Tuesday, July 14, 2015

Distressed Debt & Carlyle Group Investments

Bloomberg reported on ballooning high yield debt:

The pool of distressed U.S. corporate bonds, typically those yielding more than 10 percentage points above benchmarks, has swelled to $127 billion, from the low last year of $43.7 billion, Bank of America Merrill Lynch index data show. This month alone, Peabody Energy’s $4.8 billion of bonds have fallen 14.9 percent, while Cliffs Natural Resources’s $2.5 billion of notes have declined 14.6 percent.

The most-indebted companies are generally more vulnerable to hiccups, such as oil prices that have fallen to about $52 a barrel from as high as $61.82 last month.

“How high will energy default rates go?” UBS analysts Matthew Mish and Stephen Caprio wrote in a July 9 report. “We have been very consistent on this question: 10 to 15 percent by mid-2016.”
Private equity underwriters love market dislocation.  They can buy distressed companies on the cheap.  The Carlyle Group used distressed debt to take over companies no longer able to pay their bondholders.

David Rubenstein of Carlyle Group (CG) told Rhonda Schaffler of TheStreet.com that he thinks valuations are high and he is finding very few opportunities. He told her that "we don't really want to put money out the door, just because we have money to invest." That one single line should be taped to the wall above every home computer set up in the nation. Individual investment returns would increase dramatically. He did say that he was finding opportunities in energy and health care.

Front door or back door?  Ask the folks at Brintons or Mrs. Fields about Carlyle's debt restructurings, also known as a pre-pack.  I don't think they have good memories of the experience.  Carlyle loves energy at the moment.  I hate to think what they can do to ruin our healthcare system further.