Friedberg: Distressed debt plays need to 'be creative,' opportunistic in current market

By Stephanie N. Rotondo

Phoenix, March 19 - As the first quarter of 2013 nears its end, market sources have noted a continued subdued feel in the distressed debt market.

"Obviously the market has been dominated by new issues," said Harry Friedberg, managing director and head of institutional fixed income sales-New York for Tejas Securities, in an interview with Prospect News. "There haven't been so many situations in distressed so people have to look elsewhere for returns."

And while Friedberg said he "can't blame" investors for chasing yields, he also opined that it was important to "be nimble" when looking for distressed opportunities.

When the axe falls

It's no secret that the economy has been tough the last few years. But as the economic crisis has turned towards a recovery, securities have been trading at or near all-time highs. While that is certainly good for investors, it also raises red flags, Friedberg said.

"You have to look for another shoe to drop," he said. "Credits are getting fully valued; money is flowing in too easily."

Politically, he said, neither side of the aisle has been able to come up with solutions that fully address the problems the market is currently facing.

"They're half solutions," he said. "Eventually, you have to pay the piper."

When the piper comes calling, "that's when [the distressed market] picks up quite a bit, that's when things get interesting again."

Given that, market players need to watch for the signs. In his opinion, an uptick in student loan defaults is "one thing to watch out for."

"You want to watch for anything and everything impacting the consumer that might cause them to wobble," he said.

Closed shops not the answer

Because of a lack of distressed ideas - real or perceived - many shops have shuttered or cut their distressed desks. Friedberg believes that is not the right way to go.

Instead, he says, desks need to "be opportunistic" and focus on their clients' needs.

"Most of our clients are multi-strategy funds," he said. As such, desks need to think multi-strategy as well.

"It's not always a deep distressed situation," he said. "Sometimes you have to look at other ways to express an idea."

That could mean temporarily veering away from straight bonds and looking into commercial or residential mortgage-backed securities or other areas within the capital structure.

"A lot of people missed the boat on structured products," he said, noting that that particular arena was "integral" to Tejas' success over the last few years.

Biding your time

Until the other shoe does drop, Friedberg thinks that investors need to be more open-minded when it comes to recognizing distressed opportunities.

"The mentality is to go for large situations," he said. "But with so many of those ideas picked over at the money, the real money to be made is in off-the-run situations."

While those situations "don't come every day," and sometimes they are a little less liquid, they can generate value, especially if no one else has recognized the potential.

"Once you get to the point where everyone is talking about it, there's nothing to talk about anymore," he said.

But to take this strategy, one must be patient and have the necessary expertise to navigate the waters. It also requires, for the investor, a certain amount of trust in their brokers. Having "deep relationships" with clients allows brokers to inform them on new potential ideas that might even seem outlandish at first.

For instance, Friedberg notes that Tejas was one of the first to recognize an opportunity in Ambac Financial Services Inc.

"People thought we were crazy," he said. "But it proved to be extremely profitable for our clients."

In the end, investors and desks alike "still have to be creative," Friedberg said. Instead of falling into a "herd mentality," it's better to look for "unique opportunities" that others might have missed.

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