The current recession will last at least three years and possibly longer absent a revival in credit markets, according to investors who specialise in distressed debt and bankruptcy. "This is going to be a three- to four-year disaster," said Michael Psaros, managing partner at KPS Capital Partners, at a restructuring conference in New York.
The United States is going through a "Great Recession," which will provide investors in distressed assets with unprecedented opportunities, he said. "We are going to invest an awful lot of money this year," Psaros said on Thursday. "There is an inexhaustible supply of bad management out there." KPS Capital, which manages special situations funds and private equity funds with capital exceeding $1.8 billion, largely sat on the sidelines last year.
The firm is ramping up its investments this year, he said. "We're just very excited about this year and next," he said. Holly Etlin, a managing director at AlixPartners with 30 years of experience in restructuring, said financial distress will last three to five years due to a lack of liquidity in credit markets and lack of debtor-in-possesion financing, or DIP loans, used by bankrupt companies to reorganise operations.
"Stuff has got to start moving off the bank balance sheets," Etlin said. "I talk to colleagues and friends who are just sitting on their money. Until banks start clearing off their balance sheets, they aren't going to be in a position to lend." Etlin reported seeing very little bankruptcy financing and asked the audience of 180 participants if anyone in the room was doing any DIP loans. No one in the room rose their hand.
"That is not viable," Etlin said. "We see continued distress for three to five years." Among potential investment plays, Etlin said consolidation in the media industry, particularly print media, may provide good investor returns. Jonathan Pertchik, chief restructuring officer at WCI Communities, also said the ethanol industry as a burgeoning sector may provide some opportunities.
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