Page 253

Tepper and I talked in the conference room where there were mementos of recent deals Appaloosa had participated in. These included Kmart, Kroll, Intermedia Partners IV, Goodman, United Industries Corp., and Parker Drilling Corp. The variety of sizes, and types of deals underscored Appaloosa's opportunistic approach.

Tepper describes the methodology as 95 to 100 percent fundamental. The goal is to provide returns higher than those of corporate bonds.

EMERGING MARKETS/RUSSIA AND KOREA

Tepper gave several examples of his micro opportunistic approach. Tepper has gone into emerging markets where others fear to tread. He openly says that what makes him different from many other traders in sovereign and emerging debt is that he is willing to take bigger positions and be more aggressive. "We often catch the bottoms. We'll be there at the turning points."

After the Russian default on government bonds in 1998 in which many hedge firms got hurt—Appaloosa was down 29 percent that year—Appaloosa was in there heavily buying Russian bonds in November. Tepper said he felt comfortable doing this because it all boils down to probabilities—one of his favorite themes. The bonds were selling at 15-cent coupons and trading as if the worst case had already happened. Probabilities that the bonds could go lower were not great but the upside potential had a great probability. Worse-off emerging market disaster cases such as Congo bonds or Vietnam bonds were trading at 10 cents. Wall Street desks were no longer allowed to buy the bonds. It was this aggressive action that generated a 60 percent gain in 1999 for Appaloosa.

Did the 29 percent loss in 1998 lead to any changes? Not really. "We fell asleep with a sense of false liquidity. We thought liquidity was there but it wasn't. Things happened so fast in Russia and we couldn't get out."

Again by being opportunistic, Appaloosa was also the first Western firm to buy Korean Treasury bills in November 1997. None of the major U.S. investment banks were willing to be in Korea. Credit-rating agencies were beginning to downgrade the country from investment grade, which pushed the debt price down so far that it yields as much as 8 percent over U.S. Treasuries, or 13 to 20 percent.