Vulture Funds Feast On Debt During Economic Slowdown
23 Jan 13:12
By Christiane Bird
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The slowing economy and recent surge in bankruptcy
filings and disappointing earnings may be bad news for most businesses, but
vulture funds, or funds that invest in distressed debt, are having a heyday.
"We've been finding a lot of attractive opportunities out there," said Martin
Whitman, manager of the $1.7 billion Third Avenue Value Fund, New York. "We're
at a peak in distressed debt now that we haven't seen in five years."
Over the past six months, Whitman has increased the distressed debt holdings
of his fund, which invests mostly in deep value companies, to 7% from 2%.
Similarly, Jeffrey Altman, co-manager of distressed investing for the $20
billion Franklin Mutual Series funds, a six-fund family, has increased all his
funds' distressed debt holdings to 8% to 10% from 5% to 7% six months ago. The
rest of the funds' holdings are in value companies and arbitrage.
"This is a very interesting time for distressed debt," he said. "And as the
economy weakens, we'll see more and more opportunities. We expect our
distressed debt holdings to continue to grow."
Distressed debt investors buy the debt of troubled companies at a fraction of
its face value in the hopes that the debt will eventually be worth more.
Distressed debt can take the form of bank loans, corporate bonds or debt to
suppliers.
Nowadays, distressed debt fund managers are seeing investment opportunities
almost everywhere they turn.
Whitman is especially interested in companies involved in asbestos-related
lawsuits that have scared off investors. One of his top holdings is USG Corp.
(USG), maker of gypsum wallboard, which, though suffering from an "asbestos
taint," also owns solid subsidiaries which offer good protection, he said.
"But that's just to name one investment area," he went on. Many movie chains,
nursing homes andassisted nursing homes have filed for Chapter 11 bankruptcy
or are considering filing, he noted. "Plenty of retailers are also going belly
up," he said.
Altman is also paying especially close attention to nursing homes, as well as
to funeral homes, troubled California utilities and large downgraded companies.
He recently purchased some of the debt of Finova Group Inc. (FNV), a commercial
lender, and Xerox Corp. (XRX).
"We're seeing a wall of distressed debt out there coming at us from every
direction," said David Winters, director of research at the Mutual Series
funds.
Niche Market
But despite the current economic climate, the number of mutual funds that
invest in distressed debt is extremely limited.
"It's a niche market," said Eric Jacobson, a senior analyst at Morningstar
Inc. "When it comes to weak companies, most mutual fund managers tend to steer
away because of the credit risks involved - which is not to say it's not a
valid place to invest."
That risk factor also explains why even those mutual funds that do invest in
distressed debt have only a small portion of their holdings in that area, he
added.
Investing in distressed debt is more common among hedge funds, private
investment funds, and more speculative institutional funds. But even among
hedge funds, the number investing in distressed debt is limited. Of the
approximately 1,500 hedge funds tracked by Managed Account Reports, only about
two dozen have investments in distressed debt.
Like mutual funds, hedge funds and private investment funds are also taking
advantage of the economy's current woes.
On Dec. 28, Patriarch Partners LCC, a New York-based fund boutique, acquired
about $1.35 billion worth of FleetBoston Financial Corp.'s (FBF) troubled
loans, for which they paid $725 million in cash and $203 million in securities.
It was the first time in more than a decade that a U.S. bank that wasn't being
shut down or sold off unloaded its loans on anoutside company,
On Jan. 8, the Denver-based Anschutz Corp., owned by financier Philip
Anschutz, and Los Angeles-based Oaktree Capital Management LCC, one of the
country's largest managers of distressed securities funds, bought some of the
bank debt of Regal Cinemas Inc. (X.RGL), the movie theater chain. The two
investment companies acquired about $350 million of Regal's $1 billion in
syndicated bank loans - meaning large corporate loans put together by a group
of lenders - with Anschutz taking about 80% and Oaktree 20%.
Turnberry Capital Management, which manages three hedge funds which invest in
distressed debt, had a "spectacular" 2000, after a mediocre 1999 and a lousy
1998, said Jeff Dobbs, a partner at the fund company. Much of that success was
due to the funds' strong exposure to the U.S. natural gas sector through both
bonds and stocks, he said.
Dobbs is currently paying especially close attention to high-yield bonds
issued by solvent companies, which he calls the 'the greatest area of growth"
in distressed debt.
However, not all industry observers view the current distressed debt market
as a promising opportunity.
'New Economic Paradigm'
"There's been a lot of press lately about prices being at 1990 levels, but
there were more good buys in the early '90s than there are today," said Charles
Gradante, president and chief investment strategist for the Hennessee Hedge
Fund Advisory Group of New York. "I think we're in a new economic paradigm
where many of the major players now in trouble - J.C. Penney Co. (JCP), Xerox -
may not survive" to pay back their debts.
Much of the reason for that, he went on, is the Internet, which has had an
enormous impact on everything from retailers to car dealerships which now sell
on the Web.
Eugene Major, chief investment officer for Dunbar Capital Management LLC,
said he's "not convinced that there's tremendous opportunity there" although he
has seen considerably more activity inthe distressed debt market.
"The results of most funds seems to be mixed," Major said. "Smart people are
being cautious."
Many of the high-yield issuances are of dubious quality, he said, and with
the economy slowing and an increase in default rates, the distressed debt
market could suffer.
-By Christiane Bird, Dow Jones Newswires; 201-938-2046;
christiane.bird@dowjones.com
(END) DOW JONES NEWS 01-23-01
01:12 PM |
