Distressed Debt Market Cools As Funds Pause To Evaluate

Pension fund and endowment investment in distressed debt during the third quarter cooled somewhat from the torrid pace of the first six months as funds paused to reevaluate the asset class. Last quarter, there were three completed searches resulting in three mandates, according to Loan Market Week andiisearches.com . By comparison, there were eight completed searches resulting in 13 mandates during the first six months of 2002. Furthermore, three searches were postponed or called off entirely over the past three months. But market players expect the distressed debt market to maintain some steam through the fourth quarter, with four large searches currently in progress.

Wilbur Ross, chairman of WL Ross & Co., told LMW that funds are going through a reevaluation period. "Some are re-examining how much they want to commit, and others are postponing investments altogether," he said. Indeed, the University of Dayton endowment, which was considering a $20.7 million investment, decided not to allocate any additional assets to distressed debt at its August meeting. And at the end of June, Wake Forest University cancelled its search and Claremont McKenna College postponed its search indefinitely.

This new air of cautiousness can be partly attributed to troubles in the collateralized debt obligation market, Ross noted. A number of CDOs, which serve as one of the main vehicles of pension and endowment investment in distressed debt, have seen defaults or declines in value. As a result, it is getting harder to raise money for such vehicles, which is making the managers a little nervous. "They are beginning to take a more cautious approach," he said. "The leverage multiples investors put up with are going to be more conservative and the pricing is going to have to be more generous."

The information included in the following chart represents new, potential, pending and completed search activity for the period July 1, 2002 through Sept. 30, 2002 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 Chung at (212) 224-3936, email gchung@iinews.com or fax to (212) 224-3233.