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Brian Chappatta

Big Short on Malls Is the Only Distressed Game in Town

The hard-hit commercial real-estate market is being left to private investors to sort out.

There aren’t many plays left.

There aren’t many plays left.

Photographer: Christopher Furlong/Getty Images

It’s hard to think of a less sympathetic group during the coronavirus pandemic than hedge funds and other firms that buy distressed assets and companies. They’re colloquially referred to as “predators” or “vultures” for a reason, after all. These investors step in when the outlook appears bleakest — and they have all the power — to lock in potentially huge returns in exchange for a cash infusion.

Still, one recurring theme of the current economic crisis is how the quick rebound in many financial markets has confounded distressed investors and left them looking flat-footed. I wrote in late March that the firms scrambling to launch credit funds might be too late by the time they finished raising money. Indeed, by mid-April, the average yield spread on junk-rated corporate bonds had fallen to 700 basis points from 1,100 basis points on March 23. A 1,000-basis-point spread is typically the benchmark for “distress.” In the span of weeks, the projected future return from buying risky credit was slashed drastically.