Distressed Opportunities still abound for investors

Woman evaluating investments while on her laptop

The emergence of a post-COVID-19 recovery has not diminished the stresses on some sectors and companies.

Investors would be wrong to assume the opportunities for distressed investing have passed. The advent of vaccines and the potential for a sustained global economic recovery have brought considerable optimism. It is true the U.S. stock market continues to set records and credit spreads have narrowed, suggesting investors aren’t overly concerned about risks to the markets.

Generally, the opportunities in distressed investments are greatest when a major disruption, like a pandemic, causes pessimism to a degree that securities’ prices sink below their intrinsic value. Now that optimism has returned, as the global economy emerges from the COVID-19-induced slowdown, is it even possible to continue finding these pricing dislocations? 

In our view, the answer is yes for several reasons.

Access exclusive investing opportunities

The recovery has been uneven.

While broad data suggest the economy and markets are doing well, the recovery has been very uneven. Many traditional sectors – like retail, hospitality, leisure, and energy – continue to lag in the recovery. Even accommodative monetary policy and the extensive fiscal stimulus the U.S. government has provided have not been enough to help these sectors fully overcome the impact of the COVID-19-required restrictions on social gathering and travel.

Around the globe, one key to economic recovery has been the rate of inoculations. Many countries in Western Europe are still behind a pace that would provide more sure footing for their economies to rebound. 

In early April, the World Health Organization even called out the European Union’s vaccine distribution as “unacceptably slow.”1 

By April 1, Britain had delivered 52.4 doses of COVID-19 vaccines per 100 people, ahead of even the U.S. rate of 44.9 doses. But for the European Union, only 16.4 doses had been administered per 100 people.2

When finance ministers and central bank governors from the world’s 20 leading global economies met in early April for a virtual G20 conference, the unevenness of the economic recovery across the European Union and parts of Asia was a primary concern. The attendees confirmed the need to ensure that stimulus measures were not eased too soon and that some relief was provided to poorer, debt-laden countries.3

We believe there will be opportunities to invest in distressed securities in those regions that are slow to recover, as well as in the still-struggling sectors in countries that have rebounded more quickly. 

The self-protective measures companies had to take have put many on the financial brink. 

Amid a massive slowdown, companies have many levers they can pull to try to limit the impact of greatly reduced business activity. They can cut costs and reduce or even eliminate any previously planned investments in expansion and growth. While these measures offer a temporary stopgap, they can hamper the long-term viability of a company. Now that we have surpassed the one-year mark of the pandemic, many companies have been stretched to their financial limits. We expect the default rates on corporate debt to remain elevated this year.

Experienced investors can identify which companies and sectors have the most potential to emerge successfully.

Finding opportunities among distressed securities, in any environment, does take skill. First off, it requires an ability to differentiate between the widely perceived risks and the actual risks with a sector or company. 

Currently, for example, the consensus is that the hotel industry will continue to suffer from a long-term decline in travel. The consulting firm McKinsey & Company last year projected that hotel occupancy rates might not recover to their pre-COVID-19 levels until 2023.4

Even with that ominous forecast, the impact of COVID-19 was not uniform across the sector. Economy hotels, for example, cater to customers, like truck drivers and extended-stay guests, that still needed rooms throughout the pandemic. In both the economy and luxury sector, many of the best-known names simply franchise their brands and the decline in occupancy rates hurt their franchisees more than it did the companies with the best-known brands.

In any sector, assessing the opportunities with distressed securities must be done on a case-by-case basis. It’s not enough to simply look for a company on the verge of defaulting on its debt and even declaring bankruptcy, with the assumption that there is a chance to buy a viable asset on the cheap.

Corporate debt that might be selling at 50 cents on the dollar may seem attractive if one believes the company could be poised to recover. Still, it takes expertise to gauge the viability of the company and its industry. Is it a company that can successfully emerge from the disruption, or is it a business that many never thrive in the newly changed landscape, like a retailer with a primarily brick-and-mortar business that isn’t equipped to handle the shift to e-commerce that the pandemic accelerated?

Just as importantly, investors who take on the risk of distressed securities may benefit from having experience in guiding companies on the steps they must take to revitalize their business.

With companies that have gone into bankruptcy, ownership transfers to the creditors. The largest and most influential creditors may lead the steering committee that will aim to lead the company out of its financial straits. This may include spearheading the discussions on determining how to restructure the company, identifying where value can be extracted from it, and determining what lines of businesses it should focus on and what it should discard. In essence, they’ll be deciding what the company should look like as it emerges from bankruptcy. 

Unquestionably, getting the most from the investments made in these distressed securities requires considerable business acumen, beyond the skills of only identifying investment opportunities.

Investments for any market and economic conditions

It is a relief for everyone that the world seems ready to get past the many challenges the pandemic brought, but we believe there are still opportunities to realize substantial returns from distressed securities at companies whose fortunes are not poised for an immediate rebound. 

In fact, we believe these opportunities can be found in any economic environment. For that reason, a distressed investing strategy might be worth considering in a portfolio through all market climates. 

Additionally, the factors that drive the performance of these securities are more closely tied to the idiosyncratic risks associated with each company. This is what sets distressed securities apart from traditional stocks and bonds, whose performance can be largely driven by general perceptions about broad markets and macroeconomic conditions like interest rates. The typically low correlations that the returns of distressed securities have with the returns of traditional asset classes have the potential to make them excellent diversifiers at any time.  

Notes:

1. Source: “Covid: Europe’s vaccine rollout ‘unacceptably slow’ – WHO,” BBC News, 4/1/21

2. Source: “Covid: Europe’s vaccine rollout ‘unacceptably slow’ – WHO,” BBC News, 4/1/21. BBC drawing on Our World in Data as source for inoculation rates.

3. Source: “G20 to discuss uneven recovery from COVID crisis, officials say,” Yahoo Finance, 4/6/21

4. Source: “Hospitality and COVID-19: How long until ‘no vacancy’ for US hotels?” McKinsey & Company, 6/10/20

How helpful is this content?

Since inception, over $1.7B has been invested on Yieldstreet

Join today for free to access alternative investment opportunities.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest" or "Annualized Return" represents an annual target rate of interest or annualized target return and "term" represents the estimated term of the investment. Such target interest or target returns and estimated term are projections of the interest or returns and or term and may ultimately not be achieved. Actual interest or returns and term may be materially different from such projections. This targeted interest or returns and estimated term are based on the underlying investments held by the applicable.

4 Reflects the initial quarterly distribution declared by the board of directors on February 6, 2020, which will be payable to stockholders of record as of June 10, 2020, and the initial offering price of $10 per share.

5 The Fund will cease investing and seek to liquidate the Fund's remaining portfolio no later than 48 months after the Fund's initial closing. It may take up to twelve months thereafter to fully monetize any remaining illiquid investments in the Fund's portfolio.

6 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

7 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 8th, 2021, after deduction of management fees and all other expenses charged to investments.

8 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Prism Fund before investing. The prospectus for the Yieldstreet Prism Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetprismfund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

Banking services are provided by Evolve Bank & Trust, Member FDIC.

Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure
Copyright © 2021 YieldStreet, Inc.