Are there any distressed credit teams at MMHFs? Teams that invest similarly to the traditional distressed credit HFs (Elliott, Oaktree, SVP, Silver Point etc). If so, who are some of the best PMs?
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Ask yourself if running a distressed strategy like the funds you mentioned (loan to own, turnaround operations, replace management / board, etc.), which is really more comparable to private equity than trading credit, makes sense in the context of a MM risk model.
The MMs are expanding outside of their traditional areas. Quick look at Reorg will show Citadel's involvement in Yellow Corp, Instant Pot and Spirit Airlines. MLP has a distressed team as well that takes positions unthought of 2-years ago. Both Citadel and MLP have PC teams. Baly will follow in 2-3 years per usual schedule. P72 has tried distressed in the past and given up (Dave Rosen was the main PM but now heads up Rubric). MLP also seeded an ex-Canyon guy recently and is rumored to be giving billions to head of Tac Opps at Coatue.
Most FI PMs who say they're doing stressed at pods are doing HY/IG with maybe 10-20% of book in stressed but there are a few PMs out there who are doing distressed. No clue as to what their risk parameters or P&L take etc are but they definitely exist. Remains to be seen how much capital platforms will give them and if they'll just pull the plug in 2 years...
It doesn’t necessarily remain to be seen - many have been blown out
OP here. This is exactly my thought. The risk parameter & investment timeframe at pods don't allow true distressed strategies. But recently I have heard some distressed credit teams in MM are hiring. Hence the post. FWIW I work at a distressed SM HF
Since we are talking about true, loan-to-own distressed, which as I've mentioned is closer to turnaround PE, my opinion stands that the MM HFs will not let you do this. From my experience, the stressed / distressed the MM HFs get involved in are typically large cap, on the run names where even though they are distressed there is still plenty of market liquidity because you are talking about $1bn+ debt tranches usually. So if you want to trade a lot of IHRT, DISH, AMC, SFRFP, etc. knock yourself out here. I've known people at the MM HF distressed pods, and they generally get blown up because 1) the liquid, on the run stuff is usually trash and bad investments and 2) sudden drawdowns and volatility inherent with distressed can still kill you. I don't think the above post detailing examples of Citadel's involvement is the best barometer because 1) in Yellow Corp, if you buy the whole debt tranche its hard to have MTM volatility, 2) Instant Pot, from what I read, did not work, and 3) I would categorize Spirit as an on the run investment analogous to the above. Maybe the reality is changing though and the MM HFs are figuring out better ways to participate in distressed, but if they are I would guess it is due to FOMO and less about that they've figured out how to get these strategies to work within their risk frameworks.
There was a E&P bankruptcy I believe where a Citadel distressed pod and the CIO Pablo Salame were involved (with sleeves rolled up)
Agree and disagree. Yes, distressed is akin to turnaround PE so inherent illiquidity will limit the size of overall exposure in broader portfolio, though it certainly is an accent. Majority of these di/stressed situations are being handled out-of-court which is the reason why the default rate is artificially lower so the lack of MM HF involvement today is a function of less RX opportunities available. Should the default rate increase meaningfully, these MM HF will gravitate to where they find value. Distressed exchanges disadvantage par loan buyers (CLOs, etc) who bought with a point of OID in the primary, but create opportunities for MM HFs who purchased cheap paper in the secondary. StressedCo may alleviate some of their debt burden at a discount, but the exchange price can be a premium relative to MM HF cost. So di/stressed company investing today is predicated on MM HF view that the company has 1) a positive view on near term fundamentals/events which creates return upside, 2) permissive credit docs and near term maturities create ripe setup for StressedCo to shore up near term liquidity by utilizing liability management or 3) in absence of positive catalyst, the MM HF may be comfortable with an in-court workout process if the business model is viable but mgmt screwed up its balance sheet (again these are not plentiful in current environment). In the third case, yes these may be illiquid position but all MM HF have legacy illiquid holdings which can be side pocketed or run sizable books so its exposure is de minimis as a part of the broader portfolio. Some MM HFs can also source NewCo equity after it emerges from bankruptcy.
FI PMs currently running di/stressed at pods are extremely necessary. They may not receive the largest risk capital today but its precisely what pods are designed for. What is out of favor today may be in favor tomorrow.
i did stressed/distressed at a pod (did a few in-court cases too)... very difficult...
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