Rising Prices Cool Distressed Debt Investment, But Opportunities Remain

The pace of new investment in the distressed debt market by pension funds and endowments has slowed considerably in the last six months, according to iisearches and Loan Market Week. Rising prices are cited as the main culprit, but several distressed managers insist opportunities remain. "High returns are synonymous with rising prices, and rising prices don't give you great [new] opportunities," explained Howard Marks, principal of Oak Tree Capital Management.

Oak Tree is seeing high returns on their current distressed debt investments, but is not raising new money to put into the distressed market at the present time. "This market is one which changes on a dime," Marks said. "A year ago, things were basically being given away, but we are not currently in a buyer's market." he added.

The University of North Carolina at Chapel Hill entered the distressed debt market in March 2002, when it saw the default rate skyrocketing, said Mel Williams, v.p. and director of private investment at the University of North Carolina Management Co. "UNC is comfortable with 14% of its portfolio in distressed debt, the endowment's largest single exposure to an asset class, but is not looking to put any more money into this market," Williams stated. "The market is less attractive to new investments than it was 18 months ago," he added. Robert Wallace, executive director of the Oklahoma Police Pension & Retirement System, said the fund had been investing in distressed debt through Oak Tree for a number of years for diversification purposes, but is currently not looking to invest in new debt.

But there are still potential mandates up for grabs. The Dallas Police and Fire Pension Fund is in the process of hiring a fund through which to invest in distressed debt, said Richard Tettament, administrator of the fund. "We want to enter this market because there are higher than expected returns," he added. The Dallas fund is looking to invest about $20 million in the distressed market and while Tettament noted that, "everyone is putting money into this market right now," he said that there are enough opportunities in the market to support the current demand.

There are a number of distressed debt managers that are in agreement and have started raising capital in the last few months. Arthur Penn joined Apollo Management in April to start a distressed debt business and is said to be raising $1 billion (LMW, 4/27), while Murray Stegelmann, who was head of the bank loan group at General Electric Capital Corp. left to start a fund (4/14). In addition, Oak Hill Special Opportunity Management, an affiliate ofOak Hill Advisors and Oak Hill Capital Management, is out raising additional capital for the Oak Hill entities' first dedicated distressed debt fund (7/7). "Now is absolutely the time to allocate money to this asset class. There are many opportunities in the US and in Western Europe," said one recent entrant to the game.

"In the last six months, the prices for a number of older names, including WorldCom, have gone up, but there continue to be new opportunities coming in," added Dominique Mielle, senior v.p. of Canyon Partners. Airline companies should be interesting prospects because they will likely survive the bankruptcy process--which will enable the companies to cut costs--and there will continue to be a need for airlines, Mielle noted.

Directory of Distressed Debt Searches (JAN. 1- JULY 9, 2003)

The information included in the following chart represents new, potential, pending and completed search activity year-to-date as compiled by iisearches.com. This information is derived from many sources and, while it is deemed to be reliable, cannot be guaranteed. To report search and hire activity, call Gar Chungat (212) 224-3936, email gchung@iinews.com or fax to (212) 224-3233.