Distressed Debt Analysis with Stephen Moyer

This past Thursday, Stephen G. Moyer—portfolio manager at PIMCO and author of Distressed Debt Analysis—taught a seminar at NYSSA on, you guessed it, distressed investing. Mr. Moyer’s aforementioned book is considered the bible of distressed investing by most practitioners, and is one of the most “readable” financial texts available. His half-day seminar was a condensed presentation of the key concepts from the book, as well as some interactive Q&A with the audience.

The seminar was geared towards—and mostly attended by—investors fairly new to distressed investing. From conversations with other attendees it seemed the majority were “equity guys” who wanted to get involved with distressed investing. For the handful of experienced distressed investors the seminar served more as a review. And while the “distressed guys” may not have been exposed to any new concepts, it was both very interesting and highly impressive to hear Steve discuss numerous bankruptcy cases. From his examples it seemed like he was involved in every meaningful case for the last two decades, which probably isn’t that far from the truth.

Rather than summarizing the bulk of his presentation we will again refer our readers to his book, which we previously recommended as a top pick in our reading list. (See link above) However, there were a couple of interesting interchanges during the Q&A that warrant discussion.

First, the topic of supply and demand for distressed assets in the coming years was discussed. As previously discussed on this blog, most of the distressed community expects default rates to remain elevated for the next several years. However, unlike many past high-default periods, there has been an unprecedented amount of capital raised by distressed investing vehicles (hedge funds, asset managers, private equity) prior to the peak in defaults. Mr. Moyer believes the total amount of “new capital” raised for distressed investing to be in the $60-80 billion range. That said, he believes this level of distressed demand will be commiserate with the amount of future distressed opportunities and shouldn’t cause undue pressure on returns.

The second interesting topic was Steve’s discussion of the GM/Chrysler bankruptcies and their potential role as precedents for future bankruptcies. On this topic he was relatively “bearish” in that he thinks there is a good chance that future bankruptcy cases will cite the GM/Chrysler decisions as precedents for screwing different classes of claims. His advice, predictably, was to more carefully analyze and/or avoid situations where the government may be involved. Pressed further though, he also seemed a bit concerned that there could be problems with cases not involving the government. Now, as a disclaimer, it’s important to note that PIMCO was one of, if not the largest GM bondholder and his comments are probably colored as such. His opinion on this matter stands in stark contrast to those expressed by several participants at the Global Distressed Investing Forum, where the consensus was that GM/Chrysler as case law would be a non-event.

Anecdotally, Mr. Moyer made an ironic comment regarding the “holdout problem” in debt exchanges. For those unfamiliar, when a company proposes a debt exchange existing holders are often asked to take a haircut on their principal amount, among other things, in exchange for the company improving its balance sheet and hopefully staying out of bankruptcy court. However, assuming the exchange is successful bondholders who do not exchange will be (economically) advantaged relative to their non-exchanging peers. Paradoxically, if there are too many holdouts then the exchange will fail. While discussing this very issue, Steve lamented that when he thinks of the holdout problem, he “always pictures some New York slicksters” [as the holdouts]. I thought this was pretty ballsy considering PIMCO pulled off the mother-of-all holdouts when they backed out of the GMAC exchange at the last minute, leaving the company short of its minimum participation level.