The distressed market was in high gear last week, with an estimated $300 million changing hands as the tide begins to turn and investors start to go after the reams of paper dumped into the market over the past several months. One dealer said last week's volume was about double what is normally done in the distressed market in a typical week.
Dealers noted that as credit deteriorated there was a rush to unload paper. The supply in the market initially weighed down levels, but the pendulum is swinging in favor of these same credits as the demand begins to pick up. "Banks were under pressure to reduce [their position] in non-performers; there's been a gigantic size of non-performers over the last year," a dealer remarked. "The supply, combined with the fact that banks are under pressure to sell, put real supply i.e. sellers in the market. The demand naturally comes. There's just so much demand from new pockets right now."
Collateralized loan obligation managers and funds have been ramping up, and more hedge funds are coming into the market, bumping up prices. "A lot more investors are coming into the distressed market. Prices are on the rise because there are buyers," one dealer said. As an example, he noted that Mariner Post Acute Network is pulling out of Chapter 11 bankruptcy and levels have steadily moved up, last week hitting 60 from its previous level of 56. Good news from companies like Goodman Manfacturing, which sold off some assets and appears to be pulling back up, are fueling optimism. One of the biggest movers of the week was Tenneco Automotive, with its credit spiking to 85 from the high 70s. Dade Behring jumped from the low 60s to 70 in a single day last week.
Much of last week's volume came from large blocks being traded out of shops that are getting out while the going is still good on certain names, one trader said. "People are deciding they don't have to wait for a credit to hit par. If you got in a deal at 98 and it dropped to 60, but it's come back up to 90, it makes sense to get out now," he explained. "Some of these credits still have some issues, so why stick around?"
Even a par dealer conceded that distressed is getting the brunt of investor attention right now. "There's just a lot more money looking at distressed," he said, noting that any impact on it is more visible than it would be in the par market. "The distressed market is much smaller than par: If you add $500 million to it, it's going to have a much bigger impact."