American Express will to launch its first distressed debt fund on May 1, joining a wave of other investors seeking to take advantage of the growing opportunities in the distressed market, according to BW sister publication Loan Market Week. The fund currently stands at $52 million but will be open to investors for up to $250 million in assets under management. The new fund focuses on top positions in the capital structure with 80% of the portfolio dedicated to senior secured bank loans and bonds, according to John Engelen, the fund's senior portfolio manager. Engelen joined American Express in May 2001 to prepare the fund, after a stint running Salomon Smith Barney's global distressed effort.
Engelen said that now is the opportune time to get involved in the distressed debt market, despite the approaching economic recovery. "Typically the best returns take place as the economy improves," he said, adding that the peak of default is the best time to get involved. He notes that this most recent trip through the bankruptcy cycle is likely to be longer than the bankruptcy cycle of the early 1990s. "The returns might be less, but the recovery times will be longer," he said of this current cycle. Typically it took three to five years for companies to work through bankruptcy, but investors were looking at returns as high as 43% for high-yield bond investments in 1991, he explained. With this new bankruptcy cycle, which includes both telecom and asbestos names, the work-out term could be as long as five to seven years with investors seeing returns in the high teens to low 20% range because the quality of leveraged companies has decreased.
He said he sees the supply of paper increasing in the secondary market with original lenders supplying 75% of the paper as regulators push banks to more actively manage their portfolios and their credit risk. In addition, he noted that in the mid-90s as a result of the low default rate, many banks began to get rid of their work-out groups and therefore do not have the support to manage the leveraged loans that totaled $130 billion in the secondary market last year.
American Express joins a slew of new distressed players, including Water Tower Capital, Quadrangle Group, and Silver Point. Water Tower Capital is closing up its distressed fund in mid-June and will consist of 60% bank debt and 40% bond debt, said F. John Stark III, principle and ceo of Water Tower Capital. Quadrangle Group has also launched a new distressed debt fund with capital under $100 million. Silver Point is also a leading name on the list of new players. "Silver Point is going to be a prominent player because of its principles," one distressed player said. Ed Mule, formerly in charge of Goldman Sachs' distressed investment worldwide, said he started Silver Point in October, but could not comment on the other whether or not it was a distressed fund.
Larger players such as GE Capital have also taken a bigger presence in the distressed market as well. After starting its distressed group 18 months ago, Murray Stegelmann, managing director, head of the bank group at GE Capital, said one third of its new business was done in the distressed market last year. The firm has $8 billion in total invested in the bank loan market.