Featured Events | Oct 18, 2018 | Gabelli School of Business
Opportunities abound in distressed debt investing
A pharmaceutical company struggling to make sales. A food manufacturer saddled with debt. A chemical producer plagued by pension obligations.
At first blush, these scenarios don’t exactly evoke images of cash windfalls. And yet, for a special breed of investors, they can mean just that.
Distressed debt investing is a risky proposition with the potential for major upside. Investors hunt for opportunities where they can purchase debt, which trades in much the same manner as stocks, on the cheap. The hope is that the gambit will pay off eventually, with investors either making a profit when the price of the debt soars during a turnaround or market players cashing in on fees to provide even more debt to these troubled companies, sometimes via a bankruptcy process.
On October 12, at the Gabelli School of Business’ McNally Amphitheatre, distressed debt investing, now a multi-trillion-dollar industry, was the topic du jour. On the agenda were discussions about how investors can use it to create returns and how future Rams could end up with careers in the space.
One example of a distressed investing bet gone right was that of KV Pharmaceutical.
After facing a litany of problems, including backlash for jacking up the price of its premature-birth-prevention drug, Makena, KV Pharmaceutical ended up in bankruptcy court. In 2012, investors, including conference panelists Michael Gatto, partner at Silver Point Capital and adjunct professor at Columbia Business School and the Gabelli School of Business, and Jim Gillespie, co-founder and portfolio manager at Greywolf Capital, began buying up the company’s debt on the cheap.
But once the debt was purchased, the work had just begun. Gillespie’s firm, Greywolf, had to go toe-to-toe with other debtholders like Silver Point, over what the company was ultimately worth. Because Silver Point held mostly secured debt, meaning it would be first in line to be paid, Greywolf had to argue that there was enough value in struggling KV to pay off the secured debt, and then some. Following months of battle between interested parties like Silver Point and Greywolf, a deal was struck—with Gatto and Gillespie’s friendship still intact.
Ultimately, both camps of debt holders were able to recoup their investment and received a distribution in bankruptcy court, and the company eventually recovered from its bout with restructuring, with sales taking off due to regulatory changes.
In addition to learning from the examples described by panelists, students and alumni looking to get into the industry or advance their careers received advice from the legal perspective. Fred Fogel, partner and general counsel, Baupost Group, emphasized the importance of both curiosity and perseverance. Alan Kornberg, co-chair, bankruptcy and corporate reorganization department at Paul Weiss, encouraged those just starting out to get a feel for the process by sitting in on bankruptcy hearings. And Chaim Fortgang, former head, bankruptcy department at Wachtell Lipton, highlighted that while distressed debt investing can be a complex and legal-intensive business, creating and maintaining good working relationships is critical to achieving success.