Xerion Capital Partners, a distressed investment firm set up by Daniel Arbess, a founder and ex-head of special situations investments at New York-based Triton Partners, will begin to buy assets in the coming weeks. "Our immediate focus will be on mid-cap businesses struggling with excessive leverage and possibly facing, undergoing or emerging from recapitalization or reorganization," said Arbess.
He explained that while defaults may have peaked at around 15% last year, there is still substantial opportunity for distressed names over the next seven to 10 years due to refinancing needs. "The leverage ratios available to companies as a multiple of cash flow are much lower than in the past," he explained. Senior secured bank debt lending multiples in 1996 were about 4.8 times EBITDA, compared to about 2.5 times today. Additionally, the EBITDA of many of these companies is also down. Arbess estimates the size of the leveraged credit market at $1.5 trillion with much of the debt issued at higher leverage levels than are acceptable now. Debt that has not already defaulted will need to be refinanced over the next few years, and "refinancing the debt at the same rates may be very difficult," he noted.
Arbess said he left Triton because the firm does not want to concentrate on distressed situations. The departure of Arbess has triggered a key man provision for the approximately $50 million Triton Inflection Fund, a relatively new fund that bought securities it believes would become next-generation equity, and this is now being unwound, he said. The fund was just launched in September and the 90-day returns were in the 15% range, he said. Officials at Triton could not be reached for comment.
Triton specializes in structured finance vehicles, but Xerion will not initially use structured finance technology, Arbess noted. Xerion will be investing across the capital structure, but is looking for the fulcrum security that will be converted to equity when the company is reorganized. Furthermore, the real focus will be on mid-cap, profitable but over-leveraged and out-of-favor sectors, he said. "The strategy is value-oriented, activist and somewhat contrarian as regards specific sectors," he added.
Arbess would only characterize the funds capitalization as "significant," declining to provide a specific amount. The staff will be four or five with the people already identified, he added. John Hale, who worked at Triton as a senior special situations analyst will be coming on board, Arbess said, declining to name the other potential recruits.