Distressed Debt – A Compelling, and Timely, Opportunity
The COVID-19 pandemic has expanded the universe of companies in financial distress, creating a buyer’s market for distressed debt funds.
The end to the coronavirus health crisis is in sight, however, it may take much longer to recover from the economic slowdown that it caused. The loss of revenue attributable to COVID-19 and stay-at-home measures resulted in many companies taking on significant debt, which could create stressed scenarios if revenues fail to recover. Bloomberg recently analyzed 3,000-listed U.S. companies and concluded that nearly 20% may now qualify as “zombies,” businesses with insufficient earnings to cover their interest expenses after adding an extraordinary $1 trillion of debt to their balance sheets during the pandemic.1
The result is a favorable dynamic for distressed investors with the global opportunity set nearly 2.5x larger than the capital targeting it — approximately $140 billion of capital is seeking to invest in a $320 billion universe. Distressed fund capital deployed during previous market dislocations – the Global Financial Crisis (“GFC”) and the dot com bubble bursting (“Dot Com crash”) – delivered historically high returns, suggesting that 2020, and even 2021, could be strong vintages.
Zombie firms are sitting on an unprecedented $2 trillion of obligations
Source: Bloomberg, as of September 2020. For illustrative purposes only.
MONETARY STIMULUS PRODUCED A LIMITED PUBLIC MARKET RECOVERY
To mitigate the negative economic effects of the COVID-19 pandemic, Congress and the Fed – along with other governments and central banks across the globe – injected unprecedented fiscal and monetary stimuli. These included the $2.2 trillion CARES Act; an expansion in the eligibility of quantitative easing and existing stabilization programs by over $3 trillion; and a reduction in interest rates to near zero.