Michael Tennenbaum Explains Why $50 Billion In Distressed Debt Could Default In Next Two Years
Old school private equity guy-turned-hedge fund manager, Michael Tennenbaum, was on Bloomberg TV, discussing his perspectives for the distressed debt market (yes, such a thing did once exist, before HY bonds of 20x levered companies starting trading at par+). And all those who believe that courtesy of the Fed's intervention in every market there will never be another bankruptcy, let alone a bond yielding more than 10% take heart: according to Tennenbaum a full $50 billion in distressed debt may go Chapter in the next two years, although this is probably more good news for all the mini restructuring boutiques who overhired last year only to see the administration make bankruptcy illegal. The math: "Over the next five years $1.2 trillion in non investment grade debt comes due, of which $200 billion are due in the next two years, and of that a quarter or $50 billion are issued by companies rated rated B or lower. The experience that we and others have had is that this leads to default." Of course, Tennenbaum is a traditional debt-for-equity investor is more than incentivized to see this occur: he is currently sitting there doing nothing, as not only does nobody need DIPs or other rescue financings (why, when you can issue new B3/B- debt at 8%), but no company is willing to part with equity when every pitchbook it sees tells it can progressively refi current debt into paper that may eventually pay a 0.001% coupon. On the other hand, this, as well as every other contrarian outlook is predicated on the assumption that the Fed will be able to control the demolition of the US economy, which it won't. Which is why we are confident that not only will Mike be correct (eventually), but the full amount of HY paper that will default will boggle the mind when the dominoes really collapse. Until then, study learn (and earn) the Bernanke Moral Hazard Put: learn it and love it.
Many more interesting observations from Tennenbaum, but here is a sliver on why the PE legend is bearish on the economy:
The math is very bad. The consumers are 70% of the economy, they are liquidating debt. The degree of stimulus coming from federal deficit spending is flattening and maybe declining. When you see things like AIG selling shares, that's in effect reducing the government deficit. That's taking money from investors who are buying shares and paying down some advances that the government made. So there aren't much in the way of drivers for the economy in the next two years. If there is opportunity for inflation to speed up, then we could see more vigor, but in the meantime all the people who excitedly early this year had projections they are going to be able to pay their debts and get some refinancing, are now finding they don't have pricing power and the promised land is not just around the corner.