Natural tailwinds?

What are some of the headwinds you see facing distressed debt? 

There’s not a lot of corporate debt out there that’s trading at a price that would make it attractive for many traditional distressed debt investors. And I think that’s in part because there has been a sharp decrease in the amount of debt that’s defaulting, or that investors believe is going to get into financial difficulty and possibly restructure. 

Traditional distressed debt investing – buying debt at a price that implies you can make money by affecting a restructuring or by having the borrower resolve its financial difficulties – there’s just not a lot of [it]. That’s not a very deep market compared to where it was during the depths of the global financial crisis. It’s been a difficult environment for traditional debt investors to find attractive opportunities. 

  

That being said, you do see opportunities in distressed-for-control. 

As investment managers see companies that are looking to refinance an existing obligation, for example. Or looking to create some financial runway for their business; we’re still seeing some opportunities for investors to go in and look at businesses where there’s quite a bit of quality or potential for the business to be successful.  

The investment managers we’re talking to can still exploit those short term difficulties to acquire pretty high quality businesses that have good standalone potential. And the distressed-for-control mechanism allows them to acquire those assets or businesses at relatively low valuations with relatively low leverage coming out of the situation. 

  

Q In a recent report to MassPRIM’s board, you mentioned that you believe the outlook for mezzanine investors to be poor. Why is that? 

I think of [mezzanine] as kind of a private high yield market. Kind of a market that is relatively attractive when spreads are wider or when liquidity is lower because the lender in this case – the folks we’re working with – have opportunity to write credit at relatively attractive pricing. 

What I find challenging about it today is that it feels like – notwithstanding what happened in June and early July – the conditions have generally been pretty high liquidity; it’s a reasonably robust market for credit, generally coming in with tight spreads compared to historically. 

  

Q What about other strategies? Do you see MassPRIM engaging in direct lending moving forward? 

We would join with other investors in a vehicle that would then go out and be involved in lending. Some of the firms we work with already have those capabilities, but we’ll also talk to others about potentially working with them to be a direct lender. 

Our regular standard operating procedure has been to join with other investors in comingled funds. But I think we’re going to look at different  ways to be effective in investing in markets. And I think that we are going to look at that sort of issue of structure and be objective about it. We don’t have any preconceived, ‘It has to be one way or the other’ [notions]. 

  

Q It sounds as though you may still be on the fence with it. 

We’re interested in that and to see if there are some natural tailwinds that drive some of this natural activity where a manager could acquire assets and generate really attractive returns because of some of those catalysts. 

We have been talking about that both internally and with investment managers to see if that’s an opportunity that we ought to allocate capital to and take advantage of those tailwinds.