Attorney: Only a Shallow Pool of Distressed Deals Expected

The market for distressed assets is not living up to initial expectations. At the beginning of the pandemic, many expected a wave of opportunities deals to come to the market—much like following the 2008 Financial Crisis—but that has yet to happen. While some still expect to see more distress at the end of the year, the reality will likely be a shallow pool of distressed deals.

“I think that we thought we would see something more cataclysmic than we have in certain respects,” Manny Grillo, a restructuring partner at Baker Botts, tells GlobeSt.com. “That doesn’t mean that there haven’t been a number of properties that haven’t needed to be restructured, but a lot of what has occurred in the marketplace to this point has been the amend-and-extend variety rather than full-scale restructurings.”

The hospitality sector has been the hardest hit by the pandemic, and ultimately has the most distressed opportunities for investors. That is especially true in major metros and business-serving properties. “The most activity is in hospitality. If you break down that particular segments into sub-segments, the properties that cater to a business clientele have seen the greatest degree of weakness because of the reduction in business travel,” says Grillo. He adds that many events that were canceled prior to the pandemic have not been rebooked for this calendar year. Those properties are ultimately losing two years in revenue. That is one area where there could be a significant end-of-year boost in transaction volume.

Overall, there is a fundamental demand-supply imbalance in the distressed market, with more buyers than opportunities. “The markets are awash with capital. People went out and raised funds in the last year thinking that they were going to seize on opportunities. The bottom line is that there are functions of supply and demand,” says Grillo. “There is a lot of money sitting on the sidelines looking for opportunities. I think that you are going to see a shallow bottom in terms of where the market is going to go, and it will probably be spread over a longer period of time.”

That has lead to a pricing gap between buyers and sellers, which is also hampering market activity. “There is a material price disconnect in the market. Potential investors are looking for deeper discounts and existing investors, whether they are equity investors or senior lender debt investors, are trying to hold out to see how much recovery takes place at the end of the day,” says Grillo. ‘As long as that happens, there will be fewer transactions. As we get later in the year, people will have to decide if it is time to pay the piper.”