Distressed Debt Investing: 2010 Review and Defaults/Bankruptcies in 2010

2010 is in the record books. Last year, in a post entitled "2009 - What a Year for Distressed Debt!" I wrote:

"2009 was such a great year for distressed debt and debt investing, but the math alone makes it hard to justify another return like this. Here's to hoping its one-half, or even a quarter, or even a tenth of 2009's return..."

All the numbers for various distressed debt funds have yet to be released. I am hearing high teens returns as being a fairly common occurrence. Of course I have heard of some outliers on either side, but that is typical for the distressed debt strategy. Distressed Securities (as defined in the CSFB High Yield Index) was up 17.6% on the year. In the same index, bonds priced less than 80, were up 25.4% during the year.

In the past, we have shown you a chart with the aggregate number of issuers with bonds carrying a spread of 1000 bps over the benchmark. Here is that chart for 2010 alone:

2010 - Number of Distressed Debt Issuers

And long term...

Long Term - Number of Distressed Debt Issuers

As one can see in the first chart above, distressed really rallied in the last two months of the year as the "risk on" trade was on the go. What is also interesting about the above charts is that they only reference corporate "Traceable" bonds. According to JPM and LCD, over 10% of bank debt is trading at a price of less than $80. Seemingly, there are currently more opportunities in bank debt land relative to bonds.

In my experience through the year, and talking with various traders, analysts, and PMs at a number of shops, the two money making trades of 2010 (outside of just "Long Risk") were:

1. Long structured credit: Whether it be BB CLO liabilities, MAV notes, the 0-3% loss piece of synthetic structures (thank you mortgage insurers!), or subordinated tranches of CMBS, long distressed structured credit was a huge winner in 2010.
2. Grabbing your sack and buying post re-org equities in the summer: So many trades to name here but the ones that really jump out at you (and seemingly many people were long): LYB, LEA, CIT, SOA, SIX, Delphi (traded privately off the distressed desks), etc.

Of course, a number of vanilla distressed strategies did remarkable through the year. And that list includes things like litigation plays in Tribune and Capmarks' bonds, long stressed financials, long GM (despite the government squeezing all the juice out) and other "on-the-run" distressed like Tronox, ATP (after the oil spill), Airline credit, etc.

Which names defaulted in 2010?

EnviroSolutions Holdings (Bank Debt)

FGIC Corp (Bond)

FGIC Corp (Bank Debt)

Gateway Casino (Bank Debt)

Graceway Pharmaceuticals (Bank Debt)

Great Atlantic (Bond)

Green Valley Ranch (Bank Debt)

Indianapolois Downs (Bond)

Insight Health (Bond)

International Aluminum (Bank Debt)

Jacuzzi Brands (Bank Debt)

Local Insight (Bond)

Local Insight (Bank Debt)

Loehman's Capital (Bond)

Medical Staffing (Bank Debt)

Mega Brands (Bank Debt)

Movie Gallery (Bank Debt)

National Envelope (Bank Debt)

Natural Products (Bank Debt)

Neenah Foundry (Bond)

Neff Rental (Bond)

Neff Rental (Bank Debt)

Network Communications (Bond)

Network Communications (Bank Debt)

Oriental Trading (Bank Debt)

Penhall International (Bond)

Penton Media (Bank Debt)

Regent Broadcasting (Bank Debt)

RHI Entertainment (Bank Debt)

Spheris (Bond)

Spheris Operating (Bank Debt)

TerreStar Networks (Bond)

TerreStar Networks (Bank Debt)

Truvo USA (Bond)

Uno Restaurant (Bond)

US Concrete (Bond)

Vertis (Bank Debt)

Vertis Holdings (Bond)

White Birch (Bank Debt)

Wolverine Tube (Bond)

Workflow Management (Bank Debt)

Xerium Technologies (Bank Debt)

There's a number of names on this list that have already emerged and are trading on a when-issued or post re-org equity basis. Some have yet to file. It is indeed good hunting ground for those inclined to look at distressed debt (Local Insight should get interesting). Unfortunately, for you that love to see companies file: the outlook for default rates is to go even lower in 2011.

In my estimation, there is still a handful of opportunities to keep distressed investors busy in 2011 though definitely less than in the beginning of 2010. I think this is going to be very interesting year where returns among distressed funds will be significantly more varied than in 2010. Here's to hoping you (and I) are on the right side of the trade.