It’s Awful, Except for Distressed Investors Readying to Pounce
(Bloomberg) -- Distressed-debt investors may be getting closer to the moment they’ve been waiting for: an old-fashioned market meltdown.
Coronavirus concerns have sent bonds of the lowest-rated issuers plunging over the past week, amid the kind of panic selling that creates opportunities for investors who focus on troubled companies. They’ve been raising new funds and stockpiling record amounts of cash for years -- even as the supply of distressed debt bumped along at skimpy levels -- to pursue opportunities that have yet to emerge.
“The coronavirus pulled forward what we were expecting by about six months; the underlying weakness was already there,” said Peter Cecchini, chief market strategist at Cantor Fitzgerald LP. “Later in the year, I think it will get more interesting. I think it comes in a big way.”
Energy companies, already the biggest source of distressed bonds, were among the hardest this week, with new lows on issuers ranging from Chesapeake Energy Corp. to Whiting Petroleum Corp. Oil fell to its lowest level since December 2018 and energy bonds have continued to under-perform most high-yield sectors.
Other industries weren’t spared, with yields driven past 20% on some bonds from retailer J.C. Penney Co., container-maker Tupperware Brands Corp. and mall operator CBL & Associates Properties Inc.
“Markets had been ripe for a correction for some time,” said Ben Briggs, a high-yield and distressed credit analyst with INTL FCStone Inc. “Once the dust settles, there will likely be buying opportunities to be had.”
The supply of distressed debt has been mostly stuck around $100 billion since early 2017, leaving investors, bankers and lawyers who specialize in the field scrounging for what little business was available. The day of reckoning has been put off because central banks around the world have made cheap money so widespread, which enabled financially weak companies to put off defaults.
U.S. corporate high-yield bond funds reported outflows of $4.2 billion during the week ended Feb. 26, the largest outflow since October 2018, according to Refinitiv Lipper data. Risk premiums on derivatives insuring against high-yield defaults widened the most this week since September 2011, after S&P Global Ratings cut the U.S. AAA credit rating.
Managers at GSO Capital Partners are looking at their existing investments and companies they like that are already in their portfolio, to see what opportunities may exist, according to Dan Oneglia, co-head of distressed investing at the credit arm of Blackstone Group Inc. The energy sector is already distressed, and certain companies that were already weak are getting weaker, Oneglia said.
The volatility in the markets this week “does make people stand up and pay attention,” he said in an interview. “It’s too early and hard to say if this is short-term or if there’s something more going on.”
Distressed opportunities will be limited to sectors that are directly affected, like the airline and cruise industries, said Kenneth Buckfire, co-founder of investment bank Miller Buckfire, which is now owned by Stifel Financial. It will be four or five years before the “vast majority” of potentially troubled debt comes due, he said. That means any impact from coronavirus will be limited, he said.
“We’re probably entering a market period with increased volatility, so risk premiums should go up,” he said. “It doesn’t mean the market is going to close.”
But market losses, especially if fueled by leverage, could create forced sellers, and deter new buyers from stepping in given the unknown impact of a potential economic slowdown, said Phil Brendel, the distressed-debt analyst at Bloomberg Intelligence.
“Distressed spikes usually occur due to sharp selling in a vacuum of bids, prompted by great uncertainty,” he said. “We have those elements now, so an acceleration of distressed supply seems likely.”
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