David Einhorn Says He’s Short U.S. High Yield, Investment Grade Debt

(Bloomberg) — Hedge fund manager David Einhorn says that he’s shorting U.S. corporate debt as protections for creditors deteriorate.

His firm Greenlight Capital is wagering against both junk and investment grade debt, according to an investor letter seen by Bloomberg. The macro position will provide a hedge for the firm’s bullish equity positions in addition to being an attractive, standalone bet, the letter said. The cost of taking such a position is “quite low” as credit spreads tighten, according to the letter.

“Rating agencies have been complacent and allowed debt/Ebitda and debt/equity ratios to deteriorate without a corresponding reduction in credit ratings,” Einhorn said in the July 25 letter. “Meanwhile, we are a decade into an economic recovery and there are signs the economy may be slowing.”

Credit graders have come under scrutiny by investors in recent years for letting companies load up on debt to fund acquisitions with minimal reductions to their credit ratings. A 2018 Bloomberg analysis of the merger boom found that more than half of companies making acquisitions pushed their debt ratios to levels typically associated with junk-rated companies but were allowed to keep investment-grade ranks.

Einhorn is joining several other prominent investors that have warned against froth in corporate debt. Credit market risk is at an all-time high, Pacific Investment Management Co.’s Scott Mather said in May and JPMorgan Asset Management’s Bob Michele recommended last month that investors sell the highs in corporate credit and buy government debt instead.

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