May 1, 2009
Dear Partner:
Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore,
Ltd. (collectively, the “Partnerships”) returned 4.4%, 4.4% and 4.8%1, net of fees and
expenses, respectively, in the first quarter of 2009.
This year has continued last year’s volatile and difficult investing environment. The first two
months of the year witnessed a precipitous market decline. At the end of February the market
had posted a “two and twenty” result, as in: two months into the year the S&P 500 was down
20%. In the decline, the financial crisis spread into the real economy and the banking crisis
deepened, culminating with widespread discussion about possible “nationalization” of the
banking industry.
As the market fell, we partly or completely covered a number of our shorts in bank stocks and
purchased several new equity and debt positions at attractive prices. On March 6, our gross
short exposure was down to approximately 32%, the lowest level of gross short exposure we
have had since March 2003. Despite our concerns about the economy and the outlook, we
have maintained a net long exposure… just in case the market bounced. We believe that over
time it is easier to manage a net long portfolio. Perhaps we leave a few chips on the table in a
decline, but bear market rallies are very hard to manage from a net short exposure. Wrong-
footed longs become smaller problems in market declines, while wrong-footed shorts become
bigger problems as the market bounces.
As steeply and quickly as the market declined, it began a sharp and furious recovery in early
March. During the recovery we exited a number of long positions and once again added to
our short exposure in financial institutions (and one quasi-financial institution). We also
instituted new short positions in several REITs. After such a rough second half of 2008, we
are pleased to finally have a positive quarter as we begin to dig out of last year’s hole.
Nonetheless, the environment remains very challenging. On the one hand, security prices
reached unusually attractive levels early this year, as many investors sought to preserve
capital by raising cash. On the other hand, it is apparent that the country faces extraordinary
economic challenges that will, at a minimum, lead to a very uncertain investment landscape.
It raises the question of which is bigger: the economic crisis or the government? We don’t
know the answer for sure, but we continue to have a fraction of our assets in gold… just in
1
These returns are net of the modified high-water mark incentive compensation of 10% and reflect the returns
for partners who were invested on or prior to January 1, 2008. For partners who participated in our most recent
capital opening, their individual results will reflect our standard 20% incentive compensation.
2 G r a n d Ce n tr a l T o w e r • 1 4 0 E a s t 4 5 t h S t r e e t , 2 4 t h F lo o r • N e w Y o r k , N Y 1 0 0 1 7
Phone: 212-973-1900 • Fax 212-973-9219 • www.greenlightcapital.com
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case. Add in a huge dose of political risk and a deteriorating fiscal position, and this makes it
a very “interesting” time to be an investor to say the least. We have also bought some options
on interest rates on the possibility of much higher rates over the next few years… just in case.
During the quarter, the Partnerships suffered modest losses in the long portfolio, which were
more than offset by profits in the short portfolio. Three of the four 1% or greater contributors
to performance this quarter were short sales of financial institutions. The other was our long
position in the debt of the Ford Motor Company. This quarter we didn’t have any losers that
cost in excess of 1%. Part of this can be explained by increased portfolio diversification, as
we have implemented many small investments based on a sense that they are broadly
mispriced notwithstanding the unusually wide range of macro outcomes possible.
During the quarter, the Partnerships added significant long positions in EMC Corporation
(EMC), various debt obligations of the Ford Motor Company and its subsidiaries (Ford),
Harman International (HAR) and Pfizer (PFE).
EMC provides storage systems, software and services. We believe that EMC’s core
information storage business has attractive recurring and secular growth characteristics. 2009
will be an extremely challenging year for all companies exposed to enterprise IT spending.
However, we expect EMC to fare better than most given the less volatile nature of storage
spending. EMC should benefit from any normalization in enterprise IT spending given its
large market share and presence. We established our position at an average price of $10.72
which represents less than 7x our estimate for 2009 EBIT, net of EMC’s cash and its
investment in publicly traded VMWare. EMC shares ended the quarter at $11.40 each.
