Three state pension funds are considering moves into distressed debt, joining a growing list of funds looking to appoint distressed debt managers. Illinois State Teachers Retirement System, Indiana Public Employees Retirement Fund and The Florida State Board of Administration are all in various stages of reviewing potential allocations to distressed debt. The continued influx should provide a support level for distressed debt prices over the coming months. "For the second time in the last 12 years, there is a surge in investing by pension funds in distressed debt," said Gary Robertson, senior v.p. for pension fund consultants Callan Associates. "It's fairly evident from the numbers being published by Edward Altman there is a huge supply of distressed debt," he offered. He declined to comment specifically on any pension fund.
Callan made a distressed debt presentation this month to the Illinois investment committee and the fund is considering allocating funds to the category, said John Day, the plan's assistant executive director. "There is a window that correlates with the downturn in the economy. There is more available debt, which is an indication timing is opportune," he added. "Callan has recommended the allocation to balance the portfolio, and we wanted to create more understanding," Day noted. He declined to comment on which managers were being considered. Day stated potential mandates would come from the private equity allocation, which is being doubled over the next three years. This will be 6% of the total $21 billion portfolio and of that, 5% will be allocated to distressed debt.
The $8.2 billion Indiana fund has never invested in distressed debt, but is looking for the best risk-adjusted returns, said an official familiar with the situation. He explained an allocation of up to 10% of the alternative bucket could be distressed debt, with the alternatives being 5% of the fund. Strategic Investment Solutions is the consultant, the official noted. Additionally, the $85 billion Florida fund is mulling its first move into distressed debt. Reportedly, a decision is likely to be made by year-end. Executive director Coleman Stipanovich could not be reached by press time.
One analyst pointed out it is not just the pension and alternative funds that are looking to invest in distressed bonds and bank debt. He said a number of high-yield funds are creating buckets to delve into the territory. "The funds should provide a support level for the debt as defaulted debt prices start to converge to ultimate recovery levels," he commented.
Defaulted Debt Indexes Surge In November
The Altman NYU-Salomon Center defaulted debt indexes surged in November with the defaulted bank loan index moving to a near-record monthly increase of 5.37%. The only months that the loan index increase was greater was in February 2001 (6.71%) and November 1998 (5.44%), according to research by Edward Altman, Max L. Heine Professor of Finance at New York University. WorldCom was a heavy contributor to the gains, but even without the name, the loan index still advanced by 2.54%.
Indeed, the combined bond and bank loan index observed the largest monthly increase in the history of the indexes' reporting periods. The defaulted public bond index, in particular, increased by 8.49%, paced by the monster increases of WorldCom. Other major advancing issuers were Adelphia, Amresco and Global Crossing.
| Index of Defaulted Public Bonds and Bank Loans | ||
| Month | Public Bond Percent Return | Bank Loan Percent Return |
| 2-Jan | 1.90% | 3.51% |
| 2-Feb | -4.26% | -1.43% |
| 2-Mar | 2.12% | 3.71% |
| 2-Apr | 1.29% | 3.27% |
| 2-May | -2.17% | 0.21% |
| 2-Jun | -9.44% | -1.64% |
| 2-Jul | -4.19% | -4.27% |
| 2-Aug | 6.05% | -4.37% |
| 2-Sep | -1.11% | -2.03% |
| 2-Oct | -1.27% | -1.25% |
| 2-Nov | 8.49% | 5.37% |
| 2-Dec | - | - |
| 2002 YTD | -3.78% | 0.51% |