crows that eat before airwaves get to fly away again will be
key to at least one bbfw restructuring while bankers bigger
factor in other two.
Vulture funds eye rich feast of distressed firms
By Dane Hamilton
NEW YORK, May 31 (Reuters) - An unprecedented wave of bankruptcy filings is bringing cheer to a different breed of investor: the vulture.
Vultures, which typically buy debt and other securities issued by companies in default or bankruptcy, feed on the misery of others. Take Hugh Lamle, president of M.D. Sass Investors Services Inc., a leading distressed debt fund: "Default rates are picking up, so happy days are here again," he said, adding with relish: "There's a pipeline of rich deals to work on."
This year has been like no other in recent memory for bankruptcies and defaults. The telecommunications sector, which alone comprised more than 50 percent of global high yield bond issuance last year, is inundating the market with distressed paper. And there are plenty of victims lurking in other industries too, such as steel, California utilities and cinemas, to name a few.
Default figures from April will explain the heightened prospects for vultures and restructuring specialists. In that month alone, issuers defaulted on payments on $11.1 billion in high yield bonds -- a record volume for a single month, according to Fitch, the investment rating service.
And total default volumes in the first four months of 2001 were $33.3 billion, more than all of last year's $27.9 billion. Fitch, like its competitor Moody's Investors Service, is bracing for 2001 to be the worst default year in a decade.
In the telecommunications sector, 24 companies have defaulted on some $18 billion in bonds since January 2000, including PSINet Inc. and Viatel Inc.. In April, Winstar Communications Inc. filed for Chapter 11 bankruptcy protection after defaulting on $1.9 billion in bonds.
The sheer volume of distressed debt is a bonanza for investors who can stomach this high-stakes market. The average price of telecom debt one month after default in the first quarter, for instance, was at 11 cents on the dollar in the first quarter, said Fitch.
"The telecom sector has reached the dubious status of having produced the biggest volume of defaults in the modern history of the high-yield market," Fitch said in a recent report.
Needless to say, many investors are shying away from telecoms altogether and looking elsewhere. But for those who hit it right, the rewards can be high. The M.D. Sass Resurgence Partners fund, which has $1.1 billion under management, said it achieved gross returns of nearly 40 percent over the last 10 years for so-called "control" investments -- or investments in which it takes an active role in the company.
Despite the implications of the name, vulture funds aren't solely interested in liquidating companies, experts say.
"Distressed debt firms do, of course, sniff out the sick and weak," said trade publication Private Equity Analyst in a recent report. "But they generally have no taste for carrion. They make their highest returns not by liquidating a company, but by nursing it back to health."
Wilbur L. Ross, a veteran distressed debt investor and chief executive of New York-based WL Ross & Co, is seeing buying opportunities among smaller leveraged buyouts that went sour. And he feels the end of the latest spate of defaults is nowhere near.
"The (Bush administration) tax cut will help some people, but the amount of wealth that was lost in the market decline is a lot bigger than will be made up by a tax cut," he warned.
Ross, who manages some $2 billion in assets, is said to be raising a fund of at least $100 million to buy distressed debt, the latest in a succession of Ross funds, according to market sources. And he's not alone.
One pension fund manager who asked to remain anonymous said he has seen at least 25 prospectuses cross his desk in recent months for funds specializing in a variety of distressed debt funds.
"There's tons of paper out there -- more supply than demand," said Brian Schinderle, senior managing director of PPM America Special Investment Funds.
The unit of British insurer Prudential Plc manages nearly $900 million in distressed securities, including high-yield bonds, bank loans and other instruments. "It's a good time to be in distressed debt," he says.
Vulture funds buy distressed debt in the hopes the issuing company will emerge from its troubles after reorganization. But it's fraught with the risk of business failure and liquidation. To allay that risk, an increasing number of investors has been taking an active role in that reorganization, or engaging in control investing.
For those like Wilbur Ross, who spent twenty years restructuring troubled companies at Rothschild & Co., such hunting skills will prove invaluable among those less tested.
Those hoping to make their fortunes from all the bubble-bursting will have a harder time than they did in the recession of the early 1990s, when many fundamentally sound but overleveraged companies defaulted on their debt.
A decade ago, vulture stars such as Leon Black and Carl Icahn were able to swoop down on healthy companies overloaded with debt and make a killing when the balance sheets were resuscitated. This time around, the crop of distressed companies includes a large number with "poor or vague business plans" which were sustained only because of the ease of obtaining credit, said John Brincko, president of Brincko Associates and noted turnaround specialist.
"Many companies are not simply troubled but spiraling into oblivion," Brincko told investors at a New York conference on distressed investing last week.
11:58 05-31-01 |
