Distressed Debt Market Outlook 2011
Distressed debt investors looking for double digit returns in 2011 will need to be nimble and diversified. Distressed debt investors have and will continue to take more aggressive risk positions to chase returns.
Moody's expects the default rate on speculative grade debt to be between 3 % and 4 % this year, compared to 3.3 % in 2010, and 14.1 % in 2009. With that being said, there aren't as many big distressed names out there which is forcing investors to either move down the capital structure or focus on smaller less liquid companies, or equities. The distressed debt assets that investors in 2011 will choose will be up and down the capital structure, from senior secured leveraged loans to unsecured debt. Plenty of liquidity and low default rates have created an environment of high valuations and tough competition for product. Companies with over leveraged balance sheets will eventually be forced to restructure and correct. Fulcrum securities will continue to be in the senior parts of the capital structure. Recovery rates for unsecured and subordinated debt will be under pressure, due to the increase in leverage through the senior parts of the capital structure.
A robust high yield leveraged loan market has allowed companies to refinance problems into the future. Willingness to amend and extend by banks has allowed many companies to push out maturities and avoid default in the near term. Loan refinancing was the biggest use of high yield financing in 2010. We expect for this issuance to slow as interest rates begin to rise and end inexpensive high yield credit. Companies will begin to discover that they cannot overcome an over leveraged balance sheet by issuing new debt to replace old debt.
Distressed debt investing is a matter of opportunity and execution. Right now the pickings are slim for distressed debt investing ideas. Selecting companies that can reward distressed debt investors with double digit returns will be difficult in 2011 and will require investing insight. Judgement decisions will have to be made about the survivability, future prospects and value of the target investments. Often financial information is in short supply or of questionable validity.
There will be significant distressed debt investment opportunities in 2011 for those investors with research insights, restructuring experience and market timing successes.
Stephen P. Vlahos
Performance Plus Advisors, Inc.
727-441-1305 ext 201