By Tom Hals
PHILADELPHIA, Feb 25 (Reuters) - A strengthening economy, a
world awash in money and default rates near record lows - these
are trying times for restructuring professionals and investors.
However, those who specialize in turning around distressed
companies told the Wharton Restructuring and Distressed
Investing Conference in Philadelphia on Friday that they saw
signs of change.
"The trade winds are showing more distress," said Edward
Altman, a New York University professor, who is known for his
Z-score, a formula for determining the likelihood a corporation
will file for bankruptcy. "We're beginning to see some of the
same data we saw in 2007," when the last credit boom went bust.
Many participants pointed to signs that the next crisis was
building, thanks to a record level of high-yield bond issuance
in 2012, a flurry of leveraged buyouts and a loosening of
lending standards.
Investors had their eye on a few industries, such as
defense, where structural or regulatory changes meant companies
were unlikely to service debt taken on in frothier times.
"Healthcare will blow up," said David Matlin the chief
executive officer of MatlinPatterson Global Advisers, a private
equity firm that targets distressed companies. "It's a time bomb
waiting to happen."
Shipping, the power sector, coal and natural gas industries
were also expected to continue to suffer stress.
Distressed investment funds have racked up some of the best
returns over the past decade. The funds use a variety of
strategies, including buying debt of a distressed company to
take it over. Others buy a majority of a company's bonds at
knock-down prices and then use their position to control the
restructuring with an eye on driving up the repayment on their
debt.
DIFFICULT TIMES
Many complained that, at the moment, it was difficult to
invest in the current environment. Thanks to low rates,
companies are able to refinance. The managers of investment
funds said that the debt of distressed companies was often
overpriced.
So what's a distressed investor to do?
Managers at investment funds said they were responding to
the lack of distressed opportunities by selling companies they
acquired during the 2008 and 2009 financial crisis.
Aaron Bendikson, a managing director at Oaktree Capital
Management, said his fund was spending more time in operational
restructuring, by replacing management and closing factories.
Others, such as Ted Goldthorpe, the president of Apollo
Investment Corp, said they were looking at increasingly complex
trades and types of debt, which requires investment funds to be
more sophisticated and do more analysis.
Centerbridge Partners responded to the lack of investment
opportunities by returning $500 million to investors, the firm's
managing director, Kyl Cruz, told a panel.
With few easy opportunities in the United States, investors
also said they were exploring opportunities in Europe.
Altman said during a keynote address that while aggressive
bond-buying by the European Central Bank appeared to contain the
continent's crisis, indicators of stress in the private sector
continued to worsen, particularly in France but also in Germany.
"The math suggests there has to be an opportunity," said
Matlin.
But there was general agreement that European banks were not
going to stray from their traditional unwillingness to sell
their loans at prices that would attract U.S. investors.
Billy Rahm, a senior managing director at Centerbridge
Partners, said in more than 20 years of distressed investing, he
had seen very little money made in Europe.
"The most dangerous phrase in investing is 'it will be
different this time'," Rahm said.
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