Active trading of names in the workout process and a drive for amendments that save a credit from nonperformance can impede a company's progress towards workout salvation, according to panelists at the Distressed Debt Investing 2002 conference held in New York last week. In a session dubbed "Sell-Side Perspective: Knowing When to Hold, Draw or Fold," players pulled apart the negative impact secondary bank loan trading can have on a smooth workout process. Trading activity that enlarges the circle of people working out the credit and amendments that enable some institutional players to keep the credit are the biggest things that gum up the works or workouts.
Murray Stegelmann, managing director and head of the bank loan group at GE Capital, said problems often arise simply over the lag between the time a loan is sold and the time it closes. He noted a situation where the lag caused a delay in a company getting an amendment passed. "[Here is a] company dealing with financial stress, and it gets caught up in the amendment process," he said, noting that the change needed 100% approval.
The presence of collateralized loan/debt obligation funds also can complicate a workout. "CLOs will want to keep it as a performing loan," Stegelmann said, explaining that these vehicles cannot keep the loan if it is in default. As a result, they will push the bank group for amendments rather than bankruptcy.
The number of players buying distressed paper has increased, but not all players have the staying power to last through a workout. As more of those players buy paper, the process gets even more difficult. "No one has enough money in the game to work out the credit," Stegelmann said, noting the expansion of institutional syndicates. And the increased trading activity transfers the paper--but not necessarily the responsibility--from original lender to buyer. "Who works it out?" askedCraig Moore, a managing director at Evercore Partners.
Peter Santry, a managing director and head trader on Banc of America Securities distressed desk, agreed that some investors cannot hold distressed paper and are not set up to take on the task of a workout process. But he noted that means trading is of even greater import: trading and liquidity in the market allows for the natural allocation from desks that do not have the ability to deal with the workout process to those who can.
Distressed Debt Conference Last week, the Strategic Research Instituteheld a conference, entitled Distressed Debt Investing 2002, at the Hilton New York. Highlights included the opportunities of trading distressed debt, the downsides of Chapter 11 and avoidance of larger credits. The staff of LMW was on hand and filed the following stories.