Phil grandie said to hold off on the homeys - he was looking at key because they used all thier set aside money to handle defaults to make thier numbers look better
iht.com
SATURDAY, AUGUST 20, 2005
NEW YORK Bad news is good news for Marc Lasry, one of the largest investors in the debt of bankrupt companies.
The strong economy has not been cooperating, leaving bad news in short supply. Indeed, the number of bankrupt companies has been dwindling, as low interest rates make it easy for even weak businesses to obtain cheap financing. But Lasry and like-minded investors are betting that their day is not too far off.
"Distress is around the corner," said Lasry, who oversees Avenue Capital Group, which manages more than $7 billion invested in the United States, Europe and Asia. He ticks off the potential catalysts for trouble: rising interest rates and oil prices; a mounting federal deficit and a low dollar; and a real estate bubble ready to burst.
Perhaps the biggest factor is the risk assumed by banks and others in lending to less-established and highly indebted companies. Some 7 percent of all junk bonds issued last year were rated triple-C by Standard & Poor's, the highest percentage ever, according to Credit Suisse First Boston. This year, it promises to be even higher.
"When I look at all that, my view is that logic will win out," Lasry said. He has raised a $1.4 billion fund focused on distressed debt of U.S. companies, although he has up to a year before he must start investing the cash.
The question hanging over that bet is timing. When will boom turn to bust, leaving ripe pickings for Lasry and other vulture investors? He thinks corporate defaults will rise sharply over the next 12 months, although other investors say it could take longer.
Corporate defaults dropped to just 0.44 percent of all outstanding junk bonds in the year ended in June, according to Credit Suisse First Boston. That is down from a peak of 15.4 percent in 2002.
"Now is not a good time to invest in distressed securities," said Barry Colvin, president of Tremont Capital, which allocates money to hedge funds, and has substantially reduced its allocation in the area.
Still, Colvin said, Lasry has had good timing before.
After the debt crisis of the late 1990s in Asia, Lasry quickly invested in the region, where he has since made millions. In 2004, an investment in Thai Oil rose some 25 percent as energy prices soared.
Largely on the back of his gains in Asia, Lasry personally earned an estimated $125 million last year, according to a ranking of the best-paid hedge fund managers by Alpha, a trade publication. He now has a staff of 20 in Beijing and offices in six other Asian cities.
Within the last year, Chinese banks have accelerated sales of their bad loans as the government has become more receptive to foreign investors, he said. With more than $500 billion of such loans on the banks' books, Lasry said, "it's a massive opportunity."
Lasry also started a European vulture fund last year, largely to take advantage of new laws that will require banks in the region to increase their capital levels. The laws are prodding undercapitalized banks to clean up their books, particularly in Germany, where banks are still weighed down with loans tied to the reconstruction of the former East Germany, he said.
"Banks are already starting to sell," Lasry said.
But it has been slim pickings for vulture investors on the other side of the Atlantic.
After doing well a few years ago by investing in the debt of large, well-known companies like MCI, which emerged from bankruptcy in April 2004, Avenue's funds in the United States have lately turned to the debt of smaller businesses that still have a tough time raising capital. As an example, Lasry cites Rampage, a clothing company that had just $51 million in revenue last year.
The combination of fewer corporate defaults and a rush of money into hedge funds specializing in bankruptcies has meant lower returns for Lasry and other investors. Through July, one of Lasry's hedge funds focused on domestic debt is up just over 2 percent - slightly behind a 2.88 percent return for the Standard & Poor's 500-stock index - compared with a return of about 9 percent for 2004 and 27 percent for 2003, according to a person briefed on the funds' results.
But once bankruptcies pick up, Lasry said, he expects returns to rebound to around 20 percent. His investors are also optimistic.
"The distressed-debt market will crack sometime soon, and we want to be ready," said Panda Hershey, a portfolio manager with California Public Employees' Retirement System, or Calpers, which invests with Avenue.
Lasry has accumulated one of the largest pools of capital devoted to bankruptcy investing. And he has proved as nimble in his career moves as he has as an investor. A lawyer by training, he was an early investor in bankruptcies, managing a pool of capital for Robert Bass in the late 1980s.
After making connections through his investor activities, Lasry saw an opportunity to set up a brokerage firm specializing in two obscure niches in which he had an edge: bank debt and claims held by vendors and suppliers to bankrupt companies.
By the late 1990s, anticipating a surge in bankruptcies and a demand for funds specializing in the business, Lasry shifted his focus back to investing, setting up Avenue.
Today, he and his sister, Sonia Gardner, run a team of 150 employees on three continents.
Lasry seems unperturbed by the stubbornly low rate of bankruptcies in the United States.
"Sooner or later, reality will prevail," he said. "The cycle will turn, and we'll be ready."
NEW YORK Bad news is good news for Marc Lasry, one of the largest investors in the debt of bankrupt companies.
Now a long time ago shades used to make money buying tax liens - but then the big guys like this guy got in and those 18% returns sometimes went down to 1% - all this guys capital waiting on those vulture bargains - hehe. |
