Calculated Risk

BRYAN KRUG is a gentlemanly loan shark. He lends to businesses that are desperate for cash.

- William Baldwin

Seeking Safe Harbors Bryan Krug, in Artisan's Denver office, isn't impressed by the fine print on bond indentures. "Covenants really don't protect you. We focus on business quality."

What’s Elon Musk’s credit score? It can’t be good.

Tapped out, he ran up a tab to buy Twitter. The floating interest rate he’s paying is 10.4%. That’s more than what Donald Trump considers a tolerable interest rate on credit cards.

Musk is the richest person in the solar system. And yet X Corporation, as the company is now styled, is paying through the nose for a loan. Understanding this paradox is the job of Bryan C. Krug, evaluator extraordinaire of creditworthiness.

Krug runs the Artisan Partners High Income fund, a collection of junk bonds and syndicated bank loans from 133 somewhat sketchy companies. His aim: to buy paper that looks worse than it is. X debt is in the collection.

By conventional measures, corporate debt looks bad if the ratio of operating income to interest is low. The other tell is a high ratio of debt to equity. This is the same way you are judged on a mortgage application. The bank compares your income to your mortgage payments and the loan balance to your equity.

What are the numbers for X, a private corporation? Krug joined an invitation-only, top-secret review, personally orchestrated by Musk, of the company’s financial statements. Whatever they were, they obliged Musk to offer a very stiff coupon, but they didn’t stop Krug.