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- Distressed-credit trading at Wall Street banks has been a small, quiet corner of the market over the past decade.
- But everything's changed in the last two months amid the worldwide tumult from the coronavirus pandemic.
- Now, firms including J.Crew, JCPenney, Neiman Marcus, and Hertz have filed for bankruptcy, and massive funds like Oaktree and Pimco are raising billions to go bargain-shopping as corporations head toward fire-sales.
- Wall Street's distressed-debt desks vary in approach — some stick to flow trading and making markets in bonds and loans trading at discounted prices, while others compete with hedge funds and make proprietary bets of their own.
- But the top traders and analysts can reap huge paydays, and they're all poised to see a surge in activity as the cycle ramps up.
- Visit Business Insider's homepage for more stories.
Distressed-debt trading exists in the shadows of Wall Street, those increasingly rare corners of the world's largest securities marketplace that haven't been entirely tamed by regulatory fiat.
And yet for years, with equity markets marching ever higher and corporate defaults pinned at historical lows, the industry has been a sleepy backwater. Wall Street banks kept headcount to a minimum and bided their time, and many talented traders decamped for the hedge-fund world.
The industry brought in about $1.5 billion last year, just a fraction of the $66 billion across all of fixed-income trading, according to figures from Coalition Ltd.
"There's been scarce supply over the past several years in the distressed space," said James Borger, a managing director at Greenwich Associates who conducts an annual poll of the industry's most helpful sell-side traders. "But everything is different now, and there's going to be a lot of trading activity in the coming months."
The distressed landscape lurched dramatically in March, when the coronavirus pandemic and worldwide shelter-in-place orders pulled the rug from beneath the retail, travel, and lodging industries. Cruise operators and airlines tapped the government for bailout funds, and distressed veterans like Oaktree's Howard Marks and Avenue Capital's Marc Lasry began sizing up the opportunity.
Oaktree and Pimco are raising billions of dollars to pick up bargains from the scrap heap. Already iconic retailers like J. Crew and Nieman Marcus have filed for bankruptcy. And car-rental company Hertz filed for bankruptcy protection on Friday evening.
Amid the market convulsions, most distressed desks took a beating in the first quarter — one industry source pegged the year-over-year revenue decline at more than 30% across the sell-side.
But as the economic fallout spreads, more opportunities and flow are likely to come the way of Wall Street's distressed-debt desks, which make markets in bonds and loans trading at discounted prices, as well as bankruptcy claims, litigation events, and other more complex and special situations.
To an outsider, some of that activity may seem like it runs afoul of the Volcker Rule, a ban on prop trading enacted in the years after authorities bailed the biggest banks out of money-losing trades in the global financial crisis. However, the rules don't always apply to distressed assets, such as loans, and the regulations give some leeway and nuance to market-making functions that means the banks don't often run afoul of regulators.
Calling cards vary significantly by bank. Some focus primarily on executing orders for clients and stick to high-profile distressed companies that trade regularly — think Lehman Brothers' bonds following the 2008 financial collapse — while others invest capital alongside clients or identify esoteric assets to snatch up and hold, at times directly competing with buy-side counterparts.
As the cycle ramps up, traders will rely on a client base they've been nurturing during the slow times. While some have added talent recently, few industry insiders expect a surge in hiring, but instead expect the banks to transition some high-yield analysts and traders into more distressed work.
"A lot of this is about relationships," said Amrit Shahani, Coalition's global head of research. "It's less to do with platform and group. It's more like you're an entrepreneur."
Business Insider spoke with nearly a dozen industry insiders — from buy-side traders and portfolio managers, to current and former sell-side credit execs, to headhunters and consultants — to come up with this list of Wall Street's most powerful and noteworthy distressed-debt traders.
Mike Lee and Mike Winn, Bank of America
Within the industry, they're known simply as "the Mikes."
Mike Lee and Mike Winn have since 2014 coheaded Bank of America's distressed credit shop, which last year claimed as much as one-third of the industry's global market share, according to insiders.
While technically sharp and adept at tearing apart balance sheets to assess value, they're also trusted and well-liked on the street, putting them at the top of client lists to work with. In 2019, buy-side distressed traders ranked Lee the most helpful sell-side trader by a wide margin, while Winn cracked the top-3 as well, according to a survey of 34 portfolio managers and traders by Greenwich Associates.
"They're known for being very straightforward, very honest, very smart," a former sell-side credit-trading exec said. "There are a lot of dodgy characters in the distressed business. I think that's why people like doing business with them, because they're very credible."
