For fund managers buying distressed European assets the current business climate is anything but gloomy.
Repairing dashed hopes
“Some companies have gone into the crisis environment with the capital structure [that was] put in place back in a heated-up bull market environment. A number have crashed where there was too much leverage on their balance sheets, and then they had to face the financial crisis post-Lehman.”
In Marshak’s opinion, a poster child of this was the Yellow Pages sector. “A number of companies have been restructured, and a number will restructure again. Those that did not restructure are going through stress now.”
Loans taken out by the most troubled companies have since traded down to 20 cents on the euro, but up to low-to-high 70s, depending on the tranche.
“Some companies have too much leverage from deals and they have not grown into the capital structures,” says Marshak. “They have earnings under severe pressure. Others are facing weak environments and a weak consumer.”
Robinson highlights as some of many opportunities Thomas Cook, the British travel agent whose debt has traded at below 40 cents on the dollar, Greek sovereigns trading “in the 20s” and Germany’s Q-Cells. Another manager says Europe’s retail sector – “from electronics to clothing” – is another example, while restaurants unable to pass rising input costs through to ‘stressed consumers’ are yet another.
Managers agree it is useful to be able to analyse companies coming out of one very recent crisis, while encountering another today. So, European businesses face restricted fresh lending from their main source of credit, plus sometimes poorly conceived debt burdens.
On the other side, their consumers are far less confident, says Marshak. He has invested in distressed since 1993, and foresees a troubling economic picture for Europe: “Weak economic growth with peripheral sovereign debt issues, resulting in cutbacks in spending for governments across Europe, and a consumer in many markets that is very stretched.”
Focus on corporates
In countries such as Germany, consumers might be better off. But Marshak says they are “also concerned about what is happening, and that will cause consumer behaviour to pare back spending as well”.
He highlights a general difference to late 2008 “when you had governments throwing money at the problem. Now you are looking at what is happening to government spending, and to unemployment”.
Jeff Majit, managing director at Neuberger Berman, says: “It is on the corporate side that we are likely to see more opportunities in the near- to medium-term.
“European corporates have been slower to deleverage than their US counterparts, so a number of high-yield companies have maturity of payments coming due in the next couple of years.
“Even in a situation where a company itself goes into a bankruptcy process, there tends to be forced selling of the company’s securities by those who cannot hold defaulted debt. This can result in prices moving to extreme levels that do not reflect the true value of the business.”