Distressed debt players are turning to alternative avenues as declining defaults and rising loan prices leave market players with less traditional supply. "Everyone is looking for a different angle or different spin," said one buysider. But now, compared to two years ago, more investors are bidding for distressed debt based on the valuation of the equity they hope to gain in workout. Exide Technologies' bank debt, for example, was bid up when a few large firms went after the paper in the hopes of owning the company's equity.
"Now there are more people approaching distressed debt investing as if it's equity investing," said Michael Epstein, a principal at turnaround and crisis management firm TRG. Approaching distressed investing as an equity investment means taking an interest in the company for the long-term, but Epstein believes this is an area of opportunity. "The best opportunities are for the [investors] that want to play a role into the company's future to see it flourish," Epstein said. In these cases, not only do investors get the opportunity to get a more normalized EBITDA multiple by waiting out the distressed situation, but they also get the opportunity to increase the enterprise value of the company by fixing the business. "Returns had been quite significant," Epstein noted.
But one of the differences between this type of longer-term investing and larger more on-the-run distressed situation investing is that these new situations often require much more due diligence. The same applies to some of the other avenues where distressed investors are now focusing, including the less efficient and less liquid middle-market and European spaces. Many of these new distressed situations are not public companies. But even in the public companies, the information available to investors leaves much to be desired. Altogether, the distressed situations now need more manpower, noted one distressed loan trader.
The hiring trends in the distressed debt arena support the idea that the new distressed situations are more intensive. Despite the lack of large distressed situations, firms on both the buyside and sellside are stocking up their desks. Lehman Brothers, for example, is not letting the departure of their senior loan trader Mark Quinn to Troob Capital deter the firm from its distressed debt business. After bringing on veteran distressed trader Peter Schellbach last month, the firm recently lured John Florio, a former director in the distressed loan sales at Credit Suisse First Boston. The buyside also continues to pluck from ranks of the dealer distressed desks.
One buysider explained why. Distressed firms have been actively higher hiring for the last two years because they raise funds from recent performance and returns in the distressed market have been strong, he said. All-in-all, no one seems ready to abandon the distressed debt effort. "It can be an extremely profitable business," said one trader.