Kyle Bass Slashes Portfolio to Short the Yuan

Kyle Bass of Hayman Capital, widely known for betting against subprime mortgages and earning hundreds of millions of dollars from that bet, is making another bold prediction, this time about the world’s second-largest economy. According to a recent article posted by Business Insider, the successful hedge fund manager sent a letter to his investors earlier this month titled “The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance”, saying that “the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency”. Most importantly, the investor warns that this outcome will most likely impact all countries and markets around the world. “In other words, what happens in China will not stay in China”, said the founder of Dallas-based Hayman Capital. Mr. Bass also pinpointed some similarities between the Chinese banking system of today and the U.S banking system before the recent financial crisis, which include excessive leverage, regulatory arbitrage, and irresponsible risk-taking. It is important to note that Hayman Capital has devoted most of its assets under management to shorting the Chinese Yuan, which led the hedge fund firm to sell out of the majority of its equity positions during the fourth quarter of 2015. The hedge fund sold out of 11 positions while not adding any new positions or even increasing its stake in its few remaining positions during the final quarter of 2015, leaving only two equity positions untouched. Having said that, the following article will discuss the only two equity positions owned by Hayman Capital on December 31, as well as discuss its most noteworthy selloffs during the quarter.

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Money manager Kyle Bass owns 7.37 million shares of NMI Holdings Inc. (NASDAQ:NMIH) as of the end of the fourth quarter of 2015, worth $49.91 million. There should be a particular reason as for why the hedge fund manager decided to keep his position in the provider of private mortgage guaranty insurance, so let’s attempt to find out what that reason might be. The mortgage insurer was backed by Kyle Bass, Carlyle Group LP and BlueMountain Capital Management LLC when filing an initial public offering in 2013, so it is no surprise that the hedge fund manager decided to hold onto his investment in the company. NMI Holdings Inc. (NASDAQ:NMIH) reported net premiums written of $114.2 million and premiums earned of $45.5 million for 2015, a large increase from the net premiums written of $34.0 million and premiums earned of $13.4 million for 2014. The shares of the mortgage guarantor are down by 31% over the past 12 months nonetheless, and trade at a forward P/E ratio of just 7.70, which is far below the average ratio of 11.60 for the Financials sector. Howard Marks’ Oaktree Capital Management upped its stake in NMI Holdings Inc. (NASDAQ:NMIH) by 4% during the December quarter, to 5.67 million shares.

Hayman Capital also reported owning 2.13 million shares of Eco-Stim Energy Solutions Inc. (NASDAQ:ESES), with the stake being valued at $6.67 million at the end of December. Eco-Stim Energy Solutions is an early stage, technology-driven oilfield services company that offers well stimulation, coiled tubing and field management services. The company’s portfolio of technologies and processes can reduce surface footprint and emissions, and conserve fuel and water during the stimulation process. Given that environmentalists are fighting more fiercely against crude oil exploration and production companies, more E&P companies might be somewhat forced to use Eco-Stim Energy Solutions Inc. (NASDAQ:ESES)’s less pollutant solutions, assuming the oil industry revitalizes. The shares of the oilfield services company have declined by 34% year-to-date. The company’s revenue for the nine months that ended September 30 totaled $11.26 million, up by $10.61 million year-over-year. The increase was mainly attributable to the start of well stimulation and coiled tubing operations in Argentina. Jim Simons’ Renaissance Technologies acquired a new stake of 100,603 shares in Eco-Stim Energy Solutions Inc. (NASDAQ:ESES) during the fourth quarter of 2015.

The Dallas-based hedge fund sold out of its entire stake of 464,101 shares in CF Industries Holdings Inc. (NYSE:CF) during the final three months of 2015. The asset management firm purchased the aforementioned stake, valued at $20.84 million on September 30, during the third quarter. The manufacturer and distributor of nitrogen fertilizer and other nitrogen products has seen its shares drop by 19% since the beginning of 2016. Just recently, analysts at Credit Suisse slashed their price target on the stock to $42 from $57 but reiterated their ‘Outperform’ rating on it, after the company reported mixed financial results for the fourth quarter. The nitrogen fertilizer producer reported weaker-than-expected bottom-line results for the quarter, which were partially impacted by lower fertilizer prices due to soft grain prices and extreme global production. CF Industries Holdings Inc. (NYSE:CF)’s stock trades at a forward P/E ratio of 8.50, which is substantially below the average of 15.75 for the companies included in the S&P 500 benchmark. John Burbank’s Passport Capital reported owning 9.19 million shares of CF Industries Holdings Inc. (NYSE:CF) through the latest round of 13F filings.

Mr. Bass also discarded his stake in Allergan plc (NYSE:AGN), which comprised 17,813 shares valued at $4.84 million on September 30. As with Cf Industries, the investor’s Allergan stake was acquired during the third quarter of 2015. While numerous billionaire investors were bullish on the Botox-maker during the fourth quarter, Mr. Bass and his team might have decided that shorting the Yuan would be a more profitable bet. Data compiled by Insider Monkey shows that the number of billionaires invested in Allergan increased to 29 from 26 during the December quarter. Let us remind you that Allergan plc (NYSE:AGN) and Pfizer Inc. (NYSE:PFE) sealed a merger agreement in November 2015, under which the two entities will combine to create the largest drugmaker in the world. It should be mentioned that Allergan shares are trading at a huge discount to the actual value of the merger, which ascribes Allergan’s stock a value of roughly $334 per share. Some investors and analysts see exceptional revenue potential following the multi-billion-dollar merger. Billionaire John Paulson of Paulson & Co. owns 5.53 million shares of Allergan plc (NYSE:AGN) as of the end of 2015.

The successful contrarian investor got rid of his 606,618-share stake in Impax Laboratories Inc. (NASDAQ:IPXL) during the final three months of 2015. The stake was also acquired during the third quarter, and was valued at $21.36 million on September 30. On Monday morning, the specialty pharmaceutical company released its financial results for the fourth quarter and 2015 year. The company reported total revenue of $860.5 million for the year, an increase of 44% year-over-year. Similarly, its annual adjusted earnings per share increased by 10% year-over-year to $1.45. Impax Laboratories Inc. (NASDAQ:IPXL)’s shares are down by 17% over the past 12 months, after having plummeted by 20% since the beginning of the year. Meanwhile, the stock appears to be trading at a reasonable forward P/E multiple of 14.99, which is slightly below the average for the S&P 500 Index. Yen Liow’s Aravt Global added a 3.07 million-share position in Impax Laboratories Inc. (NASDAQ:IPXL) to its portfolio during the fourth quarter of 2015.

Disclosure: None