For fund managers buying distressed European assets the current business climate is anything but gloomy.
Standard & Poor’s analysis is broadly supportive. Its 2012 outlook on European corporates notes: “Country risks will likely weigh on the credit fortunes of more domestic-oriented European companies, especially those with significant exposure to economies that are hardest hit by the sovereign debt crisis.
“Weaker, B-rated companies – even those in the BB category – with high country exposure to the periphery still to complete refinancing ahead of 2012-13 maturities could face particular difficulties in 2012. About 57% of the 167 credit estimates that have defaulted since the end of 2007 remain highly vulnerable to defaulting again.”
Robinson says this distressed cycle could be quicker than the four years it took early last decade, not least because lawyers and the courts have precedents to fall back upon.
His event-driven strategy made more than 300% in the decade to 2009, and he foresees more opportunities to buy assets at “mid-single-digit multiples of mid-cycle earnings, possibly through distressed bonds”. However, Altana’s ‘opportunistic’ approach also encompasses distressed equities and derivatives, including credit default swaps.
He says defaults can either be ‘actual defaults’ such as Greece’s, or they can come through the ECB’s cheap loan programme: “Default by stealth, but you still have a loss.”
At first, Altana Distressed Assets fund will focus on European corporates. Robinson says: “The eurozone has let a sovereign crisis become a banking crisis and a sovereign default. You are seeing an enormous number of profit warnings across sectors, and the lowest multiples are currently in Europe.”
Indeed, by late February 45% of the fourth quarter-earnings announcements from listed European companies missed expectations. The season was “on track to be the worst” for three years, according to Bank of America Merrill Lynch.
Michael Hintze, founder of hedge fund CQS, says possible recession and more stringent loan covenants taking effect will each drive stress in Europe. Victims already include Eircom, CMA, Seat, Ferretti, Panrico and Novasep.
“In addition to this pipeline of restructurings,” he says, “we have already seen the early signs of a broad array of opportunities in asset-backed securities, commercial mortgage-backed securities, covered bonds, quasi-government entities and stressed corporates.”
Gina Germano, who invested for almost 20 years in distressed assets before co-founding Goldbridge Capital Partners last year, says: “The ongoing development of Europe’s credit markets will produce a protracted period of inefficiency [amid] a growing requirement for alternative sources of capital.”
Her view finds support from Bank for International Settlements (BIS) statistics showing Europe’s weakest banks cut local lending by 14.6% during the last quarter of 2011. The 31 EU banks that fell short of the European Banking Authority’s (EBA) reserving targets, plus all Greek banks, also sliced 43% from leveraged loan activity.
Andrew Marshak, managing director in Credit Suisse Asset Management’s Credit Investments Group, which invests about $16bn – mostly in leveraged loans and high yield bonds – says many of the corporate loans structures put in place in 2006-07 – in a “time of plenty” – were often made in the expectation that companies would grow.