Distressed debt: Which sectors offer value?

EACH cycle in distressed debt investing is different. During the global financial crisis (GFC), many otherwise viable companies faced a liquidity crisis. Prior to that, as the tech bubble burst in the early aughts, Global Crossing, Nortel and Lucent, among other firms, applied too much leverage and, in the face of insufficient demand, had to restructure or in some cases go into liquidation.

In the 14 years post-GFC, the US federal funds rate and Canada’s rate stayed exceptionally low, hovering around 1 per cent, plus or minus. During this era, every financial transaction, whether a business acquisition or refinancing, created paper at historically low rates. Now, in a higher rate regime, many of these layers of corporate debt cannot be easily refinanced.

Clearly, this is bad news for the original owners of that paper. But it could be very good news for investors seeking attractive, non-correlated returns in publicly traded stressed and distressed credit.