Distressed for Success - Opportunity in dislocated markets

As the ‘Goldilocks era of global credit draws to an abrupt close, distressed debt funds, and private equity, are forming a line to pick up the pieces. Jonathan Shapiro reports. They’re known in some circle as vultures, ready to feed off the remains of faltering companies. To others, they’re knights, guiding damsels out of danger to live once again. Regardless of how they are perceived, there’s plenty of skin in the game for distressed debt funds. Distressed debt is not for the feint hearted. While the rewards are lucrative, the risks are high, and skills, experience and knowledge are required to avert disaster. A distressed debt security can be loosely defined as a bond or loan that trades below 80 per cent of par value or at a spread above 1000 basis points over government securities. Distressed debt is more of an investment strategy than an asset class. Once a security deteriorates to the extent that it becomes distressed, and existing debt holders head to the exits, opportunities are created. It’s a highly complex game that remains the domain of dedicated and specialist distressed funds, hedge funds, private equity houses and specialist teams within private investment banks. “What constitutes ‘distressed’ is a very broad range of situations from straight liquidations to refinancing and even to the extent of contributing equity value,” says Tod Macri, managing director of the strategic investments group at Deutsche Bank in Hong Kong. Distressed debt is regarded as part of an “event driven” investment strategy in which a passive or an active approach can be taken. On the active side investment can be “controlled” or “non-controlled”. “Distressed investors could assume a degree of control of the company and restructure it to turn a profit. It’s more of the private equity approach,” says Urs Alder, , head of institutional sales, Man Investments Australia. (remainder of article not available) .