Anyone looking at distressed debt funds

[accountant23]

Seems like a good place to be going forward. Does anyone have any insight to the type of skillsets they look for? Mostly banking I would guess.

 

[BosyBillups]

Distressed debt requires more "legal" analysis, as in, bankruptcy order, covenants, current creditor analysis.

But w/ securities like mortgages, probably experience in that market is the best skillset.

 

[SeanC]

i find distressed debt and special situatiosn to be the most interesting areas of research but i really dont know much about them.

maybe FIanalyst can help shed soem light.

 

[wessun]

Investing in distressed assets is very lucrative, especially in a down turn. A good understanding of the bankruptcy process, and emergence options, the players on the debtor and creditor commitees, capital hierachy, asset valuations- especially liquidation valuations, and tax issues with NOL's is much needed in the vulture space.

Also a good understanding of various fixed asset classes is helpful as that may be the only thing left for secured creditors during a liquidation.

A good read is "Distressed debt analysis". I think by some guy called Stephen Moyer, a top trader at Tennenbaum Capital Capital authored that book.

 

[cfa2grunt]

If you're investing in distressed debt funds, it's most important to get up to speed on the fund managers and how they pick their credits, etc. (after doing initial work that wessun suggests).

Distressed mortgages are a very difficult sector for an outsider to understand, and even the experts have a hard job in selecting the "good" distressed credits. Gain an understanding of the structures (priority of payments, triggers, prepayments, defaults) so that you can evaluate fund managers accordingly. Every deal is different because they all have different mixes of mortgage products (2/28, 3/27, 30-year fixed, some with/without prepayment penalties) and all of these loan types perform VERY differently. If you decide to invest in this sector, make sure you have a lot of faith in the managers because you will not be able to evaluate the securities very well without a lot of knowledge and access to certain resources.

 

[FIAnalyst]

I wish I could add a little more about distressed investing, but my experience has been limited. One of our coverage companies went distressed, and it was definitely a learning experience: It required a complete tear down of the company, which had some regulated operating subsidiaries.

The two biggest things are: What are your sources/uses of cash, and how reliable are they? And what are you assets worth in a sale scenario.

We worked a cash burn analysis into our model and ran several stressed scenarios. For the liquidation analysis, we spent a lot of time on the phone with other desks in the bank trying to nail down values for particular asset classes and what would happen if they were thrown out onto the market. The biggest problem there was getting more color on what the particular asset and liability break down was between the regulated entities, that are structurally senior, and the holding company. It was easy to get a top line number for both, but the sub-categories provided no color whatsoever. Not sure if I'm getting my point across, so maybe an example would help: Company A has $100 mln in trading securities; $50 mln are large cap equities and $50 mln are equity tranche CDO investments. They are held in Units A, B and C, with each unit holding 33% of the total securities. However, the distribution is not even and they provide little color that will tell you which unit holds more CDO than equity, and vice-versa.

It becomes a lot of educated guess work at that point.

I really haven't had enough coffee today, so I am probably rambling. The bottom line is, that you are forced to know every little detail about the company and your model needs to take into account a lot of factors that a normal earnings model will not. Overall, I think you would benefit greatly from having a lawyer on the team, particularly when it comes to how the balance sheet will be treated in the case of bankruptcy protection. I think I learned a great deal from the experience, and I think it was probably the most interesting experience I have had on the desk.


*this is for distressed credit investing, I have no clue as to what investing in distressed asset classes such as MBS entails*



Edited 1 time(s). Last edit at Tuesday, October 16, 2007 at 09:35AM by FIAnalyst.

 

[ValueAddict]

I'll add my 2 cents regarding investing in Distressed Debt Funds at this point in time...

Basically everyone and their mother is trying to raise add-on capital or special funds - SPV's, delayed draw committment funds, self-liquidating PE-type funds, vehicles to take advantage of hung bridge loans (whose spreads have contracted prior to most funds even being able to raise capital)...

These vehicles are basically illiquid and most manager's won't provide interim pricing due to obvious reasons of the mere impossibility of trying to cut an NAV based upon bad data or even worse - models.

I'd be cautious and only invest with manager's with a good track record purchasing distressed assets. Some hedge fund manager's are jumping on the band-wagon and getting involved in the asset class when it's not their "bread and butter" business line so to speak.

If you're interviewing you can talk to these points (minus the negativity aspect...)