Peritus I Asset Management, LLC
Investment Philosophy Summary*

Peritus invests in corporate credit, primarily high yield bonds and leveraged loans, which earn what we view as a high current yield. Additionally, most of the securities are generally acquired at discounts to par ($100) allowing for a potential opportunity to generate capital gains as well. These bonds and loans are principally sourced from the secondary market, where the Peritus team has developed long term relationships with the major trading desks on Wall Street.

Because Peritus picks each security individually and builds our client portfolios bond by bond, we believe we can add value in terms of both rates of return as well as by being nimble in the market. By holding a diversified but limited number of securities, Peritus can pick and choose the industries and securities we feel offer the most value. We view credit as either “AAA” or “D” (it either pays or doesn’t) and place limited value on credit ratings. Instead, we exploit the fact that most fixed income investors continue to use ratings as one of their primary investment tools and we believe that the focus should be on the fundamentals of the businesses in which you are investing rather than ratings. Additionally, we believe financial statements are created for one reason—to raise cheap capital. This naturally has led us to be suspicious of all financial statements and externally produced “research.” Rather, we generate our own investment ideas, focus on true cash flow, and look to buy credit at prices that we feel provide a margin of safety. Additional factors we consider are excess cash on the balance sheet and/or a history of producing real free cash flow, as well as a capital structure that can be sustained on conservative forecasts.

Peritus reverse engineers the traditional financial analysis process. Our analysis begins with the Statement of Cash Flows, moves to the Balance Sheet and then to the Income Statement. To be successful in the credit markets, we look at debt as senior equity and as such, do not stop at a traditional credit analysis, but look at a complete appraisal of the business’ intrinsic value. Through our fundamental and valuation analysis, we not only determine whether an investment should be made in a certain company, but also where in the capital structure (secured, senior, or subordinate) we believe the risk/return is most attractive. We feel that there are generally few “bad” high yield securities but plenty of bad prices, so successful investing marries the process of financial and valuation analysis with managing marketing expectations, market psychology and timing.

*The above is intended to generally demonstrate the potential investment rationale and analysis performed by Peritus on a prospective investment. All processes, procedures and investment criteria do not apply in every circumstance and are subject to change.