When people talk about dealflow slowing down, they're not referring to a slowdown in bankruptcy M&A," Anthony Baldo, editor of newsletters and databases at The Deal, said while moderating a panel on distressed debt at The Deal Economy 2010 conference in New York on Wednesday.
According to The Deal Pipeline, there have already been 527 deals in the bankruptcy space worth an aggregate $255 billion year to date. Last year at this time, there were 396 deals worth only $43.3 billion. In 2007, there were 289 deals worth $51 billion. This data shows that the marketplace is expanding.
This year, we've also seen:
398 "363 bankruptcy" sales worth almost $80 billion.
57 auctions involving credit bids, closed for more than $55 billion.
246 deals won by strategic buyers for a total of $45 billion.
One notable change from six months ago is there has been an uptick in prepackaged bankruptcies with a change of control element to them. One reason for this, according to Scott Winn, senior managing director at Zolfo Cooper, is that investors fear that bankruptcy will be too costly and will amount to a loss of control.
Prepackaged bankruptcies, whether they result in a debt-for-equity exchange or whether they result in an M&A transaction, shorten a company's time in Chapter 11, where adviser and counsel fees are being accrued, Winn said.
"Being in bankruptcy for four to five years can be very detrimental and risky," added Andrew Horrocks, managing director at Moelis & Co.
However, "the downside is that the underlying operating fix to a company does not occur [in a prepackaged bankruptcy], or at least it does not occur in context of restructuring," Winn concluded.
When looking for places to invest, Maria Boyazny, managing director at Siguler Guff & Co., suggested looking across five different categories."The distressed opportunity is very broad, compared to past distressed cycles, which focused on one or two areas," she said. "Looking around, spreads are at wide levels compared to historical standards, so distressed opportunities must be looked at comprehensively."
Those categories are:
Residential-mortgage-backed securities and home loan market, an $11 trillion market.
Commercial real estate and commercial debt market, a $3.5 trillion market in the U.S.
Corporate distressed debt leveraged loan market and the high-yield market, a $1.6 trillion and $1.1 trillion market, respectively, in the U.S.
Consumer debt, including student loans, auto debt and credit card debt, a $2.5 trillion market.
Municipal debt market.- Sara Behunek