Per a recent Wall Street Journal article, distressed debt investors, “are seeking more than $67 billion across 59 funds* and if they succeed, the total would smash the record set in 2008, when firms raised $44.7 billion to profit from the fallout of the financial crisis.” Over the past several years, firms have had relatively easy access to credit creating a lull for distressed investors, yet given current economic conditions and volatility, the market is again ripe for investing in distressed debt.
These types of funds invest in debt instruments that are trading at a significant discount to par value due to a negative outlook, or perceived likelihood of borrower default. This is a situation many companies are experiencing as a result of the shutdown of non-essential businesses and its ripple effect on the economy. In a typical situation:
- The distressed debt fund takes ownership of a company through a debt-equity swap structure where the company agrees with the lender to eliminate some or all of its debt in exchange for an ownership stake.
As investors launch these funds, there are workflow and accounting hurdles to consider; managing the intricacies and complexities of this style of investment can be an operational headache. Additionally, relying on spreadsheets or accounting systems built for traditional portfolios is inefficient and runs a high risk of error. For compliance and investor transparency, fund managers require solutions to seamlessly and efficiently manage these complex operations and strategies.
SS&C Advent’s Geneva significantly reduces operational stress in accounting for debt and derivatives by natively accounting for different types of loans with an intuitive and modern user interface for managing all workflows associated with the loans. Geneva offers full support for distressed bank debt with full compensation and cost of carry accruals, automated interest accruals and payments, and offers the flexibility to suspend interest and amortization accruals separately for distressed facilities. Moreover, Geneva gives firms the flexibility to manage distressed debt portfolios, even supporting restructurings, and convertible debt to account accurately for takeover situations. By easing the operational burden of accounting for complex strategies, firms are able to focus on opportunities, strategies, and profitable decisions.
There are significant operational challenges and investment risks associated with distressed debt, yet when the strategy succeeds, the rewards are phenomenal relative to market returns. As distressed debt investments continue to gain traction, fund managers will require solutions for tracking and allocating complex portfolios and transactions. To learn more, view this brief that explores how Geneva improves accuracy and reduces risk in processing complex instruments.
Louch, W. (2020, May 19). Distressed-Debt Funds Seek Billions to Profit from Coronavirus Carnage Wall Street Journal. May 19, 2020. Retired from: https://www.wsj.com/articles/distressed-debt-funds-seek-billions-to-profit-from-coronavirus-carnage-11589796000
*Data according to data provider Preqin Ltd