Their business model cuts both ways. On the one hand, the Mikes work with hundreds of clients and trade big-name defaulted bonds across the spectrum, like PG&E or Frontier Communications, according to sources familiar with the busines.
But BofA's distressed squad has a deep bench of research analysts and has acquired more mystique on the street for trading in murkier securities with potentially greater upside. Lee and Winn generate sizable revenue from unearthing illiquid or off-the-run assets — like middle-market leases and trade claims for bankrupt companies — and co-investing with hedge-funds or orchestrating their own trades.
They're known to source beaten down leveraged loans, pitch them to investors, and buy a block of the assets alongside them.
One senior buy-side trader said Bank of America's distressed shop was the only sell-side firm they considered a competitor.
Sources say the Mikes each regularly hit $100 million territory in annual revenue hauls.
Amy Silverzweig, Barclays
Barclays isn't at the top of traders' minds when they think about their go-to trading counterparties, but the British bank does boast one of Wall Street's most popular traders.
That's Amy Silverzweig, a managing director on the distressed desk who's known for being particularly good in the loan market. Silverzweig joined Barclays in 2018 after 11 years at Goldman Sachs and quickly elevated Barclays' game, industry insiders say. Greenwich's survey placed Silverzweig second on a list of the market's most helpful sell-side traders.
That's not to say she's always easy going. Silverzweig is known for having a big personality and not backing down. When she finds a name she likes, she will sometimes pile in, build a big position and force other desks to trade, according to one buy-side counterpart. She studied English and economics at Dartmouth College.
"When she picks up a new name or smells an opportunity, it's a fact that guys at other firms will just get really down on themselves and just be like, oh f---, Amy's involved," the trader said. "She grabs market share and she will push the position to the point that it becomes uncomfortable for people."
She sits on a desk that's respected by industry players and run by Adam Yarnold, who took over leadership in 2016 after a string of exits. Yarnold is taking some time off, and US credit-trading cohead Drew Mogavero and global head of credit Adeel Khan are running the desk in his place.
Olaf Auerbach, Citigroup
Olaf Auerbach, Citi's head of distressed trading, is credited by some for turning around the desk at Citi in recent years. Stylistically, his tendency is to be direct — even overly blunt, some who interact with him say.
Auerbach, 35, joined Citi in 2007, not long after graduating from Rutgers, and was promoted to managing director two years ago.
Unlike other top-tier distressed debt traders, Auerbach has earned a reputation for shying away from risk. Instead of wagering hefty bets in concentrated positions, he typically opts to hold smaller stakes and trades more frequently, getting out once he's made a small profit, sources said. That can annoy some colleagues, who think he should be taking bigger swings, according to people who've spoken to them.
"He always makes money," one insider said. "But he runs risk super tight."
That's resulted in steady profits, but it also sometimes means money left on the table, and thus less eye-popping returns than some competitors.
Some who interact with him find his style vexing at times, according to multiple sources, but he's considered a talented and reliable counterparty for buy-side distressed shops, who ranked him in their top-3 most helpful traders, according to the Greenwich survey.
Shawn Faurot, Deutsche Bank
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Conversations about distressed-debt trading don't get very far before Deutsche Bank's name comes up, and particularly that of trader Shawn Faurot.
The head of US credit trading for the Frankfurt-based bank, Faurot isn't technically a line trader. But he's known for his distressed-debt chops. Rumor has it that he's made money in every year but one out of the last 10, and the year he didn't make money, he was flat, according to industry sources. Whether it's true or not is almost beside the point: It's become market legend.
Faurot helps lead a credit franchise that remains one of the few bright spots at Deutsche Bank after years of capital constraints and thousands of job cuts. An IFR News article from September, written with access to some of the bank's most senior credit traders, said Deutsche Bank "has developed what may be the biggest distressed-debt unit on Wall Street," not to mention "a similarly large niche in lending against hard-to-value assets."
A 17-year veteran of Deutsche Bank, Faurot came up through the bank's distressed-products group, a much heralded business that deals in the market's most illiquid and complex positions. The desk enjoys such status in the market that veteransoftheunitwhohaveleft for the buy side still mention it in their bios.
When Scott Martin and C.J. Lanktree left as head of DPG in 2012 to join distressed hedge fund Solus Alternative Asset Management LP, Faurot took over the business. Three years later, he moved to run US credit.
It's a surprise to some that Faurot hasn't made his own move to the buyside.