Ford is the third largest auto manufacturer in the world. We bought a large amount of secured
bank debt (term loan and revolver), of which there is $14.7 billion outstanding, at an average
price of 37% of par, starting in the fourth quarter of 2008. The bank debt is secured by almost
all of Ford’s assets including most of Ford’s manufacturing plants, inventory and accounts
receivable, working capital, its investment in Ford Credit, most of Ford’s foreign subsidiaries
including intercompany debt to Volvo, 66% to 100% of the stock of all major first tier foreign
subsidiaries (including Volvo and Grupo Ford S. de R.L. de C.V., a Mexican subsidiary), and
certain domestic intellectual property, including trademarks (i.e. the famous blue logo). In
addition, Ford has over $20 billion of cash, which it had been burning at a good clip (we
expect cash burn to fall). Even so, the collateral pool is worth many times the implied $5
billion valuation of the secured debt. We observed that when the U.S. Government invested
in General Motors, it put its money in junior to the secured bank debt. Even so, it does not
appear that Ford will need a government loan any time soon, if ever. Ford had the foresight
to borrow money when the debt markets were accommodating. Ford reacted faster than its
competitors to the slowdown by cutting production and other costs, improving manufacturing
efficiency and vehicle quality. If auto sales stabilize at these low levels, Ford should reach
cash flow breakeven in 2010 and generate $4 to $5 billion of automotive operating income in
the next mid-cycle of automobile sales. We also bought a smaller amount of various bond
issues at Ford’s credit subsidiary at very large annualized yields to near-term maturities. The
secured bank debt ended the quarter at 45% of par.
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HAR makes audio and electronic systems for the automotive, consumer and professional end
markets. The company’s key products are high-end audio systems and navigation systems for
luxury automobiles. We evaluated HAR a number of times following the failed buyout by
KKR – the deal had been agreed at $120 per share in August 2007 – and we finally got
involved when the company seemed to suffer from the perfect storm of negative events:
accelerating losses from the simultaneous launch of “infotainment” solutions on a multitude
of new automotive models and extraordinary deterioration in luxury auto sales. The
Partnerships established their positions at an average share price of $11.07. Currently, HAR
is losing money. We expect profitability to return as recently launched platforms mature,
HAR executes on a $400 million cost saving plan by fiscal year 2011 (over $4 per share after
tax), and luxury automotive sales eventually improve. HAR could earn over $2 per share
within the next couple of years, and much more in a normal environment. HAR shares ended
the quarter at $13.53 each.
PFE is one of the largest pharmaceutical companies in the world. We established a position
in PFE at an average price of $13.59, or 6x current year consensus earnings, net of cash, after
the stock sold off following the company’s announcement of a deal to acquire Wyeth (WYE)
for over $60 billion in January 2009. We believe PFE is attractive both as a stand-alone
entity and in a combination with WYE. PFE’s revenues are scheduled to decline materially
over the coming years as a result of patent expirations on a number of key drugs including
Lipitor, which accounted a quarter of PFE’s revenues last year. PFE’s acquisition of WYE
will enable PFE to “fill” this coming revenue hole while simultaneously adding product
diversity and improving its position in important areas such as vaccines and biologics. We
believe the new PFE/WYE entity will be able to generate over $2 in stable earnings per share,
which, if achieved should lead to a multiple re-rating in the future. Should the WYE purchase
fail for some reason, we believe we purchased PFE at a discount to the run-off value of its
existing products with no value ascribed to its pipeline and multi-billion R&D investments.
PFE shares ended the quarter at $13.62 each.
The Partnerships closed the following notable positions during the quarter:
Closed Security L/S Avg Entry Avg Exit IRR Comments
Price Price
Aldar Properties L 12.11 AED 2.49 AED -91% Combination of lower oil prices and imploding
emerging markets caused outsized loss.
