Distressed Healthy, Concerns Shift

Even while the default rate on high yield credit begins to inch downward, distressed investors are unlikely to see their market dry out, according to at least one market observer.

The volume of distressed credits is likely to remain high, although the fundamental risks underlying the issuers is shifting, said John Krob, senior vice president of Credit Research & Trading LLC. He spoke recently at the Distressed Investing '99 conference presented by Renaissance American Management and BeardGroup.

Companies being driven into bankruptcy are not troubled by financial risks - a heavy debt burden or high credit risk, for example - said Krob, but they are failing in terms of adapting to a changing economy. Hardest hit have been the textile, retail and healthcare sectors and the manufacturers of computer hard drive components.

"We've always focused on financial risk, but what we perceive now is a heightened sense of business risk. If a company's gone bad, you look at it and evaluate it, and you have to ask yourself: is this even fixable, or do you have a business that has just sort of been passed by," Krob said.

A traditional retailer, for example, is not only in danger of being put out of business by e-commerce, but also by more efficient competitors that have implemented cost efficient systems.

Textiles, already hard-hit, are especially at risk of staying behind the curve in reducing costs and improving efficiency. They have not only been slow in improving technology, but also face a tougher regulatory environment and less protection from foreign manufacturers.

"You have to be much more careful in where you're putting your money and what the company's business model is no matter what the industry. Because of the pace of change, there's much greater degree of business risk in any company," he said.