"Faurot is the best distressed manager and research guy on Wall Street," according one credit investor. "He could easily be running his own hedge fund."
His team has been actively involved in some of the market's most recent situations, including the bankruptcy of Pacific Gas & Electric, Puerto Rico, and Vantage Drilling, and he's represented Deutsche Bank as a member of numerous credit committees. A native of Colorado, he graduated summa cum laude from Emory University.
Deutsche Bank and Bank of America may have accounted for as much as 70% of the revenue in the distressed market last year, each generating large profits by taking positions in less liquid securities and riding them up as their values recovered, according to some insiders.
Thomas Malafronte, Goldman Sachs
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Goldman Sachs's Thomas Malafronte is a name that comes up in every conversation.
A veteran not of the distressed markets, but of high-yield trading, Malafronte likes playing in the part of the market occupied by fallen angels, those firms that were once rated investment grade before falling into junk territory. Prior to Goldman, he spent time at hedge fund Blue Mountain and Credit Suisse.
He runs a distressed desk at Goldman that has had a string of tough luck recently, exacerbated by a churn in leadership before Malafronte was named to the role last year. He took over from Adam Savarese, who lost money with wagers on coal miner Peabody Energy and US homebuilder Hovnanian Enterprises before exiting in early 2019.
Malafronte made a name for himself in 2016 when he brought in a reported $300 million by buying battered energy and mining bonds and riding them for gains as the market recovered. And he has management's authority to put on big trades if the opportunity arises, according to people with knowledge of the desk.
Malafronte's trading style has lovers and haters. Some who trade with him describe it as self-centered, willing to put on trades alongside clients or opposite them, but always monitoring the health of his position before that of his clients, according to one industry source. Especially if he's built up a big position.
"The reality is he's going to work himself out of his mess before he helps you out of your mess," the person said.
At the same time, he's more than willing to provide liquidity in size, especially if it's a situation where his counterpart has an opposite view, sources said. He's smart about pricing bonds at a level where people will buy them, and, at least with some clients, open about sharing ideas and market color, according to a buy-side source. He combines a good understanding of the fundamentals with the technical factors to know when it's time, like in 2016, to go long, another said.
"A lot of the traders who sit at the banks are brokers," that person said. "But the very good ones, the best ones, know how to combine that skillset with taking risk around the edges and he does that better than anybody."
Earlier this year, Malafronte lost roughly $70 million on Chesapeake Energy, though he's made money on other positions since then, according to people familiar with the performance. A New Jersey native, he played baseball at Rutgers.
Joe Femenia, Jefferies
Femenia may seem like an odd choice on a list like this, filled with traders at banks with the much larger balance sheets that are often required for distressed positions.
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But Femenia, since joining Jefferies from Goldman Sachs in 2016, earned mention from industry insiders as a talented trader who has built the smaller bank's franchise into one that regularly competes with the bigger players. Over the last four years, Jefferies has overhauled the team, adding 12 people to a US team that now stands at 15.
A graduate of the US Naval Academy, Femenia was a Navy SEAL who did tours in Iraq and Afghanistan. He attended Columbia's business school after the military and rose through Goldman's distressed and leveraged-finance business. He worked with Barclays' Silverzweig there.
Under Femenia, Jefferies picks its spots with a focus on power, energy, and retail industries, as well as complex deal restructurings, and a trio of people who go out and source new inventories. Femenia's team services a smaller group of accounts, but showers them with attention, according to one industry source.
Alex Bea and Joe Saad, JPMorgan
JPMorgan's traders are used to dominating most of Wall Street's trading businesses, so it may come as a surprise that the bank isn't always at the top of the list in distressed trading.
One reason is it just hasn't focused on it, content to spend resources on supporting a massive underwriting franchise for investment grade and high-yield debt, as well as leveraged loans, and the mutual fund and insurance clients who buy the paper. As one person put it, the focus has been consistent, but narrow.
It's also tricky for a bank with JPMorgan's vast client network and reputation to take an active role in the heated negotiations that can come up in distressed situations, sources said. That can include pushing aside other lenders or investors, firing company employees to cut costs, or acting as the head of a restructuring committee.
Nevertheless, insiders say it's dangerous to discount the bank due to the size of its balance sheet and its heft in other fixed-income markets, and one person briefed on its strategy suggests the bank is thinking of playing a more active role in this cycle.
