Where in the world is Distressed Debt Investing?

Distressed Debt Investing apologizes for the lack of posting. I was on a much needed vacation. As it were, going forward, I will try to post one to two times a week. If bond and bank debt prices get back to early March levels, there will be a lot more to write about and you can expect possibly multiple posts per day. In the meantime, I am working on a side project that I am very excited about (which I will talk about in the coming weeks).

Fortunately, in my "real life job" we have participated in the credit run, specifically at the senior secured levels. That being said, it is my humble opinion, that high yield bond prices, especially for very low quality issuers, are significantly above their intrinsic value. The reason for this is two fold: 1) Credit markets have opened up and various channels of refinancing are now available to lower quality borrowers 2) Given the dearth of supply in the October 2008 - February 2009 time frame, asset managers (traditional or not) found themselves with very high levels of cash, from a combination of interest payments and defensive posturing.

As credit markets opened, the option value that is a very very low priced bond became significantly more valuable (smaller chance of default leads to higher expected values of cash flows). Combining that with asset managers using cash to "chase return" leads us to a situation where a number of bonds are up 3 or 4x from the bottom despite no real change in operating / underlying fundamentals.

Bank debt has seen a very strong run-up in prices which makes more sense to me in that I believe syndicated loans in late February / early March were probably one of the most compelling investment opportunities I will ever see for the rest of my life. That being said, when on the run bank debt is trading at a price of 90 on a L+250 asset with LIBOR at 0.2%, you need a lot of leverage to meet our standard 20% IRR. The CLO machine, with its crazy magic rule of 80, have fueled the flames, especially considering the broadly syndicated primary loan market was dead for six months and many CLO structures of the 2007 vintage have not passed their lockout period (i.e. they need to keep investing in assets with their underlying cash flows). This has led to a situation where bank debt is up somewhere on the order of 31% YTD. Nutty.

This all being said, there is a lot to do on the investing side. Investors right now can lock in fairly secure yields by playing the basis between buying protection and underlying spreads. There are a few interesting DIP opportunities out there. Shorting consumer discretionary stocks is still appealing to me. And as always, you can spend countless hours arguing the value of Rouse bonds. - always the hobby of a distressed debt hedge fund analyst.