Secondary distressed investors spy new angles

Still waiting for market prices to head in the direction they desire -- that is, downwards -- distressed-asset investors enlightened the audience at the AsianInvestor/FinanceAsia Distressed and Troubled Asset Investing Summit being held in Tokyo, in a panel moderated by Pacific Harbor chief executive Warren Allderige.

The high-yield sector globally has certainly grown to a substantial size, with the leveraged-loan and high-yield markets estimated at $1.5 trillion and $1 trillion respectively. Compared to the situation during the Asian crisis 10 years ago, the space looks crowded. "There's now a pocket of risk capital that didn't exist before," says Tod Macri, a managing director in Deutsche Bank's strategic investment group in Hong Kong.

Another new feature to have emerged since 1998 is the proliferation of credit default swaps, which have provided special-situation funds with a useful way of obtaining exposure.

"Credit default swaps don't get you a seat at the workout table though," said Steve Moyer, portfolio manager at Pimco. "And they make it harder to figure out individual motivations for restructurings. Usually the creditors would want something out of court, but someone long CDSs may want a bankruptcy because of the implications it brings for that position."

The sellers are also different this time around. Instead of pension funds and savings-and-loans entities, which had in the past sold off distressed positions, it is now a more sophisticated market. Potential sellers are structured-product buyers and hedge funds, which might have been selling for liquidity reasons or to reduce excess leverage.

As mentioned, much to the chagrin of distressed managers, prices are still too high to titillate them.

"Once prices reach the high 60s and 70s [in terms of cents to the dollar], people start thinking about a par-value take-out," says Macri. "But primary and secondary interests can still be aligned. If prices are still at 30 or 50 cents, alignment interests might take a different shape." 

With no shortage of potential bidders, distressed players must cross their fingers that government stimulus euphoria fizzles out, because no fund wants to stay under-invested nor, at the other extreme, miss out on a debt landslide falling at their feet after they blinked and bought at today's prices.