Marc Baum is the chief operating officer for The Seaport Group, a research and relationship-driven brokerage boutique dedicated to stressed and distressed bonds, bank debt, trade claims and equities. In the last year, the firm has used a series of hires to build up its efforts in dealing with off-the-run bank loans and large loan sales, trade claims and the equity of reorganized companies.
LMW: Why are investors still focusing on the distressed debt market?
The distressed debt market continues to be appealing to investors. Even though general market prices are up, there remain clearer opportunities for yield in distressed debt than in other places in the market. We live in a relative-value world; people continue to invest in distressed debt because they aren't finding parallel opportunities in other parts of the capital markets.
LMW: But is there too much money chasing too few opportunities?
There has been much more money chasing distressed debt recently because other places where capital would flow aren't presenting opportunities. There continues to be a significant amount of investment capital around despite the bubble in internet stocks in the 90's and other investments associated with recovery have not yet taken shape. But presumably, as you have a recovery, the number of distressed prospects will decline and money will flow to other places.
LMW: Where do the opportunities lie in the distressed debt market?
The opportunities in this market lie in the individual names. Investors should look for stressed companies that are undervalued, which are typically not the big companies like an Enron Corp. or a WorldCom. Latin America is also appealing to distressed investors. There are many good companies that have been hammered down there and people willing to take the time to hear their stories can find lots of prospects there.
Investors tend to look first at the most obvious opportunities in the U.S., then at the secondary opportunities in the U.S., then to Latin America, because perhaps the Latin American economy echoes the U.S. economy. [In March, the Seaport Group hired Art Kenny, former v.p. in global sales and trading at Salomon Smith Barney with experience in the Latin American sector, to help it expand its presence in that market (LMW, 3/16).]
LMW: What industries in particular should investors focus on?
There is restructuring going on in the telecom industry both in Latin America and here in the U.S. We also believe that the auto industry will soon enter the distressed market; there is a lot of global overcapacity in the auto business and also their equipment suppliers overlap with the plane equipment suppliers.
LMW: What distinguishes this distressed debt cycle from previous cycles?
The size of this distressed cycle is enormous, and the degree to which this cycle has been marked by fraud distinguishes it as well. Also, in the past we have seen the weakest companies default, but now we are seeing entire industries either inside or outside of bankruptcy. Additionally, the amount of time it takes for a company to recover has diminished.
When the steel industry went under, it took 40 years to restructure it due to union and pension fund complications, but now we don't have the same built in delays to restructuring as we did. So, for example, the telecom industry can come out of bankruptcy quickly. Now that companies can restructure and exit bankruptcy quickly, they are forcing their competition to ratchet down the costs of their structures as well.