Distressed Trades of the Day

For the best part of a year now I've heard buy-siders talk about how there are great opportunities in the debt markets if you know what you're doing. I've generally assumed that these people have lost money on most of those "great opportunities" so far, and that a lot of their rhetoric was just what any fund manager says when markets go down.

But distressed-debt hedge fund GSO, recently acquired by Blackstone, has actually exited a couple of its distressed positions already, with healthy profits:

In its largest deal, it bought debt in Alltel at the same hefty discount and will be paid off at 100 cents on the dollar, as the telecommuncations company's owners - Goldman Sachs and TPG - sold it to Verizon two months later. Another big payday came when GSO bought debt of Tribune, a troubled newspaper company, Tribune at 66 cents on the dollar, watched it rise to 75 cents when Tribune sold Newsday, one of its crown jewels, and quickly sold out.

Very nice: I sure wouldn't want to be owning Tribune debt right now. There's a vague idea out there that distressed debt investing is essentially a buy-and-hold practice: you hope that the firm won't go bankrupt and will repay you in full, but if it does go bankrupt then you litigate aggressively in bankruptcy court.

GSO, it seems, is also very good at distressed-debt trading: buying low and selling high before the debt starts falling again. That skill is likely to serve them very well in today's volatile environment.