What are Distressed Debt Funds Doing in 2020?
If you're looking at doing restructuring investment banking interviews, you're likely looking at one day moving from the sell-side (a restructuring investment bank) to the buy-side (a distressed debt hedge fund, private equity firm, or distressed lender).
If you're looking for a little video break from doing your interview prep, you'll get a lot of value out of this little Bloomberg video featuring Bruce Richards of Marathon Asset Management (a large distressed hedge fund).
The whole thing is worth a listen, but go to 2:11 where he begins talking about “our playbook”.
He continues as follows, “...Our playbook is to buy the performing assets at deeply distressed prices. To buy senior in the capital structure; what we consider to be above the fulcrum for [those] companies we believe that have more risk so we’re in the safe part of the capital structure. So we’ll have a par recovery at very deep discounted prices.”
If you've gone through Restructuring Interviews, it's worth taking a step back and trying to explain to yourself what Marathon's strategy is. Can you explain it simply without thinking much about it?
What Bruce is saying here – in layman terms – is that they’re interested in going in and buying securities in the secondary market (i.e. not participating in new issuance) quite high up in the capital structure. So likely focusing on term loans (TLA, TLB, etc.) or senior secured notes. Their strategy is to buy TLs and senior secured notes at distressed prices only if they believe that they will get a par recovery if there should be a Chapter 11 (because they will not be an impaired class). A fulcrum security is the first security in the capital structure that’s impaired (not made whole) and the impaired classes are those who are able to vote in a Plan of Reorganization (POR).
What Bruce is articulating is not necessarily the strategy that many distressed funds listed would be interested in currently. That doesn’t make it a bad strategy at all, just different. For example, Elliott has a more active bend (see this New Yorker article, which isn't entirely fair, but is worth reading anyway). So, they are likely looking primarily at opportunities to buy in what they consider to be impaired classes so in the event of a Chapter 11 they then have power to dictate more of what the company will look like upon exit from Chapter 11 (perhaps by developing a blocking position, so they can block the Plan of Reorganization and generally have more influence over the emergence of the company).
Take care as always and feel free to ask questions.