Money managers under the microscope
Catching the wave
Distressed debt investors are pinning their hopes on a second wave of insolvencies in 2010 after banks’ refusal to write off bad loans made 2009 something of a damp squib.
Market participants at the launch of Debtwire’s European Distressed Debt survey in London today could not hide their frustration at the sticking plaster approach that has been applied to many ailing companies. “Some of these capital structures are irretrievably broken and it doesn’t do any good to pretend that they’re not,” said Richard Nevins, senior partner at Cadwalader, Wickersham & Taft.
The majority of survey respondents expect European restructuring to peak in the first half of 2010 as the economy improves and quantitative easing is withdrawn. Companies that have limped along through the downturn by stripping costs to the bone may struggle to build inventories and sales growth without a cash injection.
“There is still some money to be made in a second wave,” said Shaun O’Callaghan of FTI Consulting. “Companies have stopped talking about cutting back and are looking at some level of investment but we are seeing a parting of the ways between those companies that can invest and those that can’t find the money.”
As well as the usual favourites like property and construction, distressed debt investors rated the media and leisure sectors as offering significant opportunities in 2010. But O’Callaghan warned that it was important to differentiate as technological changes like the rise of the internet mean that some business models won’t improve. “Traditional media businesses that can’t make the transition will face problems,” he said.
He was more optimistic about the turnaround potential for gaming companies or satellite and cable broadcasting names. Low interest rates have supported these industries through the recession by leaving money in people’s pockets, but if rates rise, or the government increases taxation, this money will quickly disappear. “I would be very worried about this at the back end of 2010,” said O’Callaghan.
Nevins added that distressed debt investors were beginning to shy away from industries where in previous cycles they might have expected to find rich pickings – such as autos and directories. Instead they favour chemicals and semi-conductors, which will be seen as solid industries when the economy turns.
The big question is whether distressed debt investors will be able to prise anything out of the banks’ hands. As prices have risen, banks have become more inclined to try and hold on in the hope that they can sell at par. However, some market participants believe prices have risen too far, and any correction, perhaps triggered by a withdrawal of liquidity, may provide a catalyst for banks to sell.