Distressed Debt Swaps Are Mostly Costly Failures, HPS’s Puri Says

HPS Investment Partners' Purnima Puri, head of liquid credit, asserted that distressed debt swaps are predominantly costly failures, failing to keep troubled companies afloat and resulting in significant fees and demolished recovery rates for creditors. This assessment from a major investment firm highlights the ineffectiveness and financial detriment of such restructuring efforts.

Analysis

A senior executive from HPS Investment Partners, a major credit-focused investment firm, has issued a stark warning regarding the efficacy of distressed debt swaps. Purnima Puri, HPS's head of liquid credit, asserts that these transactions are largely failing to prevent corporate defaults, instead functioning as costly exercises that do not ultimately keep troubled companies afloat. The critique highlights that not only are these swaps ineffective, but they are also value-destructive for lenders, citing significant advisory fees and operational distractions that accompany the process. Most critically, the strategy has resulted in recovery rates for creditors being 'totally demolished,' suggesting that the intended benefit of restructuring is being overshadowed by severe financial detriment to stakeholders.

Key Decisions for Investors

• Investors in distressed and high-yield credit should view company announcements of debt swaps with significant skepticism, as they may indicate a higher probability of ultimate failure rather than a successful turnaround.
• It is prudent to re-evaluate and potentially lower recovery rate assumptions for credits undergoing or likely to undergo these types of coercive restructurings, given the claim of 'demolished' recoveries.
• Portfolio managers should prioritize debt instruments with stronger covenants and seniority in the capital structure to better protect against the value erosion described in these failed swap scenarios.