Distressed Debt Panel at the Bloomberg Dealmakers Summit

On Wednesday, Bloomberg hosted their Dealmakers Summit here in New York City. If you have access to Bloomberg, via the terminal or online videos, I suggest you watch a number of the panels: they are very good. One of those panels focused on the distressed debt market and restructurings. The panelists included:

  • Jeffrey Aronson, co-founder and managing principal of Centerbridge Partners (JA)
  • Timothy Coleman, Senior MD and head of Restructuring at Blackstone (TC)
  • William Derrough, Managing Director and Co-Head of Restructuring at Moelis (WD)
Needless to say, that's a bit of an all star panel. Here are my notes from the panel. Enjoy!

Question: How are you each spending your time? How does that compare to 6 months ago? What industries are you focused on?

(WD): Spending a lot of time in Europe. What is going on in the sovereign crisis is having impacts on financial institutions and portfolio companies in those nations. Unlike the United States, Europe never saw a bounce back in credit. Financing is hard to get done in Europe. Activity in the United States has picked up with a lot of new names being talked about relative to the 3-4 people had always talked about before. Shipping and power are actionable things now versus something that was just talked about a few months ago. Infrastructure as well.

(TC): Similar to what WD said. The market has been busier than anyone would have admitted last year. We expected a slow year and its been a very busy year. Names that are bubbling up are the ones that everyone had thought would refinance their debt but that's not happening - especially over the last few months. The markets are very expensive right now and that leads to borrowers and debtors moving towards privately negotiated transactions whose cost might not be as onerous as a public market restructuring.

(JA): We've seen a marked change in the opportunity set over the last 2 months. 6 months ago all the focus was on Europe. In the past 2 months, with all the uncertainty in the world and spread widening dramatically, there are a lot of things to look at in the U.S. He cautions to note that this doesn't immediately mean these situations turn into restructurings. Prices have come down and that might mean an adequate return on investment but that doesn't mean the company is going to file. Usually, when markets turn quickly, bankers might get more phone calls, but unless there is an impending catalyst (maturity, covie breach), it's not necessarily a transaction at that moment but it can still be a good investment for Centerbridge b/c the price is cheap.

Europe is a big opportunity for Centerbridge (they opened up a London office last year). Forever, people have talked about Europe/London being a battleground for restructuring transactions, but it never really happened. 20 Years ago, if you did a deal in London, you'd deal with the "London Rules" - essentially unspoken rules in a default where money center banks wouldn't take a haircut, they would extend principal and make the interest virtually zero. Because of this, there were very few attractive investments. Lenders rarely sold, which is must different than the U.S. But now, for the first time, we are seeing lenders starting to sell. We are seeing banks selling individual positions which JA had never seen before to a large extent in Europe. It is accounting driven. Banks will not take a book loss.

Question: Are you guys seeing a shift in your European business? (referencing Aronson's comments about flows in Europe)

(WD): I think a lot of sales out of Europe is being driven by Basel and cap requirements. Its not 25 years ago where they could hope to hide it. Was in the peripheral countries, banks are selling U.S. stuff first, and will end of selling Euro stuff last. With all the changes, banks are going to streamline to a core operation.

(TC): The loans are really trading at 40 - banks have it on their balance sheet at 80. Banks are writing down their loans slowly.

Question: High yield issuance has dropped 90% in the last few months, since August 1st, versus last year. Can you explain that?

(TC): Last year was sitting on top of a mountain. Last year was record record numbers. So tough comps. Really has to do with inflow and outflow of capital. High yield had lot of outflows and inflows are starting to come back. Leverage loan market lagging high yield market - loan market kept lending longer and they are still in an outflow position. I think whats going on is that there are a lot of nervous people out there. A lot of people are sitting in the high yield market because there are not better alternative but these people aren't comfortable there. At the first sign of trouble, people will pull money out.

Question: Because of that dynamic, are we in a situation of "Have and Have Nots" in terms of access to credit in the high yield market?

(TC): If you are in the distressed space, no one can access the market. The only people accessing the market are in Double - B land. Or maybe frequent issuers where investors know the story. You are still paying up big in terms of spread to Treasuries. 2 deals a week now versus 20 a few months ago. This is an aberration - this is just a moment. The market will come back; there are a lot of pent - up demand. The question is when. BB will slide into B issuers, and then into the weaker issuers. You'll see the market return. The question is how fast.

(JA): I will say the markets are extremely fickle. High yield is a quasi-debt, quasi-equity instrument. High yield really tracks the equity market. I have a different view than TC on fund flows. High yield market is maybe a trillion dollars. The fact that $2 billion comes out of the market in any weak may make the headlines - in the real world its diminimus. And really what the market is driven by is fear and greed. And when people get afraid and are concerned, people pull back. This is a moment of time, markets will go up and down.

(WD): Feels like these cycles of peaks and valleys are coming faster than they used to. You wouldn't have a credit bounce back like you saw from 2009-2010.

(JA): News flow and information is driving the shortening of those cycles.

(TC): We had 10 year cycles in the 70s, 80s, 90s, etc. I think with information that is shortening the cycle. The fact that we had a near depression in our country and the fact that was over in a year from a market standpoint is unheard of. If you had told people in prior cycles they would have laughed at you. To be honest, everyone projected that restructuring would have continued for quite some time - no one predicted it would come back as quickly as it did, then get bad so quickly, etc.

Question: And what about the severity of the trough we are in now? Are we going to see an uptick in default?

(JA): If you have a maturity tomorrow you are in trouble. It really depends on the state of the market. Some of it is just luck. Investors that own highly levered companies attacked the capital structure last year and did things proactively to address maturities. That was the smart thing to do. The major jumbo deals did the smart thing. And today they are breathing a sigh of relief.

I think people use the expression kick the can. And that's what people did (large LBOs). If you fundamentally overpay for a business, and if you put too much leverage on it, you will ultimately have to deal with that. If you own that business, the longer you can extend that debt, the better it is (you can eventually take company public in roaring markets). Eventually this debt matures.

(TC): If you look at a trend line, if we get past this current snag, economists are projecting a long-term 2% growth trend. This is down from the beginning of the year. Its hard to earn yourself out of 2% growth relative to 5% growth. These companies will get it trouble. It may not be tomorrow because few, if any of these deals have covenants and long maturities. And maybe if the market comes back, they'll push another maturity out, and continue the process.

Question: Interesting to see how many firms like Centerbridge are out there looking for distressed opportunities. What do you see when working with distressed companies, what do you make of the distressed investing environment chasing these deals?

(WD): As compared to twenty years ago, there is a lot more money allocated to distressed. There seems to be a consolidation of the number of firms out there relative to 2007. LPs are trying to figure out who the long term players in the market - meaning its hard for small firms to grow / grow their asset base. From the advisory side, if you are thinking to introduce someone to a situation, you want to make sure that investor is going to be their tomorrow. You want stability in the organization when making these introductions - you want them 6-12 months down the line when you are closing the deal.

(TC): There is A LOT of money chasing deals. Money was raised in 2007 and never deployed. If you are skillful (like Centerbridge), you know how to make money in this sort of market. But net/net, there is definitely money to be made in the distressed market right now.


PPP Lusofonia 9/30/2011  

Distressed asset sales are now driven by rising long term funding costs, not just asset impairment rules.

Anonymous,  9/30/2011  

a blog post on value investing and stop losses. Readers may find this helpful. Cutting losses is a taboo topic for value investors



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.