Edward Altman, Max L. Heine Professor of Finance at the Stern School of Business, New York University, set the tone by noting that this year may be a tough time for distressed debt and restructuring pros, but there is plenty to look forward to in the near future. "This will be a tough year to achieve the returns you achieved last year," said Altman, who advises Citigroup, Concordia Advisors and Miller Mathis.
The market-to-face value ratio for loans is at 80 cents on the dollar--the highest level since 1996 and up from 42 in 2002. Bonds have gone from 17 to 50. Meanwhile, the market value of U.S. distressed debt has dropped to $400 billion market value and just over $600 billion face value, from almost $800 billion face value and $500 billion market value in 2003. "In the last 15 months we have clearly been living a benign credit cycle," he said. "But it won't get much smaller." It will go down in the next quarter, but defaults will follow in 2005.
The default rate for the high-yield market, which is hovering around 1%, is expected to rise to 3% this year and in 2006 to go to 4.1%. Altman admits he has been wrong before, including last year, when he also predicted 3%. "Well I was wrong last year, but if those damn pilots at Delta Airlines had not given in, I would have been right on the money," he joked.
The amount of low-rated debt that has been issued in the past year is an indicator and with 42.5% of new issues in 2004 rated B-/B3 or below, life is going to get busier for restructuring pros and distressed investors. The defaulted amount is expected to be $30.3 billion in 2005 and $44.3 billion in 2006.
But Altman also sees strong interest in the distressed sphere. There is between $125-150 billion chasing distressed assets with over 120 managers dedicated to the distressed sphere. Additionally there are investors, such as Warren Buffett, that are able to jump in and out. Altman states, "People are trying to raise money on performance, but will performance remain good?"