I had never seen pricing as attractive as we saw last fall and this winter for performing loans – the type of distressed asset we prefer.  We acquired debt with an 80% to 95% probability of yielding 25% or more to maturity or to an event [e.g., the bond being called].  In the 5% to 20% chance that we were wrong, and there would be a money default, we would still be okay in a reorganization.  Pricing like that was never available before.

Another big change occurred in recent years in small bankruptcy cases – those less than $300 million – where administrative expenses became so large that companies were forced to do a prepackaged bankruptcy or its equivalent.  In the old days, much could be done through a conventional Chapter 11 even for smaller enterprises.

For companies in reorganization, whether in court or out of court, it has never been more expensive.  Companies are getting ripped off by professionals – lawyers and financial advisors – and by management like never before.  For distressed investors like us, this environment has created great opportunities to make capital infusions directly into poorly financed businesses.  We are very active in this area right now.

 

We really haven’t had to do much on the macroeconomic front.  If you are an adequately secured creditor, the general economic environment doesn’t figure in too much.  Macroeconomics becomes more important as you go down the capital structure.  It is crucial in most common stock investing. 

The macroeconomic environment is the worst I have seen in my adult lifetime, which is why we have tended to invest in more senior securities than would otherwise be the case.

We lost the unbelievable irrational pricing that existed in December of 2008, which was also when my book was finished.  At that time, it was very easy to see exceptional opportunities in performing loans, such as those identified in the book: GMAC, Forest City, and MBIA, for example.  These bonds offered yields to maturity or to an event of 30% or more.  Now, when we buy comparable securities, the yields are closer to 20%.  We are not buying a lot at 20%.