'Distressed' Assets Are Investment Play Of The Month

by Carla Johnson, Investors Offshore, London

28 June 2002

Every cloud has a silver lining, they say, and it was never more true than this week. The hedge fund sector has been drowning in a surfeit of cash and a lack of opportunities for some time now, as markets wandered about with no particular direction.

However, the death plunge of WorldCom Inc, which has been devastating for many plain vanilla equity and bond players, is meat and drink for hedge funds and other contrarian investors. But 'contrarian' tactics don't just involve shorting assets when the bear is on the prowl; they can also include investment in 'distressed' assets.

Bloomberg reported yesterday for instance that after WorldCom bonds plunged 88% on Wednesday, dropping from 78 cents to as low as 9 cents, Wilbur Ross, Chairman of W.L. Ross & Co., a private equity firm specializing in distressed investments, decided to buy. And Ross is not alone in believing that WorldCom has real assets and customers.

In fact it has been a good year for the 'distressed' investor. Accounting scandals and bankruptcies at Kmart Corp, NTL Inc, Enron, Tyco and many other major firms have provided a flow of distressed investment opportunities.

This week Deerfield Capital Management announced the launch of a program for investing in distressed financial instruments, principally corporate bonds and bank loans, although Deerfield's initial distressed investment product will ony be available to "Qualified Purchasers."

Deerfield's distressed investment team is headed by Aaron Peck, a Senior Portfolio Manager of Deerfield, who was most recently a Senior Analyst at Black Diamond Capital Management. "Entering the distressed arena is a great complement to our existing trading strategies," remarks Gregory H Sachs, Chairman and Chief Executive Officer of Deerfield. "We anticipate Mr. Peck's addition will help augment our existing management of investment-grade corporate bonds and senior secured bank loans, and create new opportunities for the development of products devoted to the increasing institutional demand for managers in the 'distressed' asset class."

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