Smart-Stock.net

As we wrote about here last week, eurekahedge.com featured a very informative article by Dean Menegas about distressed asset investment.  In fact, there was enough information to warrant a few different blog entries.  Today’s entry addresses Menegas’ thoughts on developing and foreign markets.

After describing some of the basic types of distressed asset investments, Menegas, who is General Counsel at Spinnaker Capital Group, mentions that Asia, Eastern Europe, and Latin America have been steady sources of distressed asset accounts for the last twenty years.  This is largely due to the prevalence of financial crises and defaults (and of investments in them) in emerging markets.  Both corporate and sovereign organizations can suffer from disastrous loans and economies, which creates long-term investment opportunities for savvy investors.

Menegas cautions investors that emerging markets, whether foreign or domestic, posses several key differences from developed ones: “Investments in both sovereign debt and in the debt of domestic corporations are affected by politics, macroeconomic factors, currency valuation and convertibility stresses, the evolution of tax and legal regimes, trading and settlement structures, and market liquidity. Specialist firms develop methods for analyzing, pricing, and controlling those factors, so that to the maximum extent possible they can focus on the economics of a particular investment.”

He concludes his article with an example of Thai Oil Company, which represents a successful distressed asset  in a foreign developing market.  The company amassed an outstanding debt of over $2 billion by the end of the 90’s.  Upon defaulting, the debt traded at around 30 cents on the dollar.  Thai Oil bought back about half its debt at 50-96 cents on the dollar and underwent debt restructuring (issuing clean debt and giving 50% of its equity to creditors).  Having subsequently improved its business model, redeemed its name, and significantly lowered its outstanding debt, it was able to bring substantial value back to its equity.

Finally, Menegas echos our sentiments regarding wise distressed asset investment:  “Trading in emerging markets distressed investments can therefore be extremely profitable for those who understand the value inherent in restructurings and have a capital structure enabling them to hold investments through the completion of those restructurings; can price the risks presented by the lack of clear bankruptcy laws, legal structures that often favour shareholders, and the other relevant sovereign risks; have the capacity to provide liquidity and the knowledge base to dispense it properly; and can bridge the natural structural mismatch between sellers and buyers in distressed investing and especially in emerging markets.”

If you can find an effective investment company that remains in the investment for the long haul, distressed asset investment can be a great way to expand your portfolio.