or tendered at well above the prices where it has traded down to in June 2022. We have allocated more to banks and insurers in 2022 as they have cheapened.”
Insurance companies’ tender offers for legacy paper can generate one-off opportunities for very high rates of return: accurately anticipating an offer earned Colibri an annualized IRR of 41% on perpetual junior subordinated paper from Dutch insurer Aegon, which Meyer thought was well telegraphed by the insurer’s previous public statements. He finds limited investor and sell side coverage of insurance paper makes it inefficient.
Contingent convertibles are the highest beta sleeve within financials and can also be bought in anticipation of special call triggers, but sometimes Meyer will see better risk/reward in somewhat more senior paper: “We are always looking for the sweet spot of the balance sheet. In the case of Austrian Bank Raiffeisen, we own a tier two bond instead of the AT1 with a fixed bullet maturity, where we have confidence in repayment next year. The T2 curve inverted due to market stress”.
Meyer finds that whether and when banks and insurers may repay debt is subject to cultural differences across Europe: “Banks in the Netherlands and some Scandinavian countries are more inclined to call bonds at the first date for reputational reasons. But one Norwegian bank never called its legacy bonds because it viewed them as cheap financing”.
There can also be surprises: “Credit Suisse recently called a bond and refinanced at a yield more than 100 basis points higher, contrary to market expectations”.
Regulatory approvals add another uncertainty to the mix, and Meyer forms his own views of banking regulators: “The UK PRA’s approach is surprisingly aligned with the EBA, which led me to invest in some paper from Barclays”.
The main focus is in Europe, but some US bank bonds have sold off to levels in the 70s and 80s where Meyer envisages a high chance of tender offers around the 85 or 90 level.
A more challenging refinancing market can generate very high IRR when there are positive surprises. Meyer anticipates an IRR of 30% on a Swiss property bond where the company has obtained a new revolving credit facility and sold some assets. Asset disposals can be transformational from a credit perspective even for companies such as a French supermarket that are going through challenging conditions. The strategy is not pursing merger arbitrage as such, but private equity M&A deals from huge US firms, and asset spin-offs, can generate cash flows that dramatically improve credit quality.
Cross covenant situations can generate interesting sources of optionality, where one loan maturity becomes shorter if another structure is not refinanced before a deadline. Meyer noticed this for a UK oil company.
Meyer has been activist in the past and expects to become more involved in bondholder discussions as assets grow. For now, he sometimes invests in names with activist creditors. For instance, Elliott Advisers was active in Lubeck based 3D printer, SLM solutions, which received a bid from GE. Equally, Meyer has been in positions that were shorted by other hedge funds, such as Raffinerie Heide. “Its parent company in the USA may support and furthermore they just bought another refinery in Denmark which can be used as collateral as well. Thus, several catalysts are identified,” says Meyer.
Sometimes, a specific bond can offer a unique opportunity for a corporate action, even if the issuer overall may be heavily levered and face some challenges. This applied to an issue from frozen foods maker Arytza. Overall, Meyer is emphasizing stressed situations and avoiding distressed, though he is keeping an eye on the distressed space and meeting firms such as Aston Martin to keep them on a watchlist.
This wide variety of trades reflects diverse influences. Raised on a farm in Germany, Meyer had no prior contact with global financial markets and his parents are still surprised by his interest. He has a pan-European perspective, having studied a double degree in business administration and finance, including two years in Marseille as part of the Ecole-Franco-Allemande scholarship. Corporate events fascinated him as a student: his master’s thesis, at University Leuphana Luenebuerg, on financial instruments and restructuring, was the only one overseen by supervisor, Prof Dr Johannes Jorg-Riegler, who was also then CEO of Bayerische Landesbank and on the KfW management board. Other influences included his first financial market job, working on financial data analysis, sentiment data, and writing articles for Stefan Risse, who is now capital market strategist at Acatis Investment GmbH.
At former employer Aramea, the founders Thomas Gollub and Markus Barth taught Meyer important lessons in client relationships and entrepreneurial strategy, and Senior Sven Pfeil was helpful for market knowledge. At Aramea, Meyer had a remarkably broad remit. He ran EUR 2.5 billion in two funds and some AIF: Aramea Rendite Plus and Aramea Rendite Plus Nachhaltig, which invest in European subordinated and junior subordinated debt, split 70% financials and 30% corporate hybrids. He conceived the ESG strategy, including analytics from PRI, FNG-Siegel and Eurosif; headed fixed income trading; handled regulatory reporting to BaFin, issuer roadshows, security selection and portfolio construction. He continues to manage for Aramea a buy and hold long only fixed income mandate which is part of a balanced fund.
Now the aim is to focus on 40-50 positions mainly in pure play event driven/stressed strategies. This is a fully active approach, which includes positions outside usual benchmarks and investment universes, which might be off limits for some mutual funds, especially in Germany. For instance, Colibri’s administrator, Ampega, is Germany’s third largest for insurance, part of The Talanx Group with EUR 180bn AUM, but did not until recently have various bonds, including AT1 bonds, and Payment in Kind bonds, in its systems: “Its systems could not handle a Payment in Kind bonds due to the uncertainty of cashflows – real money investors are not active in this area and that might be our chance,” says Meyer.
A structured idea generation process is intended to produce a systematic and repeatable process from over 30 screening mechanisms, from multiple sources: Bloomberg EQS fundamental screening; fixed income screening; MiFID II trading volumes and sizes, and prospectus features such as Next Put Date or Payment in Kind options. New screens are regularly added: “This year I have worked with Bloomberg in London to develop a screen for inverted corporate yield curves, which uses default probabilities because most of the issuers tracked do not have proper CDS curves. Inverted curves can be a signal of stress and distress or might be due to technical issues such as illiquidity or aggressive sellers,” points out Meyer.
As well as sell side and proprietary research, Meyer finds ReOrg, which has a big team of lawyers and analysts looking at high yield, a valuable independent resource that expands his bandwidth. Sarria may also be added for more coverage.
Colibri’s team is currently Meyer and his former colleague from Aramea, Jan Frederik Dreyer. Most non-investment functions are outsourced: regulatory licensing and compliance comes from FIDUS Finanz; administration and sales from Ampega Investment; Baker Tilly provides law and accounting services and prime broker UBS deals with trading. UBS was a natural choice for prime broker. “I already had good relationships with the investment banking and trading departments, and make use of their offices and research,” says Meyer. He maintains trading lines with his prior network of brokers and can give up trades to UBS. Meyer expects to add JP Morgan as assets grow, where, “The Nexus platform is an attraction for credit default swap and total return swap solutions. We appreciate banks who take a positive view on Colibri’s growth prospects”.
A UCITS is the preferred vehicle of Colibri’s clients in Germany, Austria, Switzerland, Luxembourg and Liechtenstein. The daily dealing fund runs a barbell between two sub-strategies. It keeps 10-25% in 10-15 liquid, low beta investment grade bonds, while 75-90% is in 30-40 alpha bonds.
There is a relatively low management fee, including discounted early bird fees, and a hurdle rate of 200 basis points above EURIBOR under the performance fee.
Meyer runs EUR 55 million as of June 2022, across both the Colibri event strategy and the Aramea mandate. He has been offered seed deals but could only contemplate selling some management company equity if it brought strategic benefits, such as sales, beyond simply raising assets. The strategy is attracting interest from pension funds, insurance companies, and family offices. Colibri capacity is estimated at EUR 500 million to remain nimble, or to use the more figurative German word “Schnellboot” (meaning fast boat). The Colibri bird is one of the fastest and most dynamic flyers.