LTRO might mute distressed strategy, but will not kill it, says Neuberger Berman
The European Central Bank’s three-year cheap loan program will probably have the effect of temporarily muting the growth of opportunities for Europe’s distressed assets managers.
But other forces exist that could still make the opportunity set an attractive one, says a fund of hedge funds manager active in the area.
Jeff Majit (pictured), a managing director at Neuberger Berman, said the ECB’s Long Term Refinancing Operation, which has been used by at least 800 eurozone banks since December, meant fewer banks would be forced sellers of assets to willing hedge fund buyers, in the near-term at least.
Such opportunities were widely expected since the crisis, as banks deleveraging of their balance sheets would disgorge ‘problem assets’.
But they are largely “yet to materialise”, often because banks have been reluctant to offload these assets at discounts to where they are marked on their balance sheets.
The ECB’s €1trn-plus bank liquidity program makes the possibility of wide-scale forced selling more remote, Majit says.
“LTRO reduces the chances of massive amounts of forced selling in the near term.
“But, should the European situation deteriorate, there is potential for bank to have no choice but to become aggressive sellers.
“But it is difficult to have an accurate perspective on exactly how real the opportunity set will be without first having a view on the likelihood of one or more disorderly sovereign defaults or a break-up (of the eurozone) – but again with LTRO that probability is quite low at this point,” he said.
Some Spanish Cajas have reportedly made selective divestitures, in an orderly fashion, of corporate and property loans, while Britain’s Lloyds Banking Group has sold pools of corporate loans and mortgages.
But Majit said he did not expect widespread selling for “at least the next couple of quarters at a minimum”.
However, he added that austerity taking hold across Europe would see opportunities arise for fund managers, as companies fall into stress and potential default on loans and bonds.
“Whether that is a good opportunity, or a great opportunity, will be dictated in part by the macro environment in Europe.”
Majit added historically the main financiers of Europe’s high yield businesses – banks and CLOs – would not be in a position to extend as much credit as they had before.
Therefore, it is possible these companies – many of whom remain highly levered – will no longer have access to easy financing. Some will likely be forced into default. This dynamic would present increased opportunities for hedge funds specializing in distressed debt.
Majit added that there remain a handful of larger distressed opportunities in the US – so a lack of widespread corporate distress yet in Europe did not mean distressed fund managers were not already reaping rewards from elsewhere around the world.
Neuberger Berman manages funds of hedge fund strategies of which distressed opportunities form one part.
Neuberger Berman also has a London stock exchange-listed vehicle, the NB Distressed Debt Investment Fund, with more frequent liquidity available to its shareholders.