Blackstone’s Goodman Says Long Bankruptcies Are Eroding Returns

Bankruptcies are getting longer and more litigious and they are hurting recoveries, according to Bennett Goodman, co-founder of Blackstone Group LP’s credit arm GSO Capital Partners.

"The one thing we’ve observed in the last couple years is when you get to a restructuring, there are lots of different creditors and different tranches of debt, it certainly takes a much longer time, there’s much more litigation," said Goodman, the "G" in New York-based GSO, which he founded with Tripp Smith and Doug Ostrover in 2005. He was speaking at the Private Debt Investor New York Forum on Tuesday.

Large bankruptcy cases, such as those of Caesars Entertainment Corp. and Energy Future Holdings Corp., can drag on for years. Last year, the energy sector in particular saw restructurings drag out as creditors fought for recoveries as commodities prices bounced around. Samson Resources Corp. filed for bankruptcy last September and is still working through the plan.

"More value was destroyed the longer these companies remained in bankruptcy," Goodman said. It’s especially true "if we’re talking about the second-lien or unsecured market," he said, where "recoveries are going to be a lot lower than the historical past. And that’s primarily because there’s just more senior debt ahead of them."

Also prolonging bankruptcies are credit derivatives, which offer protections that can make holders indifferent to how quickly a restructuring is settled, Goodman said.

‘More Aggressive’

Aside from lengthened bankruptcies, competition for opportunities is also pressuring returns as distressed investors search for places to put their capital.

"We’re in the later stages of a cycle, we see a lot of capital coming to the market, we see guys are willing to do more aggressive things because there’s more competition," said Goodman. "We’re going to stick to our niche."

This is when it’s important to "stick to the knitting," be disciplined and not get caught up in fads, Goodman said.

"The biggest mistakes managers make are style-driven," he said. "All these software deals in the last 18 months might be great growth stories, they might be good equity investments," but not for lenders.

While private-equity counterparts have a more glass-half-full outlook on investments, “credit investors and lenders are never going to be believers, we’re always going to be doubters,” Goodman said. “That’s what makes us good underwriters.”

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