With $1 Trillion of Distress Gone, Debt Pickers Find Scraps

(Bloomberg) - For investment firms profiting from buying the debt of troubled companies, this seemed like a once-in-a-lifetime opportunity: a pile of $ 1 trillion in bad bonds and loans in America alone when the pandemic hit the markets broke down in March last year.
But after a massive federal bailout and rock-bottom interest rates kept even some of the shakiest companies afloat, those juicy targets have shrunk to less than $ 100 billion. Distressed debt specialists who once had to spend 131 billion US dollars last year have been looking for bargains that are always elusive. Even the real estate sector, which has been ravaged by offices, hotels and shops following the pandemic, has managed to avoid an epic wipe for the time being.
How are distressed investors - often among the most savvy in the markets - putting all of this money to work? Some, like Caspian Capital, decided to give some money back to investors as the rewards would no longer justify the high risks.
Others look further afield. Olympus Peak Asset Management deals with unpaid claims from vendors in companies that are already bankrupt. Arena Investors looks for convertible bonds and real estate loans that have been issued by banks. And business giants like Oaktree Capital Management are looking for opportunities in Asia.
"People don't invest, they just hunt," said Adam Cohen, Caspian's Managing Partner. This comes with an added dose of risk, according to Howard Marks, co-founder of Oaktree, the dean for distressed investments. "To get higher returns these days, you have to be willing to give credit to someone who isn't clearly coming back," Marks said in a Bloomberg television interview.
The money is still flowing in and the managers have made some progress in finding new jobs. According to advisors at Preqin, around 40 funds - from Oaktree to Angelo Gordon & Co. - raised around 35 billion US dollars between this and last year.
For Arena Investors, a $ 2.2 billion investment firm that was getting smaller and nimble had its advantages, said chairman Dan Zwirn. This is because 80% of troubled companies owed less than $ 1 billion in early April and about 60% of companies that filed for bankruptcy last year owed less than $ 500 million. This has resulted in too many larger companies chasing after the few remaining big situations.
"When you write checks for $ 100 million, the competition is excessively high," said Zwirn.
Arena deployed almost all of the $ 519 million it raised over the past year on a special opportunity strategy, targeting industries affected by the pandemic. Among other things, they worked in the following areas: real estate loans, loans for special situations in the areas of energy and aviation as well as litigation financing.
Tighter lending
Fund managers like Olympus Peak are also looking for companies too small to tap into the seemingly limitless bond and stock markets that were boosted by the unprecedented wave of federal stimulus over the past year.
Large borrowers in the public market have now largely been taken over. Smaller companies, on the other hand, have relied more on banks for liquidity. And the percentage of banks making it harder to get a loan is still high at 11.4%, according to the Federal Reserve, well above the 1.9% average since the great financial crisis.
"If all you have trouble is in the public market, all you have to do is hold your position because if you sell it there is nothing else to buy," said Jason Dillow, CEO of $ 8.4 billion Bardin Hill Investment Partners.
Largest distressed / special situations funds from 2020-2021
Either way, distressed fund managers try a variety of tactics to increase returns, according to those familiar with the portfolios:
Bardin Hill raised $ 600 million on privately negotiated loans in early February and deployed about 78% of that. The money went into high-end cruise lines, fitness, technology, healthcare, and education, as well as alternative assets such as insurance-backed claims. Olymppus Peak, which operates a $ 1.4 billion hedge fund, launched a $ 300 million fund this month in bankruptcy claims. So-called trade receivables are often small, illiquid and labor-intensive and therefore less attractive for a larger fund. Angelo Gordon raised $ 3.5 billion at the start of the pandemic and invested everything plus $ 1 billion in recycled capital. The company preferred high-yield, privately-negotiated financing with strong protections for its investments identified in its agreements. Centerbridge Partners' Special Credit III strategy invested $ 1.8 billion in March and April 2020. Since then, 90% of these positions have been negotiated. The money has been redeployed into growth companies like HCI Group Inc. and bailout funding for companies like cinema chains like AMC Entertainment Holdings Inc., UK subsidiary Odeon and Cineworld Group Plc. In February, Monarch Alternative Capital had invested more than 60% of the $ 3 billion it raised last year for its latest distressed loan fund. The company lent bankrupt companies after the pandemic temporarily closed them. The list included a franchisee for Wendy and Pizza Hut, Ann Taylor's parent company, Ascena Retail Group, and the owner of Chuck E. Cheese. Monarch looked beyond the pandemic and at times increased its investments to keep the companies alive. Shaw & Co. raised $ 1 billion for its newest private loan fund targeting stressed assets and financing with a 5-year investment window, the company said Tuesday.
For Cohen's $ 3.5 billion Caspian capital, investing in bad loans is too tight a mandate in today's world that the company has expanded into businesses that are just stressed out. It looks for returns of 10% to 15% or loans that trade between 70 and 90 cents on the dollar but are not in default.
Despite this larger scope, Caspian decided to close its $ 500 million fund on the dislocation strategy after it paid off as prices rebounded. Investors got $ 565 million back.
"Money always burns a hole in your pocket," Cohen said. “The best you can do now is not to make a mistake. This can save you a lot more money than mediocre trades can bring you. "
According to JPMorgan Asset Management's David Lebovitz, companies with patient capital don't have to invest immediately, and there could be a bigger wave of opportunities after policymakers scaled back economic support.
Meanwhile, Oaktree plans to raise $ 15 billion for its latest distressed fund and use its money outside of the US. So far, according to public documents, only around 10% of the committed capital had been drawn up by February. Oaktree's pitch to investors cited nearly $ 5 trillion in opportunities across Asia, mainly China, including bad loans, bonds, shadow bank loans and leveraged loans.
The remaining question is whether the remaining distressed assets are destined for recovery or whether they will simply be kept afloat by a historical leap of dead cats that will not last.
"If you had a strong business from the ground up, you could have found the liquidity to meet the challenges of 2020," said Chris Acito, chief investment officer of Gapstow Capital Partners, a New York-based company focused on The selection of loan funds has managers specialized. "Many of the companies that are still in dire straits have flawed business models that are difficult to revive."
(Updates with D.E. Shaw in last bullet. An earlier version corrected Arena Investors' name.)
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