By Chelsea Emery - Analysis
NEW YORK (Reuters) - Some industries that are most desperate for investor cash to survive, including media and retail, are least likely to get it, and that will lead to a painful shakeout for the weakest companies this year and next.
Investors specializing in buying debt or assets of troubled companies say they’re raising cash and are ready to invest once the economy has stabilized. But they are focusing carefully on industries with clear growth prospects or hard assets that can be liquidated if necessary.
That’s a change from a year ago, when credit was easy to obtain, and investors took chances on a range of industries, even unprofitable ones. No more, said investors and restructuring advisers.
“There’s plenty of capital,” said Michael Bruder, head of Macquarie Capital Funding LP’s MBLCF.UL New York restructuring practice. “It’s not that there’s a dearth of capital. It’s that people will only invest in a business that has a sound business plan.”
That’s likely to leave some struggling industries out in the cold, while others, like financial services, real estate and industrial companies can be saved by investor capital.
“Distressed investors are more suspect of opportunities in the retail and media sectors because of the uncertainty associated with returns on new investments, given the current conditions of these industries,” said Randall Eisenberg, senior managing director at restructuring advisor FTI Consulting.
Companies that don’t find investors are at risk for shutting down entirely. “In my 35 years in the business, I’ve never seen anything like this,” said Bruce Zirinsky, co-chair of the business reorganization and bankruptcy practice group at law firm Greenberg Traurig LLP, speaking at an Institutional Investor distressed investing conference on February 23. “It’s one of the scariest times I can recall.”
Data on distressed investing is difficult to obtain since hedge funds are secretive about how they allocate their cash within various funds. But two-thirds of respondents in a Debtwire survey said they plan to shift dollars to distressed debt this year. Debtwire, which publishes distressed debt forecasts, surveyed more than 100 private equity and hedge fund professionals in December.
Private equity firm Apollo Management LP APOLO.UL founder Leon Black, for one, has said there will be “huge opportunities” in distressed investing, and in December it raised $14.8 billion for its latest fund, Fund VII.
The firm is spending about 60 percent of its time “playing defense” by supporting previous investments, and about 40 percent of its time examining credit and distressed investment opportunities, Black said.
David Shapiro, co-founder of distressed investing specialists KPS Capital Partners, said at the Wharton Restructuring Conference in Philadelphia last week that his firm plans to invest “more dollars in the next 24-month period than we have in our prior 12 years.”
Firms surveyed by Debtwire said financial services offered the best opportunity for distressed investors since banks and other financial companies offer much needed and profitable services.
Once money-losing loans are removed from their balance sheets, they will be good investments again, said Macquarie’s Bruder.
Michael Fineman, senior research analyst for Third Avenue Management said his firm was taking stakes in trucking and shipping companies that stand to benefit once the economy turns around. Third Avenue has a distressed fund called Special Situations. Fineman declined to say how large the fund was, saying only that it holds 50 percent in cash and is willing to take chances on companies with strong potential cash flow.
Real estate also offers great opportunities for investors with time and patience, he said.
But Fineman has turned his back on retailers that don’t own their own real estate. He is also shying away from media companies, saying the upheaval caused as the Internet lures away viewers and the resultant decline in advertising revenues made the group too risky.
Revenue for broadcasters is expected to tumble as much as 20 percent over the first half of this year, putting many at risk of breaching loan covenants, and some may run out of liquidity, according to Neil Begley, a senior vice president for Moody’s Investors Service who tracks the broadcast industry.
The media and entertainment sector topped Standard & Poor’s list of the top distressed industries in January, with almost $60 billion in distressed debt. Bonds are considered distressed when their yields are at least 10 percentage points higher than U.S. Treasuries.
“We’re seeing unprecedented levels of default,” said Fineman. “We’re still in the early innings. No one is going to waste their time on anything they’re unsure of in this cycle. They’ll pass and move on.”
Additional reporting by Emily Chasan editing by Jeffrey Benkoe