Cablevision Term Loan L 80% 89% +66% We bought at a low multiple of cash flow when the
loan market cracked.
CF Industries Holdings L $48.86 $51.41 +27% We had sold it at about $40 on the way to the $160’s.
Inc. It came all the way back down, we bought it again, but
sold it quickly, as earnings visibility became impaired.
Dr. Pepper Snapple L $23.84 $17.68 -46% We thought that the spin-off dynamic would lead to
Group, Inc. favorable earnings results. Earnings and the outlook
disappointed and we sold.
HCA Term Loan L 78% 87% +105% A decent credit that we purchased opportunistically.
Triple-S Management L $14.50 $12.58 -13% Company struggled to achieve our targets and their
Corp. own.
American Capital S $41.59 $4.61 +77% Competes with Allied Capital and rapidly grew its
Strategies Ltd. portfolio into the peak of the credit bubble.
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Closed Security L/S Avg Entry Avg Exit IRR Comments
Price Price
Arthrocare Corp. S $56.61 $19.99 +86% Healthcare fraud. The authorities have spoken.
Capital One Financial S $38.06 $32.28 +47% A bank with heavy exposure to consumer credit. This
Corp. short was wild and woolly during the short selling ban
last summer. Eventually, it worked.
Procter & Gamble Co. S $62.03 $53.98 +46% A victim of the weak consumer and strong dollar.
Southwest Airlines Co. S $13.49 $6.94 +75% An energy speculator disguised as an airline. When oil
prices collapsed… fortunes reversed. This was our
second successful descent and landing on Southwest.
US Bancorp S $32.31 $17.15 +78% See Capital One. This one worked better.
Porsche/Volkswagen S N/A N/A bad A relatively small position that caused a large loss.
stub
Zale Corp. S $21.14 $3.73 +92% Heavy exposure to the deteriorating consumer, bad
inventory control, a “luxury good” and financial
leverage are a dangerous mix. A rough in the diamond.
As we announced at the annual Partner Dinner, we promoted Justin Lepone to Partner. Justin
has done a fantastic job for us over the years. He is now the Partner of Partner Relations or
the Partner Relations Partner. Feel free to call him by any title you wish or just call him. We
love having him, we hope you do as well, and we all congratulate him on his well deserved
promotion!
In the first quarter Jeremy Weisstub and David Tepperman joined us as research analysts.
Jeremy began his career as an M&A analyst at The Blackstone Group in 1998. In 2000, he
joined Oak Hill as an associate working in private equity. Jeremy spent two years at Perry
Capital and most recently spent two years as a principal at Redwood Capital. David (aka “the
other David”) began his career as a financial analyst at Citigroup. In 2005 he joined the
Equity and Distressed Investing Group at GSC Group where he spent the last 4 years. Both
have experience in debt investing and will at least initially be focused on that area of our
portfolio. Welcome Jeremy and David!
Many of you may remember that in late 2003 we conducted an investor survey on a number
of issues related to the Partnerships. We found the results to be valuable and we made a
number of improvements in response to your feedback. We have decided to conduct another
survey this summer so that we can listen to your views and look for additional opportunities
for improvement. You should expect someone to call and schedule a 20 minute anonymous
interview. We appreciate your willingness to spend your time on this. We intend to discuss
the results at next year’s partner dinner.
At quarter end, the five largest disclosed long positions in the Partnerships are Criteria Caixa,
Ford Motor Company debt, gold, Oesterreichische Post and URS Corp.2 The Partnerships had
2
Please note that at the time we produced the March 31, 2009 attributions analyses, the Ford Motor debt was
undisclosed.
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an average exposure to equities and fixed income (excluding credit derivatives, gold and
foreign currencies) of 83% long and 50% short.
“A nation that is afraid to let its people judge the truth and falsehood in an open market is a
nation that is afraid of its people.”
-John F. Kennedy
Best Regards,
Greenlight Capital, Inc.