Some Hedge Funds Investing In Distressed Debt May Be Hoping To "Loan-To-Own"

Hedge Funds Review is reporting that hedge fund managers are investing less in distressed debt than one year ago, down 12 percent (48 percent to 36 percent) from last year (see article). This is somewhat counter to other reports that have discussed how other notable managers, such as John Paulson, are seeing distressed debt as an area with excellent opportunities. Many of the managers that are investing in distressed debt appear to be investing primarily in secured loans, utilizing a "loan-to-own" strategy. The feeling is that secured loans are less risky and provide more opportunity since if the company files for bankruptcy, the debt investors may have the ability to acquire control of the company if the borrower seeks to deleverage by exchanging debt for equity. Of course, this strategy seems viable only if there is an expectation that the levered company will eventually recover, and could explain why both the banking and energy industries are two of the more popular industries for employing the loan-to-own strategy. There is an expectation in the market that energy companies will continue to generate interest and capital, while the banking industry is likely to receive federal support to prevent total collapse.