There will be significant distressed debt investing opportunities in 2012 for those investors with research insights, restructuring experience and market timing successes. Distressed debt investors had slim pickings in 2011 and even invested into equities to chase returns. Already, in 2012 we have a number of large Chapter 11 Bankruptcies such as AMR Corporation, Ambac Financial Group, Eastman Kodak Co., Hostess Brands Inc., MF Global Holdings, and NewPage Group Inc. This is our ideal target market; large, valuable and liquid companies in Chapter 11 Bankruptcy.
In the current deleveraging credit environment companies will find it difficult to service debt levels, profits will fall. These companies will need to refiance an extreme amount of debt. The large number of leveraged buyouts created by cheap credit with inflated valuations and too much debt will send many of these companies into the protection of Chapter 11 Bankruptcy to restructure. The debt of some of these companies was issued based on aggressive corporate earnings assumptions and low borrowing costs and may find money to refiance hard to get on favorable terms. Two years ago banks couldn't take hits on leveraged loans, so they amended and extended. Banks are more conservative now with a cushion of capital and won't be lending which will make it difficult for mid sized and large companies to refinance millions and millions of leveraged loans that will be coming due.
Two Points Of View On Europe
European market turmoil is a reminder that the long term deleveraging process underway will continue. This shift will continue to create opportunities for distressed debt investors as companies and nations struggle with highly leveraged balance sheets.
The hard landing argument suggests that Europe will be forced into more deleveraging and austerity, destroying spending.
The soft landing argument suggests that the Europeans will prime the pump and flood the markets with liquidity, preventing serious demand and deflation destruction.
Buying up Debt
Vulture investors will continue swooping in on corporate carcasses, buying up debt below 25 cents on the dollar, restructure the business then sell it later for a tidy profit. Private equity will continue to target both large and mid sized distressed names such as NewPage Group and AMR Corporation.
Due to excess leverage, investors should expect lower recovery rates in the bottom tranches of the capital structure of companies exiting bankruptcy.
Distressed debt investing is a matter of opportunity and execution. Selecting companies that can reward investors with double digit returns is possibly but will require investing insight. Judgement decisions will have to be made about survivability, future prospects and the value of the target investment.
Stephen P. Vlahos