Because he has a fantastic track record in distressed bonds, I was very interested to see that both Third Avenue Value (TAVFX) and the Third Avenue Small Cap Value (TASCX) Fund run by Curtis Jensen were buying distressed credits in companies he believes are 70% to 80% likely to remain performing credits. In addition to buying more shares in long-term holding Forest City Enterprises (FCE.A), the fund purchased the bonds of the company at levels that provided yields to maturity of better than 30%. Forest City has exchange-traded bonds as well that trade under the symbol FCY (FCY) on the NYSE. These are senior unsecured notes that trade at less than 25% of par, with yields of better than 30%. Whitman has done very well with this type of investment over the years, and if Forest City can survive the recession, these notes are a home run. In a bankruptcy, a quick glance tells me that these may work out to at least the purchase price as well.
I am not making a broad call for a market bottom. Rushing the trumpets with broad-based buying in stocks and high-yield bonds is still too dangerous right now. In all likelihood, the market will push still lower as politics, banks and real estate remain front and center. I am saying that it is starting to look like a party for value and distressed investors, and it is time to start paying attention to the extreme values being created by the falling market.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Adaptec, Electro Scientific and Forest City Enterprises to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
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