Reuters: Who's Buying Distressed Debt - And Why

It’s not just Blackrock (BLK)! Jennifer Ablan provides a helpful roundup of who’s buying distressed debt, and why:

BlackRock Inc., Third Avenue Value Management LLC, Trust Company of the West, Pacific Investment Management Co., or Pimco, and Metropolitan West Asset Management have launched or plan to launch distressed debt funds, betting that mortgage security and corporate debt prices have fallen enough to warrant interest, even though further declines are possible.

The volume of distressed debt trading 1,000 or more basis points over Treasuries is a record $184 billion, Ablan reports. "We are going to see a cycle at least as good as what we saw in 2001-2002," says Michael Fineman of Third Avenue.

Bill Gross:

In some cases the prices are now attractive enough to overcome the inevitable rising default rates. Some of the paper we see yields 10-15 percent under very onerous conditions. Even if 100 percent of the mortgages in a 'pool' default, the recovery value is probably 50 cents on the dollar or higher. Thus, if you're buying paper at 50 that is backed by first mortgages, you are pretty well protected.

Sounds attractive, assuming the world doesn’t come to an end. . . . Jeremy Grantham says he’s buying the stuff for his personal account. . . .

Comments

[Tim Plaehn:]

Under what circumstances would the world come to an end? Home prices in the worst markets are down 25-30%. 50% default + 50% paid off + whatever interest is earned = 85 cents on the dollar.

The companies that buy the distressed debt and avoid the fraudulent garbage are going to make out like crazy!

2008 Aug 08 09:16 AM

[jjason:]

I like Bill Gross. I hope he is successful in this strategy.

LONG ON pimco.

PS. If you would like to see lower oil prices, Go To;

www.stopoilspeculation.../

And sign the petition.

2008 Aug 08 09:35 AM

[Paula Rush:]

One thing not mentioned here that is the main jist of the reasons for purchasing-these are distressed asset funds, everyone is doing it including big players like Goldman Sachs. Why? They are buying the assets for pennies on the dollar. Anywhere from 4cents on HELOCS -20-30 cents on the dollar for non performing loans and REO'S - and then ENFORCING THEM AGAINST THE BORROWER FOR 100 CENTS on the Dollar. Once again the WALL STREET CRIMINALS prosper at everyone elses expense. So New Century, Aegis, American Home, Merrill Lynch and many others, at the same time they REFUSE to modify loans and refuse to work with borrowers, sell off the same loans to "friends" and former financing partners`. In some cases it is the executives who created the crap forming LLC's to buy up the same crap. The investors on the front end got screwed, but the execs know how to turn their lemons into lemonade! So it has nothing to do with being bullish or bearish
(maybe BULLSHIT) it has everything to do with simple math. At pennies on the dolllar they see a profit no matter what they buy.

2008 Aug 08 10:36 AM

[Augustus:]

If the individual mortgages can have a "due on sale" clause, preventing the homeowner from letting someone assume them,
There should also be a clause giving the borrower the right to purchase the loan.

2008 Aug 08 01:50 PM

[Augustus:]

BTW, how is Jeremy Grantham buying into this stuff?

2008 Aug 08 01:51 PM

[GMOTrader123:]

Grantham is probably buying this stuff through two methods: 1) logging onto his vanguard or e-trade account and buying 1k or 2k shares of one of these distressed stocks OR 2) calling his head trader and screaming "buy" into the phone, then, poof, he's in for pennies on the dollar and guaranteed profit. by the way, jeremy has a huge head, physically, so i wouldn't bet against the brainwork behind that enormous cranium - maybe i'm just not a betting man.

2008 Aug 11 02:30 PM

[GMOTrader123:]

Grantham is probably buying this stuff through two methods: 1) logging onto his vanguard or e-trade account and buying 1k or 2k shares of one of these distressed stocks OR 2) calling his head trader and screaming "buy" into the phone, then, poof, he's in for pennies on the dollar and guaranteed profit. by the way, jeremy has a huge head, physically, so i wouldn't bet against the brainwork behind that enormous cranium - maybe i'm just not a betting man. Reply

2008 Oct 28 03:35 PM