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 One message rang clear at the two plenary sessions on distressed
investing at the second day of the Turnaround Management Association
annual convention in New Orleans: Those funds that have money and
stayed on the sidelines during the frenzy the last few years have
little competition for deals these days, and there are some grand
buying opportunities to take advantage of.
In the first of the plenary session on Tuesday, which was moderated by Henry Miller of investment bank Miller Buckfire & Co. LLC, panelists looked at the landscape in the distressed investing sector, the different types of players within it, the opportunities present and what responsibilities firms should take. Miller said that $60 billion has been made available in 2008 to date for distressed investing, but panelist Jeffrey Aronson of private equity firm Centerbridge Partners LP noted that if that much were on the sidelines, pricing wouldn't be as low as it is.
"Every day we have less competition, which is a good thing," he said, referring to the number of hedge funds that have run into their own liquidity problems of late from redemption requests. The investors active now, Aronson said, are the ones that were on the sidelines the past few years. In contrast, those that had been making distressed-debt purchases simply because someone had told them to buy are gone, but he said they would return, presumably on the other side of the market cycle. "It's a great time to be investing," Aronson summarized, noting the exceptional values in the market and the handful of people with capital across from a mass of sellers. Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York near the end of the session called for regulation establishing best practices for who sits on the boards of distressed companies. When knowledgeable nominees are presented, he said, they usually end up on the board of directors and make a big difference. Aronson concurred, noting that it's not a good thing for significant investors to be on a board if they have no specific knowledge of the company's industry. In the second session, moderated by James Sprayregen of Goldman, Sachs & Co., the four panelists from different backgrounds sequentially offered their views of where opportunities lay for distressed investors through the end of 2009. J.P. Morgan Chase & Co. economist Robert Mellman opened by making the case that the economy is in a recession that will likely last through late 2009. Restructuring adviser Ronald Greenspan of FTI Consulting Inc. followed by pointing to five areas in structured finance containing opportunities, after joking that respondents to a survey had said to invest in "Spam and candles." Investors could target certain residential mortgage-backed securities; enter the monoline insurance business; provide financing to the jewelry, furniture, consumer electronics or auto finance sectors; do deals with residential homebuilders looking to capitalize on tax loss carrybacks before they expire; or grab assets from the government, which has said it wants to return any assets it takes on in the bailout to private hands as soon as possible. Gregory Segall of investment firm Versa Capital Management Inc., meanwhile, said secured creditors now have less patience with troubled companies. As a result, M&A volume is up, but the level of distress has risen even further. Echoing Aronson in the first session, he said if a distressed investor has money, it's a good time to be in the market. Deep value remains in surprising places, he said. Finally, investment banker David Resnick, who leads the global restructuring practice at Rothschild Inc., said the recently proposed restructurings of bankrupts Motor Coach Industries International Inc. and Greatwide Logistics Services Inc. could be a harbinger of future deals. To wit, investors could acquire the fulcrum security -- the debt class that needs to be taken out and below which all other debt is unsecured -- and either negotiate proactively to convert the debt to equity or credit bid it in a Section 363 sale under the auspices of the bankruptcy court. The investors might offer a debtor-in-possession loan to the company if a sale can't occur out of court, albeit with tight covenants on the loan. And senior lenders might remain in the capital structure of the company, particularly if the buyer invests new money. Few refinancings, Resnick noted, are out in the market currently. - David Elman David Elman is the editor of The Deal's Bankruptcy Insider newsletter
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