Buyer competition in the distressed debt market is pushing pricing to record highs and traders and investors do not see the tide turning anytime soon. A robust economy and cheap availability of credit is keeping distressed companies flush with money. "The economy is doing well, few names have hiccups," one trader said. "Ones that do get money thrown at them."
Indeed, it seems the worse companies perform, the better their pricing gets. The debtor-in-possession loans of Northwest Airlines, Delta Air Lines and Delphi are trading in the 101-103 range a level that distressed debt investors say they have not seen before.
"I am astounded that the loans of Delta, Northwest and Delphi are trading at large premiums," said Murry Stegelmann, managing member of Kilimanjaro Advisors. "I can't recall a time when bankrupt companies were trading so high. It is almost as though people view bankrupt companies as the safest place to be."
One trader said some investors are withdrawing from the distressed debt market, but unwillingly. Fewer opportunities in the distressed debt market are prompting some investors to expand into performing loans. Stegelmann said his company, which focuses on stressed and distressed bank loans and bonds, has been doing primary syndications regular performing loans to augment its distressed portfolio on and off for the past year.
Stegelmann said he does not see market conditions changing anytime soon. Conditions might have changed when Refco spooked investors after its debt tumbled within days of its chief executive being ousted for fraud, but its debt has since rebounded. Its bank loans fell as much as 33 points before bouncing back. They now trade in the 95-96 range. "If there was a big shake-out and somebody lost a lot of money on a secured loan to a bankrupt company then market conditions would change. There would have to be big losses," said Stegelmann.
A trader at a small New York distressed debt investment firm said he is seeing more investors choosing to buy distressed companies outright or take large equity positions rather than investing in the debt a strategy that more distressed investors may choose to take. Stegelmann concurred. "A lot of funds are just buying companies since so many people are chasing debt," he said. "If you are prepared to buy a company then you can make a bigger return for your work."
