Some distressed-debt investors are buying
Activity may help stabilize markets, but most action limited to mortgages
By Alistair Barr, MarketWatch
Last update: 7:14 p.m. EDT April 3, 2008
SAN FRANCISCO (MarketWatch) -- Some distressed-debt investors have begun buying and if such activity picks up later this year it could help stabilize credit markets, experts said this week.
The strategy involves buying bonds and other securities of companies that are near or in bankruptcy, then hopefully selling later when they recover or reorganize under court protection from creditors. See story on hopes for strategy
Credit markets have been hit by a dearth of buyers in recent months as some hedge funds and other leveraged investors have been forced to sell positions to meet margin calls. Banks and brokerage firms have been particularly hard hit as dwindling activity in some markets made some holdings tougher to value, leading to billions of dollars in write-downs.
In this environment, the emergence of new buyers would be a welcome sign and could help set prices on a firmer footing.
The leveraged loan market, which finances private-equity buyouts and other acquisitions, has become particularly reliant on distressed debt investors, according to David Resnick, co-head of investment banking at Rothschild, a note restructuring and bankruptcy advisor.
"They're crucial to the liquidity of the market now and are really setting the terms," Resnick explained. "That's a very interesting dynamic that's different from previous cycles."
Dan Och, head of Och-Ziff Capital Management Group LLC, said in late February that the firm's largest hedge fund - the $20 billion OZ Master Fund - has put 10% of its money into credit strategies, up from zero before the crunch hit last summer. Most of that has been invested in senior, secured loans. See full story
"Banks are constrained and off-balance sheet conduits are no longer buying. Insurers probably won't be buying either," said Ron Greenspan, senior managing director at FTI Consulting, which advises creditors and lenders on corporate bankruptcies and re-organizations. "So the hedge funds will be the first big movers and the good news is that they have abundant capital to do it."
Mortgages
Despite a slowing economy and credit market turmoil, corporate bankruptcies have yet to increase much. That's leading some distressed debt investors to focus on trouble mortgages.
Indeed, Och said his firm's main fund has begun buying beaten-down home loans.
"We're likely to get more aggressive over the next six to 12 months," he added. "We see more opportunity in that area going forward."
Fortress Investment Group plans to raise $15 billion to $20 billion in new capital this year to pounce on opportunities created by the credit crunch.
Distressed mortgage-related securities may offer the most compelling investment opportunities, Wes Edens, chief executive of the hedge fund and private-equity firm, said.
Edens described the current crisis as "one of the great de-leveraging events of our lifetime," in which far too many assets are for sale with not enough financially strong buyers around to snap them up. See story on the 'Great Unwind'
That's left some assets trading at very cheap prices, relative to the outlook for actual credit losses, Edens said.
"Now is the time to look to buy," he said. "The gap between the market's perception and the actual risk is the widest I've ever seen."
In late March, BlackRock Inc. and hedge fund firm Highfields Capital Management unveiled new $2 billion vehicle called PennyMac that will buy distressed home loans. See full story
Citadel Investment Group, a big hedge fund firm run by Ken Griffin, bought a $3 billion portfolio of troubled mortgage-related securities for $800 million from struggling broker E-Trade Financial late last year.
Marathon Asset Management LLC, a $9 billion distressed debt hedge fund firm, rolled out a new fund to buy distressed mortgage assets in the summer.
