Introduction to Robert Levine by Jack Malvey:

Tonight, we honor and celebrate the exemplary career of Bob Levine by his induction into the Fixed Income Analysts Society Hall of Fame.

Past Hall of Fame inductees have made distinctive contributions to our noble profession in the analytical, portfolio management, issuer, and academic fields as well as to the FIASI organization itself.

But up until Bob, no Hall of Fame member has contributed in every single dimension.

First and foremost as a proud CFA and former member of AIMR’s accounting policy committee, Bob’s an “Analyst’s Analyst.” Most analysts are made; a lucky few are naturally-born.   Bob’s a member of that fortuitous natural category.   He’s detailed-oriented and possesses that funny, witty temperament that often finds amusement in the overly-enthusiastic exhortations of some issuer managements and their accompanying retinue of intermediary advisors.

In keeping with the best Wall Street traditions of efficiency, Bob also possesses a direct informality.    For example, while once standing at an adjacent urinal in Kidder’s men’s room in the mid-1980s, Bob asked me if I’d care to join FIASI’s board of directors.  Although not in the habit of accepting propositions in rest rooms, I could not resist this gilded invitation to join what surely must be a highly select and prestigious organization as FIASI.

After earning his Wharton MBA in the early 1970s, Bob began his analytical career at JP Morgan in 1974.   In 1977, he teamed up with barre little to form the absolutely finest and funniest industrial credit research team on Wall Street at Kidder Peabody.   To this day, such long-term industry veterans as Curtis Ishii, Calpers debt CIO, recall Bob’s industrial credit research as the finest ever.

Through their innovative financial quality profile report (FQP), where quality was their middle name and one-page concise analytical poetry was more esteemed than verbose novels, they introduced the notion that analytic conclusions would be enhanced through the combination of projected financial statements with traditional historical financial statements for each major issuer in the industrial universe.   For some reason, this insight, actually providing detailed financial statement projections, still continues to elude most published sell-side equity and credit research.

Career legacies also are judged by the selection and mentoring of young disciples. This formidable analytical task in the infancy of the desktop pc era was enhanced by Bob’s tremendous eye for young talent.   The notable careers launched in Bob’s fqp laboratory include Rich Bilotti, Steve Freidheim, Steve Esser (credit head of Miller Anderson, Morgan Stanley asset management), Joe Amato (head of Lehman high yield research, equity research, equity sales, Neuberger Berman), Alex Kirk (head of Lehman Distressed, High Yield, co-head of Fixed Income, founding co-partner of River Birch Capital), Bob Stansky of Fidelity, and one-step removed as an apprentice trader, Phil Falcone of Harbinger Capital.  Bob also enlisted Jim Nelson from First Boston to provide high-grade credit research, with Jim going on to great success at WAMCO as head of their credit research team.   He also greatly aided Tony Vignola’s tenure as the overall head of Kidder bond research and my own transition from a rating agency analyst to sell-side research.

Bob’s personal judgement was not infallible.   He did share his reservations about Bob Stansky’s potential as a sell-side credit analyst.   And he may have had a point as evidenced by Bob Stansky’s long successful tenure at the helm of Fidelity’s Magellan Fund.

After a decade of providing premier industrial credit research, which surely would have earned no.  1 accolades if institutional investor had bond research rankings back then, Bob became one of the founding tri-heads of Kidder’s new merchant banking and High Yield business in 1986.  His decision to focus on High Yield was one of the best call’s of his career.  Since the inception of the Lehman High Yield index in 1987, the High Yield asset class has grown from $37 billion to $790 billion and delivered a compound annual return of 9.45%.  After earning an internal reputation as Dr. No on new origination and, unlike some future equity analyst brethren in dot.com era of the late 1990s, recognizing the conflict as a good CFA, of co-mingling research in his highly-regarded “high-yield sector report” and origination, Bob shifted to Kidder, Peabody’s asset management business in 1988 as its founding president of High Yield asset management.

Bob also had an innovative origination and asset management idea.   As he highlighted to me on a napkin in 1987, why not buy 100 different High Yield bonds funded through a combination of debt and a chunk of equity?  And so, Bob created the very first corporate CBO.  He, however, did not envision the exaggerated extension of this simple securitization technique to its zany apogee in the oughts.

But like most new products, the inspiration was easier than the execution.   Bob found a particularly receptive audience in Japan.   But the capital raise required a long stretch of monthly missions to Tokyo to conduct a high-yield symposium.  Through these “high-yield university” lectures, Bob became extremely well known in Japan.   Indeed, even 15-20 years later, it seems that most senior Japanese debt portfolio managers recall “Bobu-san.”

With his close relationships in Japan and to max chapman, who moved from heading Kidder to Nomura in the U.S., it perhaps was only natural that Bob decamped to Nomura in mid-1990.

