The record tightening of spreads and the super-low default rate is pushing investors to seek out new opportunities. "Whether it is REITs, bonds, everyone is searching for yield and there is a flight to risk. It's almost consensus thinking that all asset classes are becoming fair-to-relative value," said Michael Hennessy, managing director of Morgan Creek Capital Management, an investment advisory firm.
Brent Williams, a managing director with Chanin Capital Partners, noted, "The capital markets are so juiced that you can borrow yourself out of trouble." He believes this is unsustainable, but in the interim paper is being so bid up that investors are now increasingly looking at the backend equity play, buying at 80. There are pockets of opportunity though, including the auto-suppliers and CLECs. Another avenue is making DIP loans and providing exit financing.
Allan Brown, portfolio manager and co-head of distressed debt at Concordia Advisors, which has a $300 million distressed debt fund, added that hedge funds have increasingly become lenders. The next development will be the use of derivatives. "There will be a more blurred line between distressed debt products and credit arbitrage," he suggested.