The Current Buy Sell Gap in Distressed Assets

I recently spent time in Vegas (at the TMA Distressed Investment Conference covered in earlier posts) and in South Florida. In both locations, I continue to marvel at the "trophy" properties sitting empty or near empty, and to think about how these distressed assets....and many more across the country...will get worked out. And, even more importantly for this blog, which professionals will take the lead in getting these assets worked out.

My sense is that there is still a significant gap between what most savvy distressed investors are willing to pay and what most sellers are willing to accept. The latter seem to still be thinking about ranges of discounts from what they have invested. Some potential buyers are excited about big discounts from recent investment levels, but the savvy ones understand discounted cash flow ("DCF") and are basing their decisions on DCF analysis.

If one assumes that this downturn will be long, DCF analysis gets interesting. If an asset (real estate or operating company) is likely to generate negative cash flow until the overall economy turns up (say three or four years), then the DCF for many distressed assets will be amazingly close to zero...or in some cases even less than zero...because of the way that DCF weighs the earliest years! Less than zero DCF suggests, of course, that the lender should pay the buyer just to be freed up from carrying cost burden. Ouch!!!

A trophy that cost a billion dollars within the last year or two, now could well really be worth close to nothing. Now there is a huge discount!

Most lenders and investors are not going to be able to take the accounting impacts of such reality on very many assets, any too quickly, less they expose just how precarious their own financial position is.

So, for the near term, we are likely to see a whole lot of dancing going on between potential buyers and potential sellers, with relatively few deals consummated.

But, this is not some investment advisory letter...my focus is on the Restructuring process and who will be the firms that read best this new playing field and position themselves to be market leaders for these very different times.

Change presents such great opportunities for those who shed the blinders of what has worked well in past downturns and fashion winning strategies for this downturn.