I started this blog on distressed debt on April 2nd, 2009 with a post: "What is Distressed Debt Investing." If you had told me on that day, that credit would be trading where it is today, I would call you crazy.
I talk to the syndicate and trading desks everyday. New deals for seasoned high yield issuers are 10x oversubscribed. And this is happening on a daily basis. New issues are breaking 101/102 easily. AMG Data continues to show the retail investor allocating capital to high yield and levered loan funds. All the index funds literally cannot find bonds to buy to match their various indices. No one wants to sell despite YTD levered loan returns approaching 40%. All the desk traders want to get flat.
In other words: Things are feeling kind of "toppy"
I am reducing my exposure in big ways to a lot of names that are trading well tighter than they should be at this point in the economic cycle. Moving to nearer maturities (think 2011/2012) of high quality issuers with the off-chance I get tendered or called out at a slight premium. I am shooting for 10-12% IRRs with this strategy.
At the same time, I am doing some heavy digging on a number of dicier issuers. Spanish Broadcasting is a name that has picqued my interest of late. The Primus Telecom term loan could be appealing. CIT continues to keep me busy. MGM Studios is a coin flip at this point but I err on the side of bullishness if anything. DDR's Term Loan and Revoler at approximately a 15% yield looks interesting. BYD across the capital structure is very interesting. And do not forget all the equity shorts that keep popping up on the radar screen.
We have also been stepping up our game in merger arbitrage (despite the dearth of deals) as we feel like we can capture very high near term IRRs and take little exposure to the market. An example we have mulled over is CYCL's bonds.
So, there have been things to do and keep busy on. The Distressed Debt Investor club development continues with an expected launch at the end of the 3rd quarter. I will post an FAQ about that in short order as I get a number of emails on it daily. If you have any interesting ideas or blog topics, feel free to shoot me an email.
One last reason I know things are getting toppy: I am running out of distressed debt ideas to blog about. Yikes!
What kind of criteria are you using to identify the equity shorts? Are these shorts part of a broader hedging strategy (i.e. being long radio company secured debt and short the public common?)
ReplyDeleteIt has been one screamer of a cycle, which is why I have been fading the rally where I can. I was a bull on high yield 12/2008 - 6/2009, but this is just too much too fast, and we have too many unresolved problems.
ReplyDeleteI like your blog. Keep it up.
David
while the previous opportunities may have swelled, Dan Loeb cites the current environment as intriguing and feels like "a kid in the candy store" as he believes restructurings etc in the latter stage of the debt cycle will really provide ample chances to make plays. Thoughts on his take?
ReplyDeleteQuick question: how often have you seen junior class bondholders in low-collateral situations hold out on tendering a restructuring offer in order to gain a sweetened restructuring offer? Is there an innate legal preference for senior debt beyond the rule of absolute priority, which goes out the window when a senior creditor is trying to maximize recovery on a low-collateral high cash flow firm that has a huge junior creditor base that needs to be convinced it should tender at 30 cents on the dollar?
ReplyDeleteThis is an excellent blog on debt. I particularly like your IRR strategy and I am glad to note you're not stopping there as you are giving us a glimpse of what's happening to the others. I will be waiting for the FAQ as I am interested in what you say.
ReplyDeleteEvelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)
Toppy is certainly right. Spreads still wide by historic standards and corporate debt levels relatively low with loose covenants. Amend and extend the name of the game for many large institutions. And of course the technicals keep driving things higher; even more cash will roll in 4q09 and 1q10 as pensions reallocate to HY on top of retails screening at low CDs. Deflation following by US$ inflation will be quite a potent cocktail in the next 3 years.
ReplyDeletePrimus term loan remains a good risk reward if you're ok with smaller names (the equity was so cheap coming out last month).
Keep up the good blog (kudos to having found the time in April and May- now it should be easy).