Distressed Debt Opportunities Rise as Economy Tightens

The tightening credit markets and the slump in retail, construction and sub-prime mortgage lending may make financiers in some sectors jumpy, but they may herald prime hiring season for those with skills and experience in distressed debt.

As a sector, distressed debt is broad indeed: It encompasses stocks, bonds, loans and other financial claims across a range of industries including energy, cable/telecommunications, airlines, auto industries - the list seems to grow daily. "Although the supply of distressed debt is very limited today, there's been a significant uptick in the interest of hedge funds and private equity firms," observes Mary O'Gorman, managing director of financial recruiter Snelling Search. "Why? Noting that distressed debt provides "an opportunity for superior returns relative to competing strategies," O'Gorman explains, "the firms have the ability and know-how to effectively hedge against the risks associated with distressed situations."

Today's economic outlook favors growth in the debt business. In the U.S., growth is expected to slow, which will likely result in a deterioration of credit quality, says O'Gorman. While default rates aren't expected to increase sharply in the near term, "the problems are already surfacing in the housing industry, with sales and prices drifting down and new housing starts declining," O'Gorman says.

The opportunity to help in these cases usually arises when a company files for Chapter 11, a reorganization, which gives the company legal protection to operate while working out agreements with its creditors. This kind of restructuring help can be routine or rise to the truly creative. In the event the company must liquidate, debt professionals can help in distributing assets.

Skills in Demand

At the junior level, hedge funds and private equity firms seek candidates with strong valuation, modeling and analytical skills. Their expertise may come from analyst-training programs at an investment bank, a private equity firm, or perhaps a restructuring firm. Senior applicants need strong analytical know-how, plus experience with private equity, distressed- and/or bank-lending experience. Higher level candidates must have the ability to source deals through a strong network.

O'Gorman refrains from quoting salary levels in this field because, she says, "there is no standard compensation." However, "the demand for the best candidates is very strong." When employers compete against each other, the supply usually wins.