Record-low default rates and more money pouring into the distressed market led several established investors to complain about the lack of opportunities in the distressed arena this year as Johnny Come Lately-types crowded the space.
Moody's Investors Service's default ratio hit 2.4% at the end of November, the lowest since March of 1998. The ratio of distressed credits fell to 3.9% in mid-December, also a six-year low according to data from Merrill Lynch, which defines a distressed credit as one trading 1,000 basis points over Treasuries. Investors this year complained the prices on those few opportunities were inflated by a plethora of hedge funds throwing gobs of money around, seemingly without much due diligence (BW, 11/15).
But, as of this fall, distressed managers had racked up the best performance numbers, as a class up 9.8% through September, according to data from Van Hedge Fund Advisors International (BW, 10/25). "You could have made money in airlines, asbestos and commodities," said Peter Lupoff, managing director and co-portfolio manager of a distressed and high-yield portfolio at EagleRock Capital Management in New York. He added with more players in the distressed market, the environment has changed. "There's increasing pressure to process ideas quickly," he said, noting he's making a lot of short-term trades, such as his purchase of Star Gas Partners 10 1/4s of '13 which went from 88bps to 108bps after less than eight weeks. "We're working harder than we ever have before. I'm not 24 anymore. I don't want to work seven days a week," he quipped.
Other distressed investors dismissed the notion of increased competition altogether. "This year was just another year of looking for individual opportunities and being scrupulous as to what you don't buy," said Gary Hindes, managing director at Deltec Asset Management in New York.