The Great Comeback of Distressed Investing
I recently noted [Covenant analysis isn’t all about the docs] that one of the first questions we teach students in the Foundations chapter of our Leveraged Finance Covenant Training to ask is: What are the goals of the other parties in the deal. Recent cautionary tales from the U.S. of “creditor on creditor violence” put this question in a slightly different light.
In Credit flux’s recently published Credit Rendezvous Q1 2023,Ray Costa, Managing Director of Benefit Street Partners, flags a key question for investors in the current market: “Before even worrying about who the sponsor is, you have to consider who is in your own class of debt.”
This makes distressed investing a “multi-dimensional” endeavour, with fund managers tasked with determining who the other debt investors are in the capital structure, and how widely held the debt is – understanding the motivations of those lenders is a critical element of any analysis.
But that’s just the first step – the next question is whether the covenants can accommodate those motivations. Debt and liens capacity is a critical aspect of the analysis, which we cover in chapter three of our course. There students learn how to analyse for potential priming risk in each of these covenants.
I wrote last week [Sleepless Nights Over Unrestricted Subs?] that Unrestricted Subsidiary capacity has increased significantly over the past decade, widening liability management opportunities and providing scope for savvy borrowers to entice opportunistic lenders into transactions that could be detrimental to incumbent investors. We cover this in the Restricted Payments & Asset Sales chapter.
Distressed opportunities may be making a comeback – good news for some, and a potentially risky development for others. Becoming equipped with the knowledge to analyse covenants has become an indispensable skill for all.
By Sabrina Fox - FLT Founder