Deloitte Symposium Waxes Positive

May 12, 2011
By Michael Ratliff, Associate Editor

NEW YORK – Deloitte hosted its second annual Distressed Debt & Assets symposium at the New York Athletic Club on Tuesday, May 10. The last meeting was in January 2010, and needless to say the climate has improved since then.
Pimm Fox, anchor of Taking Stock on Bloomberg Television, moderated the morning’s keynote discussion featuring Adam Metz, senior advisor at TPG Capital and former CEO at General Growth Properties Inc., and Martin Fridson, global credit strategist at BNP Paribas Asset Management Inc.

The general consensus was that the economy, while on a slow path of recovery with the addition of 250,000 jobs each month, is showing signs of life, though not necessarily a strong return. Martz believes that investors and economists should not put as much emphasis on such monthly data as they have been, and should instead focus on the bigger picture.

“It is easy to get caught up in the minutiae,” he said. “Month by month there is all sorts of variation, but when you step back, you can see we are on this slow steady path of improvement.”

Now is a safe time to use distressed debt to gain leverage, according to Fridson, simply because the risk of a defaulting a leveraged buyout (LBO) is historically low.

“Right now investors are willing to take credit risks,” Fridson said. “The risk of defaulting in the corporate market is well below historical values and is projected to go lower. Refinancing is so easy that any company can really roll over debt. The large LBOs over the last few years have been refinanced; the only ones that are defaulting are the ones like Borders and Blockbuster where no one believes that the business model is viable. Overall this environment is pretty difficult for companies to fail.”

Metz was able to weigh in on the topic and used the opportunity to speak on what General Growth Property’s meltdown and rebirth looked like from the captain’s seat. He attests that the firm’s quick recovery after filing for Chapter 11 makes GGP a poster child for how well the process works. GGP filed the largest real estate bankruptcy case since 1980 in 2009 (a result of carrying $25 billion in debt) but reorganized and reemerged in November 2010. Metz said that the collapse of the credit market was largely to blame.

“The events of 2008 really accelerated the process,” he said. “It was like playing whack-a-mole. You are putting out a fire here, and another one starts over there. We had a hard time dealing with multiple borrowers and creditors. We worked hard to stay out of bankruptcy. It is a room that once you walk in you can’t say ‘oops’ and turn around. In hindsight it was probably the best thing for all the constituents. It was like a timeout. It gave us a breather to develop and present a plan for the enterprise that worked for everybody.”

The second half of the morning saw a panel discussion with market participants on the impact of Government regulation, the role of private capital in getting broader market resolution, whether or not banks are ready to work together, and what we can learn from the past 18 months about where the distressed debt market is headed. A reoccurring theme was how isolated the recovery has been over the past year, both in credit and real estate markets.

“I think we have to recognize that there is a bifurcation in the market, that the inflow of capital is targeted towards the bigger names,” said Sabeth Siddique, director, Deloitte & Touche L.L.P. “But that is not where the problem lays. The problem is in the small bank spaces—that is what is clogging up the economy. CMBS is going towards the Rockefeller Centers, but that is only a small portion. That is a good use, but it has to spill over into the main street in Middle America, and it is just not happening quickly enough.”

Federal regulations to help improve the debt market have had a marginal impact, but the consensus seemed to be that time may prove to be the best healer.

“On the short run, the programs from the Fed were helpful,” said David Ying, senior managing director, Evercore Partners. “But I think it is important to consider that as good as the capital markets may feel, clearly it is a fragile environment with unemployment growing so slow.”

The panel also discussed the need for additional financial programs from the government. Siddique believes that the pulling of such ‘economic levers’ is warranted, especially since they can determine what can really be done to improve macroeconomic conditions.

“The fact that they are pulling that QE2 lever is a good sign,” Siddique said. “I don’t think they would have done it if they thought the market’s reaction would be negative.”

The cautious optimism and notion of a slowly recovering market that filled the air reinforced what everyone hopes is true—the doom and gloom prospects of a double-dip recession are a thing of the past.