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Distressed Debt Investors Hover as Default Risk Soars

Since the Chapter 11 bankruptcy filing of homebuilder TOUSA last month, investors continue to wonder if more public homebuilders will be forced to restructure. So far, lenders have been willing to give limited waivers to builders who violate debt covenants, heading off a restructuring.

Steve Zelin, a managing director in the restructuring group at Blackstone, says lenders are granting the waivers in an attempt to step back and get local market experts to come in and value the builder's assets.

While real estate is clearly a hot distressed target, others sectors in focus are retail and autos, which have spillover real estate effects, as the consumer weakens from housing price declines.

Jim Malley, portfolio manager at Chilton Investment Company, says his distressed fund is researching forest products and basic materials companies. While he did not provide names, he says these companies are facing high input cost inflation, which cannot be passed along to consumers in the form of higher prices.

He said restaurants and retailers are facing a similar cost inflation issue.

Jim Chanos, the legendary short seller who bet on Enron's decline before it went bankrupt, says there is a huge spike of defaults coming from the fallout of the LBO boom.

"I don't know what crack pipe these people were smoking," he says.

Chanos also expects students lenders such as SLM Corp (SLM), better known as Sallie Mae, will run into trouble as college student loan default rates spike.

Chanos also believes for-profit colleges are a "dicey proposition." He expects such colleges to face increasing student loan defaults, while he also questions the overall value of education such schools are offering.

Although Chanos did not name stocks in this group, Apollo Group (APOL) is the largest for-profit educator, owning the ubiquitous University of Phoenix.

As originally published, this story contained an error. Please see Corrections and Clarifications.
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