For the next 20 years, Bob served as founder and president, CEO, and CIO of Nomura Corporate Research and Asset Management.   His responsibilities expanded to include em, leveraged loans, and a hf.   His performance was outstanding, ranking in the top decile over this period.

And in true superstar fashion, he saved the best for last.  Just as Ted Williams hit a home run in his last at bat, his funds returned over 60% in 2009, a year when High Yield rebounded by 58%.

On the academic front, Bob somehow found the time to teach a course in financial statement analyses to NYU MBA students for several years.   And in his latest publishing venture, he has an article coming out in the July 2010 edition of journal of portfolio management.    Bob’s also considering a book length treatment of his experiences of being one of the original pioneers of the modern High Yield market as well as contributing to its maturation.  His combined tenure of more than three decades as a High Yield analyst and portfolio manager is nearly unrivaled.

Bob also has been a career-long contributor to FIASI, including a notable term as our president in 1986-1987.   In particular, Bob straightened out FIASI financial bookkeeping.  Drawing upon all of his vast analytical skills and financial experience, Bob quickly realized in his presidential term that something might be amiss with FIASI’s finances given that all of its expense receipts and bank balances were stored in a shoe box.  The alleged treasurer had no idea of FIASI cash flows and financial assets on hand.  FIASI was fortunate to have Bob, who had some experience in such matters given his background in the pre-ge Kidder days, where the accounting on the corporate bond trading desk was not terribly dis-similar.  Bob hired an outside administrator, the late Harry Hansen, which nicely resolved FIASI’s administrative issues and helped pave the way for FIASI’s future success.

Well, Bob, you’ve done it all.

Analyst, teacher, High Yield pioneer, innovator, originator, Portfolio Manager, career-long FIASI contributor, and great guy—–welcome to the FIASI Hall of Fame.   Our profession and our portfolios are richer for your outstanding contributions.   May the next phase of your fabulous career be as illustrious and as lengthy!

Robert Levine’s Acceptance Speech: 

First of all, Thank you to Jack Malvey, Hall of Fame and FIASI!

State of Research in the early 70’s

• chickens don’t sweat

Barre Littel (deceased)

He taught me the securities business from an investor’s perspective.

• eccentric and brilliant
• while we were engaged in serious research, it was not uniformly accepted on the trading desk

Together we built an inflation based credit scoring model called the Financial Quality Profile that assessed a company’s ability to maintain its property, plant and equipment and replace its inventory out of real excess cash flow (this was done during the Volcker high inflation years).  The model and results received wide press coverage and was the subject of 3 cover stories in Forbes & Business Week.  We presented our findings to the Joint Economic Committee of Congress about tax policy regarding the amount of accelerated depreciation recovery basic industry needed.  The devastation of inflation on capital goods and basic industry is enormous.  Companies in heavy industry generally cannot earn enough to modernize and maintain fixed facilities.

When I created the high yield asset management business at Nomura, Barre was one of my first hires.  He trained many of our people, including David Crall, the current CIO of NCRAM.

Dr. Tony Vignola, Head of Fixed Income Research at Kidder Peabody

He was a monetary economist and my boss.  I was a corporate credit analyst, two very different specialties.  In 1985-86 he came to me and wanted to know what I would like to do the next year.  I told him that I wanted to build a High Yield department at Kidder with sales, trading, research & investment banking as one unit reporting to me.  He said that was a little more aggressive than he expected but would discuss it with Max Chapman, the Head of Fixed Income.  Max, Tony & I met and after much discussion, we created a HY Team jointly run by a senior banker, the firm’s head trader and me.  In two years, we were the most profitable unit in the firm.

Max Chapman

Max supported the credit research business.  He became President of Kidder Peabody and after GE acquired it, he was replaced with a new CEO.  Max left Kidder Peabody and ended up as CEO of the US Americas of Nomura.  He recruited me and supported the High Yield Asset Management Company until he left.  While at Kidder and at Nomura, he placed a premium on the role of research in running a securities business. Capital would not be allocated without it being fully vetted by research.  This was true for high yield underwritings and Merchant Banking Investments.

Lessons learned:

There is no substitute for Ethical Behavior

There is no excuse for an analyst who tells his clients to buy a security based on his analysis and tells friends and family to sell it or avoid it because it’s bad.  That being said, it is unfortunate that sell-side analysts cannot opine on investment banking deals as they are professionals in this area and can be value added.  Many of the corporate problems (defaults, distressed sales, exchanges, etc.) may have been avoided had credit analysts been involved at the beginning.  This was done successfully before the Analyst Scandal and should be done regularly in a controlled way.

Trading

To avoid conflicts of interest, front running, etc., analysts should not trade in securities they are involved in.  The negative consequences are too great.  Mistakes happen and good people can slip up and be out of a career.  I have seen this happen.

Gifts – Warrants from Drexel

Gifts are dangerous.  The early buy-side pioneers in high yield learned that the hard way.  Many of the largest high yield investors received equity warrants in  LBO’s, in their personal accounts from Drexel.  The SEC did not like that.

