The Wall Street Journal-20080115-Traders See Opportunities for -Distressed- Investments- Survey Also Shows Investors Expect Recession in -08
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Traders See Opportunities for 'Distressed' Investments; Survey Also Shows Investors Expect Recession in '08
Hedge-fund managers and other traders in the credit markets plan to allocate more funds to "distressed" investments this year, and many see the U.S. slipping into a recession in 2008, according to a survey to be released today.
Despite this, most investors don't expect corporate defaults to rise as sharply as what credit-rating firms recently forecast. While Moody's Investors Service expects 5.3% of less than investment grade- rated corporations to default on their debt by the end of this year from less than 1% currently, the vast majority of investors surveyed don't see the default rate topping 4% this year.
The survey of 101 money managers and traders was conducted late last year by Debtwire, a distressed-debt news service, and was commissioned by Bingham McCutchen LLP, FTI Consulting and Macquarie Securities (USA). Some 56% of those polled said they expect a recession this year.
Distressed-debt investors, which typically focus on companies that are having problems and whose debt is trading at deeply discounted levels, can usually be counted on to take a bearish view.
But going into 2008, "there's now a reality behind their views that the markets are going to change," says DeLain Gray, corporate finance practice leader at FTI Consulting, a business advisory firm. "The markets have realized that confidence has been shaken, and the excess availability of capital is no longer there."
The subprime mortgage downturn that began in early 2007 led to a full-blown credit crunch during the second half of last year that constricted the corporate debt markets. The tight conditions will make it harder for companies to refinance or raise new debt.
A slowing economy will also put pressure on debt-heavy companies, but because most firms that went private in leveraged buyouts in the past two years are still relatively healthy, many investors think defaults may not spike until 2009.
The Debtwire survey found distressed-debt investors are eyeing opportunities in the financial-services, construction and retail sectors, areas that will be hurt by a broad economic slowdown. They are also looking to play a bigger role in the market for new LBO debt, where investment banks that need to offload a backlog of deals may try to sell securities at discounts.
That could be good news for bankers underwriting a large debt package for the buyout of Harrah's Entertainment Inc. They plan to begin marketing a $7.25 billion loan to investors today and a portion of another $5.3 billion in junk bonds tomorrow, according to people familiar with the deal.
Meanwhile, Treasurys prices gained modestly. A rebound in stocks took the steam out of an early bond rally. The benchmark 10-year note rose 4/32 point, or $1.25 per $1,000 face value, to push down the yield to 3.793% from 3.808%.
AUCTION RESULTS
Here are the results of yesterday's Treasury auctions. All bids are
awarded at a single price at the market-clearing yield. Rates are determined
by the difference between that price and the face value.
13-WEEK BILLS
Applications .................................. $51,386,326,000
Accepted bids ................................. $20,000,076,000
Accepted noncompetitively ..................... $1,595,406,000
Foreign noncompetitively ...................... $50,000,000
Auction price (rate) .......................... 99.221444(3.080%)
Coupon equivalent ............................. 3.156%
Bids at market-clearing yld accepted .......... 47.90%
Cusip number .................................. 912795D81
The bills are dated Jan. 17, 2008, and mature April 17, 2008.
26-WEEK BILLS
Applications .................................. $52,075,002,000
Accepted bids ................................. $18,000,137,000
Accepted noncompetitively ..................... $1,529,657,000
Foreign noncompetitively ...................... $325,000,000
Auction price (rate) .......................... 98.508611(2.950%)
Coupon equivalent ............................. 3.045%
Bids at market-clearing yld accepted .......... 48.58%
Cusip number .................................. 912795F55
The bills are dated Jan. 17, 2008, and mature July 17, 2008.
