More than a quarter of the hedge fund managers, long-only investors and prop desk traders interviewed for Debtwire’s annual distressed debt market outlook do not expect the volume of Eu
More than a quarter of the hedge fund managers, long-only investors and prop desk traders interviewed for Debtwire’s annual distressed debt market outlook do not expect the volume of European financial restructurings to peak until the end of this year.
The report, produced in conjunction with law firm Cadwalader, Wickersham & Taft, FTI Consulting and Rothschild, is based on interviews with 56 hedge fund managers and long-only investors and 44 prop desk traders in Europe and the US.
It says the UK is expected to produce the greatest distressed opportunities in 2009 with respondents citing macroeconomic imbalances as the key driver. Germany is also ranked highly in terms of distressed investment opportunities, as are France and Russia.
When questioned about the most attractive product categories for investment opportunities, senior debt is believed to have the best recovery prospects, whilst respondents are of the view that covenant resets and injections of money are expected to be the most prevalent forms of restructuring in the year ahead.
Forty per cent of respondents identify cash flow as the primary factor determining the timing of debt restructurings.
The property/construction, auto/auto parts and consumer retail sectors were identified by respondents as offering the most opportunities for distressed investors in 2009. Financial, chemicals and media businesses are also expected to struggle.
High yield bonds are being targeted for the highest return in 2009, with mezzanine debt ranking second.
Forty two per cent of respondents anticipate at least a fifth of a typical private equity portfolio being hit by covenant amendments and/or debt restructurings in the next three years.
‘There will be very few situations immune from the depths of the current recession,’ says David Morris of FTI Consulting. ‘The challenge will be picking the winners from the losers and putting scarce liquidity and resources to work in situations where there is a reasonable prospect of value recovery in the medium term.’
Richard Millward of Rothschild in London says: ‘2009 could be the year the CLOs crack under the weight of defaults. Distressed companies are very quickly having payment defaults after covenant breaches. And this is getting worse as a prolonged downturn erodes what little fat companies had on their backs.’
The survey also found that respondents are evenly split on whether there will be more full blown insolvency situations (49 per cent) compared to restructurings (51 per cent).
With more companies expected to enter distress in 2009, 77 per cent of respondents believe that a greater number of investors will see their debt investment converted to equity holdings.
Private equity respondents identify over-leverage and the inability to refinance as the two factors most likely to trigger restructurings of portfolio companies.
