How an expert in distressed debt evaluates risk

How an expert on distressed debt evaluates risk

What you probably already know: We’ve written about Shelly Lombard and her company, Schmooze, which is helping women learn how to build stronger business relationships. But before she was focused on that, Lombard was an expert in distressed debt and bonds for JPMorgan Chase and Barclays, among others. So we asked how someone with that kind of background think about risk.

How she evaluates a company’s risk profile: Lombard says the first thing she asks is “does the company have a reason to exist?” For example, once Netflix appeared, Redbox didn’t have a reason to exist. “Cable companies have lost about 25% of their subscribers over the last couple of years because of streaming,” Lombard said. Now, those same companies provide internet services, so have another reason to exist. But their original reason for existing has slipped away as competitors have moved in, and they’ll need to shift focus to retain their positions.

Turning a company around: If a company’s reason for existing disappears, they need to pivot. That’s easy to say and hard to do, Lombard says. It’s also often very expensive, so if a company is already struggling, turnarounds can be challenging. For instance, she was working with a dairy processor that was watching a generation of people skip regular milk in favor of plant-based alternatives. She suggested adding almond milk and plant-based butter to the company’s products. To do that, the company had to invest and had to have the right management team in place to complete the transition. In many cases, that’s simply not possible. The Redbox parent company’s bankruptcy filing on Monday is evidence of that.

On the growing amount of distressed debt in private equity firms: “I don’t think that’s something for people to be concerned about,” Lombard said. Private equity firms have acquired public companies and turned them private, and if that debt is becoming distressed, it puts their equity at risk. But it isn’t likely to put regular investors at risk because they aren’t directly exposed to these portfolios.

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