A Global Distressed Debt Hedge Fund
Distressed Debt 1 LP
Distressed Debt 1, LP is a Delaware limited partnership that searches the global bond markets looking to buy deeply discounted or defaulted debt for pennies on the dollar, from issuers that appear likely to restructure or settle the debt and still return significantly higher returns than are normally associated with high yield junk bonds. Many of these companies may be in a technical or selective default, and some of them will continue to pay interest income at very high rates while seeking better terms with existing debt and bond holders. Consequently, we seek to achieve a cash flow average above 15% while waiting for companies to improve balance sheets and negotiate more favorable terms with creditors.
Distressed Debt 1’s unique expertise is in very early identification of companies from around the world executing superior business turnarounds, where Wall Street has priced the stressed bonds for default. Good businesses can be mismanaged or become over leveraged. However, companies with monopolistic or essential industries in their own country often can have less direct competition, so a new turnaround plan along with new management could prove to be the key to a full and complete recovery. Through our highly selective process, we have acquire for pennies what others originally paid dollars for. Our goals is to not only forecast a possible debt recovery, but more importantly, we often find companies with distressed debt valuations, where a recovery is highly probable.
We search out for unique or lesser known issuers that are in trouble because of a onetime black swan event, which has resulted in its bonds being jettisoned or shunned by the majority of the marketplace because of the sudden failure to meet minimum criteria written in the prospectus of many bond funds.
The time to buy companies is when others may be forced to sell
We typically watch companies for many months after the default or black swan type of vent to evaluate whether a new management team or the operations situation has changed in any way that would offer good reason for increased value for debt purchasers. If the debt has been reduced by 70-90% or more as a result of lower bond prices and the stock or equity holders have essentially lost control, because of the risks involved, large institutional investors that may try to influence the process of reorganization are usually the major buyers of distressed securities. For sophisticated investors who understand investing in distressed securities and are willing to accept the risks, these rare situations can be extremely attractive bargain opportunities.
Black swan events hurt most investors, but a few know how to take advantage of troubled companies. Shouldn’t you?
Gran Colombia Gold (TPRFF) has reported strong first half of 2015 results, including a 6% year over year increase of revenues and a 25% reduction of all-in sustaining cost (“AISC”), which resulted in an adjusted net income of $0.13 per share, compared with an adjusted net loss of $0.54 per share the first half of the year prior. We expect that the increase in 2015’s gold production, coupled with the reductions in total cash cost per ounce sold and G&A expenses, will continue to result in increased net income.
As a result of this, Distressed Debt 1, LP has taken a position in the company’s 5% senior unsecured bonds (the Silver notes, due in August of 2018), and we oppose the company’s debt restructure proposal under the Business Corporations Act (British Colombia) for the following reasons: Read more
Our distressed debt selection process
After our initial daily screening of global bond issues for yields and maturities:
- We review the issuer’s most recent quarter and year end financials and its relative performance to the industry segment it’s within for any signs or indications that their financial woes may have changed course.
- If issuers show multiple signs of a turnaround (most do not, as they simply are just waiting for the climate that affected them to improve), we mark only the top 25% of them for further review.
- In more intensive review, we compare the debt load to revenues, income, gross profits, cash flow, cash on hand, asset valuations (vs. book valuations), etc. We believe debt to asset valuation outweighs minimal profits or low coverage ratios.
- We then review its stock and current news to see if we can identify a changing trend or a new business cycle that corresponds to any improvement. We try to measure performance from the point of the change.
- Finally, we take the idea to our team to see what additional risk they might see or find that hasn’t been factored into the issue.
Five basic steps are observed in nearly every successful turnaround: Read more
3rd Quarter 2015
We’re currently launching our Distressed Debt 1 LP. The Fund is targeting Global and US bonds that are severely distressed, due to the fact that some bonds are paying significant high interest rates, but still have capital appreciation potential, this allows the overall fund a currently significantly high interest rate while keeping the core focus on deeply depressed bonds for capital appreciation.
DISTRESSED DEBT IN AN OPTIMAL PORTFOLIO
Distressed debt has a relatively low correlation with traditional investments and often outperforms in bear markets. The historical returns of HFRI’s Distressed index (main distressed debt index) outperformed indices representing traditional assets, particularly after bear markets and during the lowest returns months for S&P 500 and MSCI global equity indices.
Investing in Distressed Debt
Distressed securities may be an attractive investment option for sophisticated investors who are looking for a bargain and are willing to accept some risk. Distressed debt investing combines the best of both worlds — the cash flow of debt investments with the appreciation potential of stocks. While there is no hard and fast rule for what makes a “distressed” investment, it’s generally accepted that distressed debt trades at a huge discount to par value because the borrower is under financial stress and at risk of default. Distressed securities are debt securities; most often corporate bonds, from companies that are experiencing a high degree of financial pressure.
When a company’s ability to meet its financial obligations is challenged, its debt securities might be substantially reduced in value. When does “reduced in value” become “distressed”? Typically, a company’s debt is considered distressed when its yield to maturity is more than 1000 basis points above the risk-free rate of return (which is the return of a “risk-free” asset such as U.S. Treasuries). A security is also often considered distressed if it is rated CCC or below by one or more of the major debt-rating agencies, which include Standard & Poor’s, Moody’s and Fitch.
Many companies fail simply because they are overburdened with debt. Distressed debt investors can make a fortune by buying the debt of over leveraged companies for pennies on the dollar, with the goal of taking control of the company.
Information on this website is provided for informational purposes only and is not offered as advice with respect to any particular security or related financial instrument. This information should not be used as a basis for making an investment decision and must not be treated as a substitute for seeking advice from a licensed professional. The suitability of a given investment for a particular investor depends on a number of factors, each of which should be considered carefully. Such factors include, but are not limited to, the risk associated with the investment, the nature of current market conditions, and the investor’s objectives, personal needs, and specific circumstances. This is neither a solicitation to buy nor an offer to sell to persons in Texas.