Distressed Debt Investing contributor Nathan, on this week's past events:
The week before Labor Day is a notoriously slow one in the credit markets as many, if not most, people vacation for at least part of the week. I spoke with a couple of folks this week who noted that this was the first “normal” pre-Labor Day week in a couple of years as most people were afraid to leave their desks in ’07 and ’08. That said, there were a couple of interesting—albeit disparate—items that caught my eye this week and when considered together they have important implications for the distressed market.
On Wednesday the Wall Street Journal reported that Brazil’s JBS SA may make a $2.5 billion stalking horse bid for the assets of bankrupt poultry purveyor Pilgrim’s Pride. BRC §363 Use, sale, or lease of property governs asset sales of bankrupt corporations and the “stalking horse” auction is one of the ways a debtor can sell some or all of its assets in order to maximize creditor recoveries. Basically, the stalking horse bidder (acquirer) will guarantee to pay a minimum acceptable amount for the debtor’s assets and then the debtor will conduct an auction where other bidders may top the minimum bid (by a certain amount—this isn’t The Price Is Right). If another bidder wins the auction then the stalking horse bidder is paid a break-up fee for its troubles.
In the case of Pilgrim’s Pride, the JBS SA potential bid is enough to pay its unsecured bondholders par plus accrued interest. Allegedly the bid even includes compensation for the equity holders, which is pretty rare. Following the news PPC bonds traded up about 15 points to $105, which is a far cry from the $10 price when the company filed in early December. Of course, nearly every asset on the planet is up since then, but still this move is pretty remarkable.
The second item I found interesting was a Bloomberg News article entitled KKR Turns Vulture Investor as Distressed Debt Beckons. The article talks about how KKR and other private equity guys are using bankruptcy purchases to acquire companies. This in and of itself is far from shocking as anybody who has followed private equity’s fund raising success over the last decade or so had to see this coming.
So where am I going with this? My takeaway from these two articles is that there is a deep and growing bid for distressed assets right now, from a variety of players, some of which are just mobilizing their capital. In the case of Pilgrim’s Pride it was a strategic player and a foreign one at that. The KKR story tells us that there are financial buyers in the market as well. And of course we already knew about distressed hedge funds. I am not trying to call a bubble here, but clearly the salad days of early ’09 are behind us and the combination of higher prices and greater competition for assets mean that the pickings will be a little slimmer, at least until the “W” kicks-in and the bank loan maturity wall gets closer.
Side note on Pilgrim’s Pride / JBS SA:
I also found it interesting that an emerging market company—even a BRIC one—was purchasing an American food processor. This isn’t an industry where JBS will just skip back to Brazil with some intangible assets and resource the labor base to its lower cost country. Protein is a local/regional industry where JBS will have to operate in the US (they already did, but now they will be #2 behind Tyson). At the risk of sounding like Jim Grant, my point is that decades of current account deficits have armed our trade partners with capital that needs to be put to work and in this case they were more willing/able to invest in a market leading American company than anyone else. I mean come on, Brazil is a country that devalued its currency just ten years ago. This adds credence to Mohamed El-Erian’s “New Normal” calls. Okay that is the end of my little semi-patriotic rant. I hope everyone enjoys their Labor Day weekend.