Look at this interesting article. It suggests that the bottom has already occurred, and there is a lot of money to be made from the debt securities of highly leveraged energy companies.
April 8, 1999
Heard on the Street
With Dow at 10000, Vultures
Still Find Places to Scavenge
By RANDALL SMITH
Staff Reporter of THE WALL STREET JOURNAL
The economy is booming. The Dow Jones Industrial Average Wednesday
hit another record. So what is left to do for vulture investors and workout
artists while everything is hunky-dory?
The answer is: Not everything is hunky-dory. And so Leon Black and
Wilbur Ross, two of Wall Street's best-known specialists in scooping up
beaten-down securities, are busying themselves in distressed corners of
other markets.
Mr. Black has just committed funds to a
real-estate investment trust joint venture, ARCap,
that will buy battered issues of commercial
mortgage-backed securities, a sector still reeling
from the after-effects of the bond-market
meltdown triggered last summer by Russia's
default.
Mr. Black's Apollo investment organization views
this as "an interesting opportunistic time," says
Richard Mack, an Apollo principal. Bruce Harting,
who follows mortgage and specialty-finance
companies at Lehman Brothers, says the
fundamentals of the real estate underlying most CMBS securities remain
sound, and that prices on the securities "will eventually come back."
If that doesn't happen, Mr. Mack says, Apollo is "prepared to hold this
stuff to maturity." One way or another, Apollo believes "equity-like
returns" topping 20% are possible.
Meanwhile, funds run by Mr. Ross have been buying distressed junk
bonds issued by energy companies that have been hit by last year's big
downturn in oil prices. The Rothschild investment banker has been
working on a proposed restructuring of $125 million in debt issued by
Anker Coal Group.
Mr. Black is a former mergers specialist who gained renown in the 1980s
at Drexel Burnham Lambert, the junk-bond house that later collapsed, and
then carved out a second career as a vulture investor in the 1990s. Many
of his biggest plays involved junk bonds issued by companies that fell on
hard times.
His Apollo Real Estate Advisors has just joined forces with a partner in
Dallas to create ARCap, which has been initially capitalized with $125
million.
The market for packages of commercial mortgage-backed securities
mushroomed in the 1990s from annual issuance of $14 billion in 1992 to
$78.3 billion in 1998, according to Donaldson, Lufkin & Jenrette. Such
CMBS securities were assembled after slicing and dicing the underlying
mortgages to create securities that ranged in risk from investment grade
down to the most speculative junk.
As the market evolved, some of the biggest buyers of such securities
became real-estate investment trusts, many of which tried to boost their
returns by taking bigger positions with borrowed funds.
But the Russian debt crisis, followed by the near-collapse of Long-Term
Capital Management -- the hedge fund that held huge positions in all types
of risky bonds including CMBS issues -- touched off a bout of relentless
forced selling by mortgage REITs. One of the most prominent, Criimi
Mae, sought bankruptcy-law protection from creditors last October.
With few bids available, yields on the riskiest types of nonrated CMBS
securities rose from levels of 16% to 18% at the market's buoyant peak to
a range as high as 30%. The market has yet to recover; the same securities
are yielding a still-lofty 25% to 27%.
Larry Duggins, president of the new ARCap venture, said the "tremendous
dislocation" in the market has created "a tremendous buying opportunity."
Mr. Duggins's Dallas-based firm REMICap is Apollo Real Estate
Advisors' partner in ARCap, which is also being funded by five institutional
investors.
At Rothschild, Mr. Ross, who became a prominent workout negotiator in
the early 1990s, has himself become a vulture investor -- like Mr. Black, in
a way, but on a smaller scale. Rothschild is raising what it hopes will be a
roughly $500 million-asset Asian Recovery Fund to invest in distressed
securities in Asia.
Meanwhile, over in the oil patch, another Rothschild fund has been buying
distressed bonds issued by energy companies such as Forcenergy, Gothic
Energy, Hurricane Hydrocarbons, KCS Energy, National Energy,
Northern Offshore, Southwest Royalties, and Transamerican Energy.
As a holder of bonds issued by Anker Coal, Rothschild has been working
with the Morgantown, W. Va., company on a proposal to restructure
about $125 million of bonds in a way that would give the company some
breathing room and give Rothschild an equity stake.
Mr. Ross, who estimates that $10 billion of junk bonds were issued
around 1997 by energy companies before oil prices fell, believes that
similar debt-restructuring deals could boost the prices of some of the other
distressed energy bonds as well.
"I think this is an unparalleled opportunity," Mr. Ross said, to take
advantage of the discounts in the junk-bond prices created by the oil-price
drop. |
