Vulture investors are looking for prey

Hungry investors continue to gear up to acquire beleaguered companies and their assets. But thorny issues, including financing, are deterring actual deals.

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By David Ellis, staff writer

NEW YORK ( -- They pray for recessions and smile a little wider when a company climbs onto its death bed.

Welcome to the world of distressed, or so-called "vulture" investors, an often-ignored corner of the market that has increasingly taken center stage as more businesses slip into bankruptcy or look to shed assets.

There has been no shortage of corporate ruin lately. Lehman Brothers sent a shockwave across the financial system when it collapsed in mid-September. Outside of the banking sector, electronics retailer Circuit City and media giant Tribune Co followed suit months later when they both filed for bankruptcy late last year.

Corporate bankruptcies climbed to their highest level in a decade last year: more than 43,000 American companies filed for bankruptcy protection, according to the American Bankruptcy Institute.

And now there is the very real possibility that the government could force struggling automakers General Motors (GM, Fortune 500) and Chrysler LLC down that same path. Video-rental chain Blockbuster (BBI, Fortune 500) has also been cited as a company that could potentially go bankrupt this year.

Smelling blood in the water, hedge funds, private equity firms and investment banks are quickly marshalling their resources.

Take Goldman Sachs (GS, Fortune 500), for example. The Wall Street bank is reportedly looking to raise several billion dollars for a fund aimed at investing in debt of troubled companies, the Financial Times reported last month.

Firms that have made a name for themselves as vulture investors are doubling down as well. Harbinger Capital, one of the country's largest hedge funds, is launching a new fund aimed at scooping up distressed loans.

Thinking that the proverbial shoe would drop sooner than it did, many distressed opportunity investors began preparing for a wave of bankruptcies as early as 2007. But that left too many investors chasing too few opportunities, notes Edith Hotchkiss, a professor of finance at Boston College's Carroll School of Management.

By the end of that year, distressed and restructuring-focused hedge funds boasted nearly $107 billion in assets under management, nearly double what it was just a year earlier, according to industry tracker Hedge Fund Research.

"We had been anticipating this for quite a while, but defaults were not materializing," said Hotchkiss, who has written extensively on corporate restructuring and bankruptcy. "Clearly that problem has gone away."

Easier said than done

Last month, bankruptcy-related acquisitions worldwide surged to the highest level in nearly five years as 34 companies were acquired, according to Thomson Reuters. But that number could climb as corporate earnings remain under pressure.

Other investors seem willing to try just about anything to profit from the growing number of distressed companies. Private equity giant Blackstone Group (BX), for example, is reportedly considering launching a $3 billion fund that would provide financing to companies on the brink of bankruptcy. Calls to the company regarding the fund were not immediately returned.

Nevertheless, few are straying from the tried-and-true strategy of buying the debt of a beleaguered firm. In most cases, investors are hoping that they can either turn around and sell the bonds for a tidy profit, or acquire an ownership stake in the company should it successfully emerge from bankruptcy.

Unlike shareholders, which are wiped out in the event of a bankruptcy, debt holders tend to hold onto to at least a portion, if not all, of their investment.

But even as vulture investors start to take flight once again, these investors still face numerous challenges, including a dearth of available financing. Lenders have largely been unwilling to commit funding for leveraged investments, according to experts.

At the same time, banks and other finance companies worry about handing money over to investors interested in buying firms that generate little cash currently.

One private equity executive, whose firm focuses on mid-sized companies, noted that financing has not been a significant issue for his firm as they tend to purchase companies that are "asset rich."

"The lenders who finance our niche of the business have never left the market," he said, speaking only on background given his firm's strict policy about not speaking to the media.

But the issue of pricing has also short-circuited many distressed deals, said Emanuel Cherney, partner and vice chair of law firm's Kaye Scholer's corporate and finance practice.

"There is a sort of disconnect between what people are willing to pay and what people think they should get on the sale of an asset," he said. "That has driven a big decline in deal activity."

Not to mention the issue of performance. Distressed and restructuring-focused hedge funds are one of the few groups within the hedge fund industry that are down so far this year. Last year, they also ranked as one of the worst performers, finishing 2008 25% lower, according to Hedge Fund Research.

Still, it may be hard to keep vulture investors from sifting through all the carcasses that continue to dot the corporate landscape. To top of page

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