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| Sharon Manewitz |
Manewitz is a managing director in the special situations and restricted investments group for fixed income at TIAA-CREF in New York. Manewitz and Roi Chandy, director, manage more than $800 million in par value in a wide range of domestic and international investments, including from public and private transactions.
Describe your group's role at TIAA-CREF.
TIAA-CREF manages $320 billion. When you've got an investment program as large as ours, it's not reasonable to expect there won't be things that go wrong. We have a discreet credits team and within that team there's a special situations function, with people dedicated to the effort of maximizing recovery in existing investments and to making distressed investments. We do buy troubled situations--we'll invest to protect a position and we'll add to an existing position because there's an opportunity there. We may also come across something and buy it in the secondary market. The bulk of our efforts are focused on what is in our existing portfolio.
Do you think the increased amount of money in distressed has changed the market?
One of the things I've observed in this credit cycle is that there's a lot of money pouring into this asset class, which has given us an opportunity to work out some long-standing situations. We've seen an improved recovery rate and an improving ability to work things out.
The availability of money has changed some of the strategies. You can't make an investment and put it in a vault and wait for your recovery. You have to watch things on a daily basis because of the number of players and the types of players. In the early days, people were complaining about the vultures. Now, people know that in working these transactions out, the vultures can be a positive, a source of recovery.
What credit trends are you observing?
I've long been a believer in themes. In the period of the '80s it was the oil and gas, then the retailers were a problem and then the airlines. Then the mega-cases were a theme. As I look into 2005, I think the autos are a theme and high-carb is a theme. Maybe the theme of 2004 is just boring. But from our perspective, boring may be good.
There's also a focus on the middle-market names. Some of the middle-market names had access to money when rates were low. As rates have gone up, rates haven't gone up as much as people thought and spreads have tightened; meanwhile, the rate to the borrower hasn't increased. If rates go up more, some of the smaller companies will start to see pressure on their cash flows. Right now the market in general is focusing on the automotive sector but as for myself, I'm thinking about what we're going to see in the consumer sector and if there will be issues there.
What kind of factors do you look for when going into a restructuring?
The underpinning is the financial analysis. But we also look at who the other stakeholders are. With vultures and different kinds of investors, it's a much more dynamic environment so we watch who the stakeholders and advisors are. In restructurings, you see the same players over and over again.
What do you think of low default rates?
I have a jaundiced view of default rates. Over the years, the concept of the default rate has changed, it has been measured in different ways. What's their measure of the default rate? Do they measure what's going on in the market? I'm not looking to discredit all of the wonderful institutions that publish default data. But the default rate for middle market companies is different than what [Standard & Poor's] and Moody's [Investors Service] follow. But is there a rate that we point to from our point of view of portfolio strategy? Still, we do look at default stats to understand what's going on in the broader market, clearly they are important to show there has been a significant decline in the rate of defaults.
What's your outlook for 2005?
There's a mantra right now, advisors out there are saying "survive 2005." There are only a number of workout situations being called into play. There was so much money in the market investing in those situations. In terms of new investments, we may see strain and investments becoming distressed in 2005. If you're looking at it in terms of default rates, we're not going to see double digits. There's enough money out there preventing something really drastic from happening. There are too many people on the bandwagon right now. But the record high-yield issuance in 2004 will come home to roost in a couple of years.
Are there any sectors you're currently focusing on?
Everyone's focusing on the autos now, but we don't see a clear sector for 2005 other than the middle-market and smaller-company trend which will be a function of rates rising to the extent that companies will be impacted by floating-rate debt rising.
But the events of recent [weeks] have made us all start looking at the pharmaceutical industry with all of the drug recalls of recent days. Everybody is looking at those announcements and their impact. But the focus has been on the big companies and the big names. That's very important, of course, but between their insurance and size, their ability to weather these events is okay. But what about some of the smaller companies? And suppliers? As big names have to cut back, what about the smaller research-type entities? They're more vulnerable to these problems. This may be a concern and an opportunity.