Distressed debt investors, which focus on companies on the verge of going through out-of-court restructuring or into bankruptcy protection, discussed where they should invest their money at iGlobal Forum's 4th Annual Global Distressed Debt Investing Summit in New York. Industries where the government is involved, like defense and healthcare, should provide investment opportunities.
"Anywhere the government plays a heavy hand" is a place investors can find above-average levels of distressed debt opportunities, says Andrew Milgram, managing partner and chief information officer at Marblegate Asset Management, a hedge fund manager based in Greenwich, Conn.
The sequester, which went into effect on March 1 and is expected to result in military spending cuts, means investors will probably gravitate toward investing in defense companies. Defense companies will be split into two groups - the winners and the losers - giving distressed investors an opportunity to buy debt at a discount.
The health care industry, affected by President's Obama's health care policies, is also a sector that will attract a lot of distressed debt investors.
Strategies of distressed debt investors have changed over the years, especially when it comes to loan-to-own strategies, according to experts.
Some companies used to give a company a highly leveraged loan in order to take the company over later but those days are over, says Paul Halpern, the chief information officer at private equity firm Versa Capital Management, based in Philadelphia. These days, it is more likely that a syndicate of lenders would take over a company toward the end of a loan cycle to reorganize the company's capital structure, says Michael Mezzacappa, a finance partner at law firm Schulte Roth & Zabel LLP.
Before some distressed debt investors get involved in a company, they may ask themselves if they want to end up owning the business if something does go wrong.
The few lenders who do execute a loan-to-own strategy must have full command over the due diligence process, including command of the company's capital structure, and they must have restructuring experience and be able to find ways to cooperate with other investors, Mezzacappa says.
Distressed debt investors can also gain control over a company by getting involved early and acting as the debtor-in-possession lender or plan sponsor during a company's Chapter 11 bankruptcy case, says Lenard Parkins, a partner, based in New York, at Dallas corporate law firm Haynes and Boone LLP.
You have to put the ideas in place before a restructuring period takes place, or it's too late to get involved, says Jason Friedman, a managing director as Marathon Asset Management a New York-based credit manager.