Finding Opportunities in Distressed Bank Debt

A few times each week, the various dealers, like Goldman Sachs or CSFB, will send out a list of all their bank debt names (including distressed bank debt paper). These names range from the very on the run - to the very off the run situation - in some case situations I have never even come across or seen.

Unfortunately, for most retail investors, it is difficult to gain exposure to bank debt unless you invest via a number of open end or closed end mutual funds. Complicating this, many times on a private deal, potential investors will be asked to sign a confidentiality agreement as to keep the debtors financial situation away from the prying eyes of competitors, suppliers and the likes.

But what if these structural issues create opportunities for investors? We all know the hordes of value investors out there that try to find companies uncovered and deserted by Wall Street to find diamonds in the rough...i.e. The number of analysts covering a particular stock is inversely proportion to the amount of mis-pricing in the security. 22 analysts covering Microsoft may mean very little inefficiency in the the stock price...But what about Bexil Corp (Symbol: BXLC)? No analysts covering the company, a market cap of $20M vs $37M of cash on the balance sheet...

The point I am trying to make - a lot of times in distressed debt land many people are looking at the same situation. Do you know how many calls / emails I got from other people on the buy side about Nakheel the last few weeks? Probably 30. (Note: Someone has written up Nakheel on the Distressed Debt Investors Club). Why not go looking for those uncovered gems?

There are few arguments against hunting for diamonds in the rough in the corporate debt world:

1. Many of the uncovered situations are so illiquid that only a fund with locked up capital / side cars would ever dream of taking a meaningful position because the mark-market is brutal.
2. In tandem with #1, if you want to be an activist in distressed debt land, you need to be able to source the paper - lots of paper is locked up in structure (CLOs, insurance companies) that do not mark to market and would rather not sell you the paper as to not take the mark.

For me, these two reasons are all the more reason to get excited about these sorts of situations. I forgot a third reason: You will not be the belle of the ball at every distressed debt holiday party / cocktail hour unless you are talking about First Data (FDC) or Harrah's (HET)...

What about Advancstar? Or Graceway's 1st or 2nd lien? Or Suburban Propane's Revolver? Who is pitching those at Houlihan's Distressed Holiday Party?

I could go on like this forever. I think the position a potential distressed debt investor has to take is why are these securities mispriced? Why was Spansion's Senior Secured Floating Rate note trading less than 10 a year ago and now is over par? (I will write a post on that a little later). Where are the mis-pricings? What does the market have WRONG...That is where you should spend your time, and then go out and exploit it.