The bank's effort is led by two execs. Alex Bea, an aggressive trader who has been at JPMorgan since 2002 and can sometimes get under clients' skin, according to insiders, and Joseph Saad, an expert in the research side of the business who is said to have the ear of Jamie Dimon and an ability to get approval for some particularly tricky positions if the opportunity is right. While their desk doesn't take a ton of risk, Bea and Saad choose their spots. They've also been known to take a client idea and trade on it themselves, according to one senior trader.
Matt Weinstein, Morgan Stanley
Morgan Stanley is better known for its juggernaut stock-trading operation than its fixed-income chops.
But while the bank has made upgrades over the years and competes with the best in debt trading, its distressed-credit platform has remained a missing piece of the equation.
To fill that void, in April the bank poached one of the industry's top distressed-debt traders, Deutsche Bank standout Matthew Weinstein, who will run Morgan Stanley's distressed desk in North America.
Weinstein started out as a lawyer, working at powerhouse bankruptcy and restructuring firm Weil, Gotshal, & Manges in the early 2000s before joining Bear Stearns 2006. Bear Stearns collapsed in 2008 as the financial crisis gathered steam, and he landed at Deutsche, first as a lawyer and deal sourcer but eventually transitioning to a trading role. By the end of 2015, he was head of the firm's US distressed-credit trading operation.
Weinstein is considered a star trader who instantly provides Morgan Stanley inroads with key buy-side clients. One trader described his style as a hybrid — adept at facilitating flow trades for funds but also skilled at identifying winning investments and wagering bets with the bank's money as well. Another said he possesses a rare combination of trading chops and legal acumen.
According to several industry sources, Goldman tried to lure him away a couple years ago, but Deutsche Bank convinced him to stay put. But in 2020, with the German lender reeling from scandals and cutbacks, Morgan Stanley successfully pried him loose.
At his new firm, he'll take the reins of a rebuilding project, especially compared with the long lineage of impressive distressed-credit performance at Deutsche. But Morgan Stanley has lofty ambitions and is unencumbered by the same scrutiny dogging the beleaguered German bank.
"They don't dip their toe into anything. They take their shot," an industry insider said of Morgan Stanley's hiring of Weinstein. "It's an aggressive place, and they like to win."
Adam Savarese, RBC Capital Markets
RBC isn't a top-tier competitor in distressed credit. But Adam Savarese has ambitions to change that.
The ex-Goldman Sachs partner signed on with the Canadian firm last fall as US head of high-yield and distressed-credit trading, and he's been shaking up the group's roster since coming aboard — including two distressed sales and trading hires that have joined in the past month.
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Savarese, a wrestler in college at James Madison University, started his career with Goldman Sachs in 1999, but jumped to Morgan Stanley in the early 2000s. He ascended to managing director before rejoining Goldman as a partner in 2015, heading up leveraged finance trading.
Savarese made an immediate impact, turning around Goldman's flailing distressed desk's fortunes with winning bets that helped net $200 million in 2016. But some of those well-called shots — including a large wager on Peabody— boomeranged in 2017, taking a large bite out of the desk's profits.
He was among a mass partner exodus at Goldman in 2019, announcing his departure in February.
Affable but also known for an indomitable work ethic, Savarese "puts RBC on the map" in distressed credit for both clients and traders, according to one industry insider.
"People like working for him," the insider said, adding that "there are some real accounts that will trade with you on day one if Sav is the boss."
SEE ALSO: RBC is snapping up key hires in distressed-credit trading as Wall Street preps for a feeding frenzy
SEE ALSO: Morgan Stanley hired a top trader away from Deutsche Bank in distressed credit — an area primed for a boom as corporate debt gets crushed
SEE ALSO: Power brokers of distress: Meet the Wall Street stars making millions trading busted bonds, bankruptcy claims, and other fire-sale securities
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Conversations about distressed-debt trading don't get very far before Deutsche Bank's name comes up, and particularly that of trader Shawn Faurot.
Goldman Sachs's Thomas Malafronte is a name that comes up in every conversation. 
But Femenia, since joining Jefferies from Goldman Sachs in 2016, earned mention from industry insiders as a talented trader who has built the smaller bank's franchise into one that regularly competes with the bigger players. Over the last four years, Jefferies has overhauled the team, adding 12 people to a US team that now stands at 15. 
Savarese, a wrestler in college at James Madison University, started his career with Goldman Sachs in 1999, but jumped to Morgan Stanley in the early 2000s. He ascended to managing director before rejoining Goldman as a partner in 2015, heading up leveraged finance trading.
