Dan Zwirn on the State of Credit: “Amend, Extend and Pretend”
Adapted from Institutional Investor
August 5, 2020
Arena Investors largely avoided the corporate private credit bubble and is now taking advantage by selectively buying other credit firms’ troubled legacy investments and other well-priced, Covid-affected assets.
Arena CEO Dan Zwirn says opportunities include convertible securities, small commercial properties, transactions with entrepreneur-owned small businesses, and subprime consumer credit. Even though the government has pumped enormous liquidity into the system to support businesses during Covid, many are struggling and need financing.
Although Arena is buying loans at a discount, refinancing loans on better terms, and providing debtor-in-possession financing, Zwirn is cautious about the lack of realism he sees in the credit market. “You see every kind of amend, extend and pretend strategy out there,” Zwirn says—so risk is increasing, many assets remain overvalued, and a reckoning may be three to six months away.
There are now some rare opportunities for what Zwirn calls “heads or tails, we win” investments where, for example, a long position in a convertible and a short position in the over-inflated associated stock create a high-potential, low-risk stance for Arena. One sector with such opportunities: the cruise industry.
There’s been benevolent behavior by creditors during Covid, Zwirn notes, which has created a false sense of comfort—ultimately, the “reality” will set in, and “It always takes longer than people think.”