Thursday, 24 February 2011

Don’t count distressed debt out yet


Credit spreads have tightened, the economy is recovering and companies are better able to borrow. All of that spells bad news for distressed-debt investors, and a recent survey found they are moving in droves down the capital structure to get better returns.
All of that is true, says Newton Glassman, managing partner of Catalyst Capital Group in Toronto, but he wants to point out that most of these investors are passive by nature. If paper is quoted at 70 cents and they believe it’s worth 75 cent, they buy it on the market just like a stock. Contrarily, there is still room for active investors, he said.
During the crisis, the passive types "followed the herd,” he said, and now that the herd is moving in the opposite direction, they are following suit. Plus, many of these investors realized they don’t have the skills necessary to generate returns when the market is moving sideways.
Mr. Glassman, however, is a so-called active investor and 85 per cent of his funds’ returns are “manufactured,” meaning that Catalyst has gone in and taken a hands-on role. Although he is tooting his own horn a little, he has the experience to back it up, including restructurings for Canwest and Quebecor World.
Although he is adamant that there is still money to be made in active distressed investing, he cautions that it’s not for everyone. “You have to have all the private equity skills; you have to actually be willing to get involved in dirty companies that are in trouble; and you have to understand bankruptcy and bankruptcy process,” he said.
Mr. Glassman acknowledges this style of investing isn’t in heavy demand right now, but he says it will be soon because, like any market, high-yield debt moves in cycles.



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