Distressed-debt: One day my price will come
Distressed-debt investors will continue to need deep reserves of patience during this downturn.
You almost have to feel a little sorry for distressed-debt investors in this cycle (but only almost). At the onset of the crisis in 2007, piling into a distressed-debt opportunity fund seemed like a no-brainer. But even as the securitized and leveraged finance markets collapsed, creative mark-to-market accounting enabled many banks to hold on to their troubled assets rather than being forced to sell them to asset-hungry buyers. These buyers must have been hoping that their patience would be rewarded in 2009 when many balance sheets looked as if they might finally yield up some ripe opportunities. But then, in the second half of the year, came the remarkable revival in the capital markets – particularly high-yield paper. Rather than being sold, bad loans could now be refinanced in an increasingly frothy bond market. And secondary asset prices recovered to levels that ensured that bargains were few and far between. Many advisers predicted that the peak in European restructurings had occurred in 2009 and the dire predictions of corporate carnage that have characterized the past two years will not materialize.
It is hard to accept that this will be so. Too many problems have been papered over by temporary fixes such as covenant resets and amendments, and too many companies have too much debt.