Before the pandemic drove down asset prices, it had been a decade since investors had a true distressed market to work within. There had been many one-off opportunities, but nothing like, say, the financial crisis in 2008 or what might be called the corporate governance crisis leading to the recession of 2001, full-fledged cycles when targets for deep-value investors appeared plentiful.
Dan Zwirn, CEO of Arena Investors LP, says that by now, however, more than a year into the era of the pandemic, he is seeing other market players buying what he believes are overpriced leveraged loans and bonds priced at nearly their par value, looking for them to rise above par with refinancing at lower rates—refinancing that could easily not materialize. These instances could create subsequent distressed opportunities for investors like Arena.
Zwirn also thinks some investors will be overpaying in the universe of special purpose acquisition companies (SPACs) because of SPACs’ two-year deadline for merging with operating companies—a ticking clock that could cause some SPACs to rush into overpriced deals. These scenarios, as well, could create opportunities for value investors as the SPAC-created companies struggle to meet financial obligations.
Another factor that may create opportunities, Zwirn says, is a response to rising inflation by the Federal Reserve. Zwirn believes that a forceful near-term response by the Fed may be needed to avoid 1970’s-style inflation and stagnation. And with such dramatically tightened credit and reduced liquidity, traditional distressed investment opportunities would not be far behind.