Institutional Investor's Alpha Magazine - March 2009 - (Page 24) DISTRESSED DEBT INVESTING companies that are struggling to restructure their debt, and little cash from distressed-debt funds is available, that’s just going to accelerate the number of bankruptcy filings.” The need for lock-ups Investment managers are setting up new products to deal with the uncertainty over when a profitable exit might be possible. Some are establishing hybrid funds with hedge-fund and private-equity elements, where all the cash must be invested up front, but where there are lock-in requirements. “If you buy today and can’t sell tomorrow, investment managers are not going to buy distressed assets, because if investors withdraw their funds, then what do you do?” says Sal (Kislay) Shah, a managing director with accountancy, tax and business consulting firm RSM McGladrey. “So the new funds that are launching are the ones with the track record and reputation to get investors to agree to twoto three-year lock-ups.” And while current market instability and a bleak economic forecast may keep many distressed-debt funds from investing in new names, the funds remain comfortable doing deals with companies already in their portfolio. “They’ll pursue a follow-on with them if they think there’s value in a company, even if the market has turned its back on them,” says Jim Abbott, a partner in Seward and Kissel’s Business Transactions Group. “We’re also seeing situations where funds that have Sal Shah RSM McGladrey “Hedge funds have been dealing with a huge amount of redemptions. If you’re constantly figuring out how to sell your assets and meet your redemption requirements, you can’t necessarily focus on new investment opportunities.” a position in a client that has defaulted on its debt might lead a bankruptcy or work out of the company on the basis that they’re already in there and have seen the value of the underlying business.” That could potentially involve term extensions, cash sweeps or the provision of bridging facilities. Still, many hedge funds don’t have the cash to deploy in this market, even if they want to. Hedge funds were expected to be big buyers in the distressed market last year, until the redemption notices started arriving. “Hedge funds have been dealing with a huge amount of redemptions. If you’re constantly figuring out how to sell your assets and meet your redemption requirements, you can’t necessarily focus on new investment opportunities,” says Shah. Meeting the demand As a result, the market faces a huge glut of demand and not much supply, as Oaktree’s Marks points out. “When we were raising our last fund, the concern was that there would be too much money chasing too few ideas. Ironically, the question I get now is whether there are too many opportunities for the money, and whether the capital allocated to distress will be inadequate to sop it up.” That may be about to change. No fund that has cash to spend is going to wait on the sidelines too long, particularly as many hedge fund managers believe that when the market starts improving, the turnaround could come very quickly. D’Cunha of Houlihan Smith says that in the Sectors Most Attractive to Distressed Investors in 2009 Financial Services Auto Manfacturers/Suppliers Consumer Products Energy/Chemicals Construction Industrial Retail Airlines/Transportation Gaming Healthcare Media Paper packaging Telecom Technology 0 5 10 15 20 25 30 35 Percentage of Responses 4 • Alpha Sponsored Report • March 2009 Source: North American Distressed Debt Market Outlook 2009
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.