Alternative Investment Servicing

The Trend Toward Distressed and Special Situations

What to consider as you navigate the complexities of debt investments

April 2020

Markets around the globe have been shaken by the COVID-19 pandemic and the global volatility that comes with it.

As a result, managers in the alternatives market have started to shift their focus toward distressed and special situations. According to Bloomberg data, distressed debt in the United States reached $934 billion near the end of March, roughly quadrupling from one week prior. This rapid spike in risky credit brings the total amount to levels not seen since the 2008 global financial crisis.1

Strategies in distressed and special situations range from purchasing oversold loans and bonds of firms with healthy balance sheets, to acquiring assets at deep discounts due to cash flow issues. Alternative managers are also seeking to deploy capital by purchasing entire portfolios of distressed credit from other market participants who are unwilling to manage the risk of such a basket of assets.

Specialized strategies such as distressed credit require unique skillsets and experience to deal with companies experiencing financial stress. A restructuring process often involves a long-term approach, sometimes encompassing a number of years. Beyond support needed in the front office, alternative managers will want to thoroughly understand the reason behind the issuers’ distress including the potential for further downside risk. Understanding how the issuer plans to reorganize their capital structure, including repayment priorities and dependent obligations, is critical. Reporting on current cash flows will also be crucial in helping managers assess their portfolios in real time.

Following the global financial crisis, our Alternative Investment Services group worked hand-in-hand with credit managers on special situations and distressed products. Using our knowledge and experience, we strengthened our servicing capabilities in the credit space. Our teams focused on specialized credit strategies and learned the importance of working closely with our clients and the agent bank community. Since that period, these partnerships have helped to ensure our client reporting is as accurate as possible, given the nonstandard information flows that prevail across special situations and distressed structures. As an administrator in the bank and private debt space, we also help to maintain the lines of communication between the lender (who we act as a proxy for) and the agent bank that typically sits between the two parties.

Working with a seasoned team can make a world of difference as you navigate the complexities of investing in distressed debt and special situations. We are ready to provide guidance and answer any questions you have around our experience with such strategies.

1.Bloomberg, Distressed Debt Balloons to Almost $1 Trillion, Nears 2008 Peak, March 25, 2020