Nathan, a contributor to Distressed Debt Investing, attended the Global Distressed Debt Investing Conference in New York City. He graciously took some notes for our readers. These are his notes from the guys focused on the distressed corporate markets (as opposed to the CRE markets). Enjoy.
Josh Abramowitz – Deep Creek Capital
Makes 2 types of investments: 1) Business itself is undervalued 2) Process based bets
View of the market – The “panic period” of early ’09 was the time for a market based bet on distressed. This is no longer the case given current price levels. That said he thinks if you look back 5 years from now the bulk of the profits (for distressed guys) will be made from 2010-2014. Notes that not a lot of bonds traded at the lows, so much of the rebound has just been profit recovery for a lot of guys that stayed invested in the same names.
Going forward investors will be rewarded for taking on complexity. Used Lehman Brothers as an example b/c there could be a lot of value but you need to do global due diligence. Focus on these type of situations b/c the market as a whole is not attractive.
Sectors: Financials are big, liquid and interesting situations but you need bigger risk adjusted returns because of the opacity of the companies. Autos are a tough, ugly business that a lot of people are afraid of. Other opportunities are more scattered, this isn’t like past downturns (telecom bubble) where you had to be big in one sector.
Politics: GM situation won’t happen again b/c it was a special case where you had an iconic company that employed a lot of people and not many other companies would have been saved that way.
Global Distressed Investing: When looking at US based, but global companies you need to know whether the foreign subs themselves are healthy. With regard to foreign bankruptcy law there has been some standardization, but you still need local lawyers. You can’t just wander into a country and expect to get your way. He says that his firm picks certain lawyers for certain situations based on what they need. (conciliator versus fighter, etc.)
Potential for a “W”: He doesn’t predict the economy and tries to hedge out as much macro/market risk as possible. That said, he thinks any signs that the recovery is overstated will freak the market b/c there is still a lot of mental fragility. Next big question (for credit mkts) is what happens w/ CLOs.
Rob Koltai – Hain Capital
He invests (and makes markets in) trade claims and prefers liquidations b/c they are easier to analyze.
- You have to careful w/ claims b/c once you own them there is no exit (other than thru the POR or liquidation)
- No way to value the Lehman trade claims accurately despite the incredible amount of gunslinging
- He is the only hedge fund guy around who is a member of the Better Business Bureau
- He targets 35% IRRs
- No leverage on TCs
- Hedges (sometimes) w/ unsecured bonds
- Key factor is turning the capital every 18 months, focusing on arbitrage situations
- More sellers today b/c CFOs don’t want to spend the time dealing w/ committees when they need to run their companies; also they just need cash
- Focuses on short-term, low complexity trades
- Does not want to own equity
- Sectors don’t matter to him
- “I am the market (for trade claims)”
Joel Klein (PPM America)
- European distressed market will never be that big b/c there bankruptcy regimes are too rudimentary
- Icelandic banks made the GM process look fair. They will never get foreign capital again and probably have to revert to a fishing boat economy
- He was offended by the Chrysler cash but not so much GM
- There is 1 rock solid rule in bankruptcy and that’s the Golden Rule: He who has the gold makes the rules
- Another 3rd party would have been treated the same way if they had put up the capital
- He doesn’t see any massive catharsis b/c of GM setting some new precedent
- The Supreme Court hates bankruptcy law b/c it’s too boring for them
Ethan Schwartz – Contrarian Capital Management
- 60-70% of what he does is standard value investing w/ an understanding of legal aspects
- 30-40% are pure legal plays on complicated situations that most people don’t understand b/c of intercompany dynamics.
- He will do jurisdictional analysis, but it is a good way to get burned too
- Judge analysis is important