Monday, 29 August 2016
Last updated 2 days ago
Feb 17 2006 | 12:00am ET
By Deirdre Brennan
John Dionne, chief investment officer of Blackstone Group’s newly-formed Distressed Securities Advisors Group and a senior managing director at the firm, has watched the industry evolve dramatically over the last decade and believes that institutional investors have finally come to accept distressed debt as an integral part of their portfolios.
“Investors now have a great appreciation for a distressed debt manager’s ability to generate alpha,” said Dionne, who joined Blackstone at the end of 2004 to head up the new group. “We also think there will be a shakeout as the business becomes far more institutionalized.”
Dionne explained that Blackstone, recognizing the changing landscape of distressed debt and hedge funds in general, decided to expand into the asset class because the firm felt it had all of the components needed to succeed in what has become an extremely competitive field.
The distressed debt group launched last July with approximately $600 million in assets under management and is currently closed to additional capital. Dionne has been selectively adding to his team, most recently hiring Joseph Russick, whom he worked with while at Bennett Restructuring Funds, a $1 billion hedge fund. The other principals on the team are Jeremiah Keefe, who joined from Deutsche Bank, and Il Lee, who was previously with Harbert Management Corporation. Eventually, Blackstone envisions having a whole suite of proprietary hedge funds.
The Road to Blackstone
A few years ago when Dionne was starting to think about making a move from Bennett, where he had been for six years, he considered the pros and cons of hanging up his own shingle alongside the other boutiques in Greenwich, Conn. In the end, he decided that the competition in the sector had become so great that by aligning himself with Blackstone he would have tremendous access to both intellectual capital and a solid infrastructure, allowing him to concentrate on money management instead of getting bogged down in non-investment activities.
“You really need to maximize the amount of time you have on the playing field, and minimize time spent away from investing,” said Dionne. “The Blackstone platform allows us to make more informed decisions in a shorter response time, addressing a more efficient marketplace.”
‘We Are a Classic Distressed Debt Fund’
There are a lot of different ways to play distressed debt, but Dionne prefers to take a classic approach, focusing on his trading strategy. He and his team actively buy and sell bank debt, bonds and equities—both public and private— and avoid time spent serving on boards of directors or gaining control of a company.
“We might be very involved in the selection of advisors in a bankruptcy, but I don’t want to go on a creditor committee. We’ve done it, and we’ve done it effectively, but there is an opportunity cost both in time and trading flexibility,” said Dionne. “The amount of information one is afforded in bankruptcy exceeds what is available from normal SEC filings.”
According to Dionne, there is money to be made in distressed debt regardless of the economic climate as a whole or in a particular company in which he holds debt. Dionne doesn’t specifically target any one sector when buying debt, but he likes asset rich companies or those with strong, sustainable cash flows. He tends to stay away from unproven business propositions and sectors that are R&D intensive. He also avoids sovereign debt and Latin America, believing there is enough to keep him busy in North America and Europe.
Bankruptcies Likely To Increase
Dionne predicts that 2007 will see a larger number of bankruptcies. He said the reason for this is that in 2004, 20% of all paper issued was CCC-rated by at least one rating agency, and last year this figure was 17%. This category, which is the lowest rating debt can get, tends to start to default within three to five years.
“Historically, over three years time, roughly 37.5% default. Within ten years, almost 60% of CCC-rated paper defaults,” Dionne said. “If you had asked me at the beginning of ’03 whether we would see a lot of bankruptcies in ’07 and ’08, I would have said no,” Dionne said. “Usually what happens after you have had a record period of defaults is that the high-yield class goes in the penalty box for a little while…say five years. That didn’t happen this time because you had the record defaults in ’02 and then record issuances in ’03 and ’04, so the asset class simply never went into the penalty box this time.”
“I don’t think you’ll see the levels of the defaults that we saw in ’02, but I think we’ll see defaults in excess of the historical norm, which is 4.8%, so there will be an ample supply of opportunities.”