Other lessons:

Take yourself seriously, especially your work product.   There are a lot of pressures on an analyst; political, business, ego.  Whatever the pressure, always do what you think is right and your client has to be your anchor.  An example from my early days.

Ethical Behavior can result in positive outcomes

Coleco Example – Coleco is a toy company that made Cabbage Patch Dolls, etc.  They also had a disastrous run with the Atari Computer.  Returning from vacation, I typically review all research reports that went out.  I noticed that we had published a stellar report on Coleco.  After receiving the report and the primary materials such as the prospectus, I realized the analyst had missed the fact that the company had warned of a loss in Q4 and the following Q1.  The analyst had only looked at a great Q1, Q2 & Q3 earnings and straight-lined the projections from Q4 and the next year:

1. The analyst was removed from covering that company and subsequently removed from research
2. I issued an errata report
3. I personally called every single client that received the original report to explain the error.

A funny thing happened.  Rather than having angry clients, I made a large number of positive, professional relationships that I have to this day.  I became the “go to” analyst on difficult credit situations.  Never hide your head in the sand, but stand up and admit your mistakes when they happen.

Things that have worked as CEO of a successful Asset Management Company:

People:

In both companies that I founded, the key was staffing.  I have found that what worked best for me was hiring the brightest young graduates from the best schools and training them in credit analysis through classroom study and mentoring.  They are smart, cheap, energetic and enthusiastic.  Over the past 30 years, many of these young analysts have become leaders in the investment community.  Many have told me that their success was based on the training they received with me.  A few notables are:

• Joe Amato – President of Neuberger Berman
• Bob Stansky – Fidelity, former Manager of Magellan Fund
• Joel Greenblatt – Author of “The Little Book that Beats the Market” and a partner at Gotham Capital
• Alex Kirk – Former Head of High Yield and subsequently Head of all Proprietary Trading at Lehman

Legacy

Perhaps my greatest legacy is not the financial innovations I have been involved in nor the terrific asset management company that I built, but it is the large number of creative people who I have had the pleasure of molding over so many years.  I am delighted that so many of you are here today.   You may not know this but I learned as much from you as you have from me.  I have wanted to have some form of reunion and today is that day.

At Nomura, the team I built followed my philosophy and is excellent.  Two people that I would like to mention that helped me build a great team at Nomura are David Crall and Rob Schwartz who are here today.  David Crall was mentored by Barre Little in 1992-93 and is currently CIO at NCRAM.  Rob Schwartz, effectively the Chief Operating Officer of NCRAM handled all the non-investment decisions of the firm allowing the company to run smoothly so that the investment people could generate great performance.

A few words about the High Yield Market

The more things change, the more they stay the same

High Yield reached its early stages of infamy in the late 80’s when Drexel Burnham used its network for hostile takeovers and Greenmail.  Names such as Ichan, Peltz & May, and Trump were viewed with dismay by targets and the US Government.  The government put its heavy hand on stopping hostile deals by stopping high yield financing.

• Federal Reserve
• IRS
• Justice Dept.
• NAIC
• FDIC

This resulted in high defaults of 89/90.  Milken went to jail, Drexel went bankrupt and high yield was OK once again.

Today, the market is dominated by private equity deals and LBO’s.  Names like Ichan, Peltz & May and Trump; also former Drexel bankers such as Leon Black at Apollo are involved in takeovers.  Fully fifty percent of all high yield issuance is for M&A and probably more when you consider refinancings.

The default rate jumped to nearly 4% in 08 and 13% in 09 and a large number of those defaults were private equity deals.  In between these two high default, highly leveraged periods was the 2000 Telecom bubble funded mostly with high yield debt based on aggressive business plans.

High yield is an enabling asset class.  It has contributed to the over-leveraging of American companies which in turn has led to the decline of credit worthiness of many US corporations.  Former AAA rated companies have gone bankrupt with this over-leveraging.

Private Equity Sponsors

Rather than reinvest in the business, private equity sponsors suck out excess cash flow.  Cash goes to pay down debt and interest and dividends to the sponsor.  There is less room left to reinvest in the business and fund future growth and add employees.

The High Yield Market can be a risky place to invest.  Inherently lower issuer quality and high financial leverage exaggerate the financial effects of economic cycles.  Due its position out on the risk spectrum in addition to the aggressive players involved (hedge funds, private equity, proprietary trading desks), the High Yield Market is especially susceptible to booms and busts.  However, despite some of these pitfalls, long-term investors in the market have enjoyed competitive risk-adjusted returns when compared to other asset classes.  As a result, high yield has become an important asset class for allocators to consider when constructing diversified portfolios.

One cautionary note, however, is that trends in corporate finance are moving to push subordinated debt or even senior unsecured debt down the capital structure, making them far more risky.  I would urge high yield managers who find themselves in this situation to demand returns similar to being a partner in a highly leveraged transaction.