Trends Watch: Distressed Credit and Special Situations
December 02, 2021
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Cindy Chen Delano, Partner, Invictus Global Management.
What is your outlook for distressed credit and special situations opportunities investing?
There are still opportunities in distressed credit and special situations because of the unprecedented amount of private credit issuance given the difficulty of finding yield in the public markets. It should come as no surprise as the effective federal funds rate since the global financial crisis has persisted at near zero.
The low yield environment leads to a larger shift toward private credit, where credit quality and contractual protections for lenders have both deteriorated greatly. To date, leveraged finance consisting of both high yield bond issuances and leveraged loans exceed a historical level of $1 trillion. The trend toward private credit continues to accelerate given the foreseeable outlook on low public market yields.
The volume of debt issuance, combined with credit deterioration and little creditor protection, gives rise to opportunities for distressed credit investors who can be nimble and can navigate legal and process complexities quickly. Absent covenants, there is little to no runway when companies are in bankruptcy and in need of restructuring. Looser documentations and lower interest rates do not change the maturity profile of over-leveraged companies in need of restructuring, especially where they were underwritten to more aggressive growth cut short by the elongated pandemic and its aftermath.
The central banks’ Herculean efforts to rescue the public credit markets from the tsunami of distress in 2020 were highly successful but these policy actions did not eliminate defaults. Defaults are merely delayed but they are not done. There are significant maturities coming due over the next couple of years. As such, there will be good companies with bad balance sheets to restructure. It will unlikely look like 2008 but I expect a steady stream across different industries most impacted by the revenue loss caused by the pandemic.
Where do you see the greatest opportunities and why?
The greatest opportunities remain those under the radar, riddled with complexities where mispricing or the path to valuation maximization is not readily apparent. I continue to see less competition but better opportunities in high-quality but over-leveraged companies, and in smaller, “off the beaten” path private companies. These opportunities are not as crowded because you need significant experience and expertise in restructuring and bankruptcy to unlock value.
What are the greatest challenges you face and why?
It is both a challenge and a great privilege to start an investment firm. I am so grateful for the opportunity to build a firm from the ground up and to imbue the firm with values that resonate with me. It is critical to overall success that we build a talented high performing team, which means finding the right people with not just the necessary analytical skills but also “soft skills” consisting of intellectual curiosity, courage of conviction and empathy. A good investor needs to be challenged and learn from mistakes and the team dynamic needs to support a dynamic learning environment.
What keeps you up at night?
As a 100% minority and woman-owned/led firm, we recognize that our viability and existence is the result of our investors’ confidence and trust in our team. We do not take our stewardship lightly, so we are always focused on delivering good returns to reward the generosity and faith of our investors.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.