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Kaiser Media Watch Blog - November 1, 2015 to November 30, 2015


Kaiser Media Watch Blog enables John Kaiser to share online content from other media he deems interesting or relevant to Kaiser Research Online audiences. He collects links to such content and writes a brief explanation. The KMW Blog gets updated during the evening KRO update. After a week or so the current KMW Blog gets archived and a new one is started. Tweets are sent with a link to the item in the KMW Blog when it is of particular interest. Right clicking the JK header allows one to share or copy a link directly to that specific blog post.

Posted: Nov 11, 2015JK: Distressed debt vultures choke on their carrion
Published: Oct 13, 2015FT: Bond predators dragged down by distressed bets
Robin Wigglesworth of the Financial Times reported on October 13, 2015 that distressed debt hedge funds lost on average 4.2% in 2015 as of the end of September compared to a 1.3% loss for a weighted composite index of hedge funds, though not as bad as special situation funds which lost 4.4%. Distressed debt hedge funds step into the market when the prospect of a debt default panics traditional debt holders into dumping their positions for whatever they can get, which the distrssed debt buyers believe is a lot less than what they will get when the indebted company gets reorganized. The reorganization is usually accomplished through a debt for equity conversion that leaves the distressed debt buyers in charge of the company's assets. It is different from the loan-to-own strategy of private equity groups in that the latter make a loan fully secured by the company's assets with the expectation that the borrower will default in circumstances where the asset cannot be sold for more than the nominal value of the debt. In the loan-to-own strategy the lender seizes the collateral with the expectation that over time the asset will recover a substantially higher value than the "forfeited" debt. Equity shareholders, of course, get wiped out. In the distressed debt purchase strategy the hope is that when the company's assets get liquidated there is enough to pay back the full amount of the debt, or at least some settled amount higher than the price paid during the panic sell-off by institutions who thought they were holding a low risk low reward security rather than the high risk low reward piece of paper it turned out to be. Or if the debt is converted into paper, the owners of the new equity end up with the lion's share of the total equity represented by an asset. Once the uncertainty of bankruptcy and the bleed from interest payments is gone, the market will often assign a much higher value to the equity, delivering a nice return, such as what the US government did when it bailed out General Motors during the 2008 financial crisis. The problem in 2015 is that the distressed debt hedge funds mis-calculated how serious the Saudis were about destroying the American shale oil industry which has relied heavily on debt financing to keep drilling those horizontal frac holes needed to cope with the steep production decline curves associated with tight oil. The expectation was that oil would stabilize with a $60 floor, but that has not happened.

 
 

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