Distressed investment opportunities are out there and more are coming up, despite the fact that distressed funds are sitting on the sidelines, said speakers on a panel on distressed investing strategies.
The distressed investing opportunities seen a year ago are gone, panelists said. “The difference between being a distressed investor now and a year ago was everything traded down together,” said Jim Galowski, partner at Stone Tower Capital. “A lot of the investing that went on last year was not distressed investing, it was momentum investing.” Now, investors have to do their homework and understand the structure and nuances of deals in order to find those rarer investing opportunities. “This is the time for real distressed investing,” he said.
Bob Sainato, managing director of the structured credit and mortgage group at Advisors Asset Management, agreed. He gave the example of certain subprime RMBS, which might be trading at 20-30 cents on the dollar on market assumptions all the underlying loans would default. But if loss severities are actually 80-85%, such deals might hold some value if current borrowers stay that way, Sainato said.
Another opportunity is to buy the control rights of collateralized debt obligations of asset-backed securities, Galowski said. By taking control of the CDOs and deconstructing them, some investors have been able to find one or two of the CDO’s assets are enough to pay for the cost of the whole transaction, he said.
In the future, more distressed opportunities will be found in commercial mortgage-backed securities. But those openings have yet to appear. “We haven’t seen the next shoe to drop because people are extending [commercial real estate debt], which makes sense,” Galowski said.