Distressed investors finding opportunities despite bull market, strong economy
Even in a raging bull market propelled by a strong economy, some companies get left behind. Some deservedly so. Others perhaps not.
Therein lies the opportunity for distressed investors like George Schultze, founder of Schultze Asset Management, to squeeze out a profit. And when he judges the situation correctly, a handsome one.
Distressed investing traditionally involves fund managers scooping up debt at pennies on the dollar, be it bonds or loans issued by companies, betting the company or asset springs back to life. Schultze not only buys beaten-down bonds at his $75 million fund, but he also sells short the stocks of companies headed into distress. He also on occasion invests in post-distressed equities on the long side after a restructuring event, typically a bankruptcy or a debt-for-equity swap.
And for all the good news out there in the stock market and the greater economy, Schultze says the step-up in interest rates is weighing heavily on companies not resilient enough to withstand the pressure.
“Interest rates have skyrocketed in the last 24 months and because of that, you’re seeing more and more distress,” said Schultze. “According to J.P. Morgan, last year was the fourth busiest year on record for distressed debt. And so you’re seeing a lot more companies facing issues due to higher interest rates, and also due to secular change and other things that are impacting their businesses, like inflation.”
Schultze points to his investment in National CineMedia (Ticker: NCMI) shares as a prime example of his investing style. The movie advertising network went through a major bankruptcy in the wake of the pandemic, restructured all its debt and cleaned up its balance sheet.
“Now with the COVID shutdown behind us, the
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