Managers make the best of a bad situation
Fund managers buying distressed European assets tell David Walker why the gloomy business climate is a good environment for their investments.
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.
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.
