Recently I attended the JP Morgan High Yield Bond and Leveraged Loan Conference in Miami, Florida. This is a marquee event for our industry that brings together a multitude of issuers and investors, as well as traders, sales and debt capital market professionals to discuss company prospects and new investment opportunities.
Attendance was strong and the tone was relatively upbeat with year-to-date performance for the asset class more than half-way to our year-end target of mid-single digit returns. Keynote speeches included JP Morgan CEO, Jamie Dimon, who was constructive in his outlook for the U.S., and Tony Blair who offered a more cautious outlook for Europe. We conducted many useful meetings with investee companies during our time at the conference. But with average yields now inside of 5.25% for the asset class, it would be difficult to characterize our risk appetite as enthusiastic at this point in the credit cycle. However, one meeting did highlight an old adage I subscribe to and that is “there’s always something to do”.
Getty Images is a company we renewed our interest in late last year when bonds hit an air pocket after a string of poor quarterly earnings. For those unfamiliar with this company, it is a pioneer of the stock photography industry and acts as an intermediary between photographers and buyers of their photos whether they be corporate clients, ad agencies or media publications. It has a highly variable cost structure as photographers are only paid once images are sold. It also has the largest and broadest collection of imagery globally with over 162 million assets, much of which is either owned or exclusive content. The company has 1.5 million customers from 185 nations and it is the trusted image partner for over 300 companies including Disney, National Geographic, the NHL, NBA, MLB and PGA. It is also no stranger to innovation and disruption and has successfully navigated numerous industry developments including the transition from print to digital, the shift from rights managed to royalty free photography and the move towards subscription-based online selling. The business is very scalable with high margins and strong free cash flow and benefits from a strong secular tailwind given the proliferation of online marketing and content. In short, Getty finds itself at the center of an attractive industry with unique competencies and has every opportunity to succeed going forward.
That being said, Getty is not a business without its challenges, and since its 2012 sale to private equity buyer the Carlyle Group, things have not gone as planned. Poor execution, increased price investments and additional marketing costs have all weighed on results. Upstart competitors such as Fotolia and Shutterstock have also made in roads in the lower margin midstock portion of the market (think of that market as a self-serve e-commerce website for photos). While not to be diminished, we believe that these challenges can be addressed over time and that much of the current investment is necessary. We also welcome recent management changes where execution has been poor. In terms of valuation, we accumulated much of our position below 80 cents on the dollar which equates to a yield of 11.5%. What interests us most though, is that at this level you can buy all of Getty’s outstanding debt and still pay $700 million less than the market capitalization of Shutterstock ($2.9 billion) which focuses solely on the midstock category and has 1/6th the EBITDA of Getty. Looked at another way, if you could spin out Getty’s midstock business at a similar valuation, you would essentially receive the rest of Getty for free. We believe that over time the market will recognize this too and have advocated as such in our meeting with the company.
Getty bonds were up smartly coming out of the conference, driven by a pretty robust investment case made by the CEO (who is also a substantial equity owner). Ultimately, results will need to follow his tough talk. We remain cognizant of the challenges ahead but feel optimistic that our out-of-consensus thinking on this investment will be rewarded in due course.