Con-tango

The vultures are here

Vulture Bearded.
Source: vultures. homestead.com

Banks and hedge funds get ready to take over the coming wave of distressed institutions…

From The Economist, an article to feast yourselves with plenty of meat.

Investment banks, readying themselves for the expected downturn, have
been strengthening their distressed-securities groups. Goldman Sachs is
on the lookout for subprime bargains and recently lured a lieutenant of
Carl Icahn, an ageing raider, to its “special situations” group. The
investment bank, wary of the “vulture” tag, says it merely wants to
ensure it can make money at every stage of the business cycle. Barclays
has poached an entire team from Oaktree Capital Management, which
manages distressed-securities funds. Oaktree itself is raising a new $3
billion fund.

[…]

Vultures hope that feast will follow the recent famine. They believe
the very lack of distress lately will mean the carrion is more
plentiful when times eventually change. More junk bonds are being
issued than ever before, more risky loans are being offered. And
remarkably, this lending free-for-all continues despite a sharp drop in
credit ratings, says Martin Fridson, editor of the indispensable Distressed Debt Investor.
No one seems bothered that 17% of senior, unsecured junk-bond issues
are on the lowest possible rung, compared with 2% in 1990.

Mr Altman, who has spent many years tracking financial junk, says he
has never seen anything like today’s market. His diagnosis: “almost
insane”. The “glut” will surely end dramatically, he says. Mr Fridson
reckons a recession could cause defaults to jump to unprecedented
levels.

That is when vultures come into their own. When sentiment turns
after a long bull run, the market usually overreacts. It loses all
sense of distinction between basket cases and risky but viable firms.
The distress can also trigger forced sales of potentially valuable
assets. Those gutsy enough to swoop can enjoy rich pickings. For
example, buyers of some troubled American power companies have seen
triple-digit gains as shares have recovered, boosted by mergers. Some
investors in struggling cable firms have also done superbly—though
others, who bought well before prices hit bottom, have lost money.