Brexit view: Opportunities in distressed

Amid the general shock following the UK vote, distressed investors and non-bank lenders have reasons for optimism.

The UK’s vote to leave the European Union (EU) has pushed down stock indices worldwide, toppled Prime Minister David Cameron and arguably empowered nationalist movements across the continent.

In the wake of such uncertainty, investors might logically be heading for the exits but some market participants and financial observers actually see opportunities for investors, namely those involved in distressed debt and non-bank lending.

“It’s going to catalyse the distressed debt market substantially,” said Jeffrey Schwartz, a partner at Robins Kaplan who co-chairs its restructuring and business bankruptcy practice. “There’s a phenomenal amount of capital available for distressed debt funds.”

Dan Pound, the London-based managing director that heads Angelo, Gordon & Company’s European distressed debt team, said to his colleagues in a note that the market volatility and a possible shrinking economy might make distressed securities attractive.

“Whilst unsettling for markets it is possible that [Brexit] creates an interesting opportunity for EU investing and we are focused on both immediate investment opportunities and medium-term distressed prospects from any significant economic contraction,” he wrote, according to an internal company memo obtained by PDI.

Non-traditional lenders could experience a boon as well in the wake of Brexit. Brad Marshall, senior managing director at Blackstone-owned GSO, said the market uncertainty would make banks more unwilling to lend in Europe, putting alternative lenders in an even better position to step into that void.

Schwartz agreed, citing the possibility of increased scrutiny from regulators over UK debt.

“[The Brexit vote] opens up new horizons and vistas [for alternative lenders],” Schwartz said. “These regulated lenders will have to pull in their horns considerably in terms of extending credit and reducing the amount of exposure” to UK debt.

The UK think-tank New Financial took the opposing view in an April report. A Brexit vote would undo the EU’s 2014 capital markets union initiative aimed at encouraging cross-border investments within the member countries. This would decrease investment opportunities, the study concluded.

“Current efforts across the EU to encourage the development of capital markets and reduce the dependence of the European economy on bank lending could be significantly disrupted if the UK votes to leave the EU,” the report read.

The study also noted Britain played an outsized role in access to capital. According to the findings, 78 percent of the capital markets business in the other 27 EU countries is conducted out of the UK. For comparison, the UK makes up 14 percent of the EU’s economy.

“When you think about it, there’s a huge risk that London will no longer be the financial capital of Europe and the Middle East,” Schwartz said, “in which event real estate values will contract because the professional firms and banks there will contract [their physical footprint].”

That puts London’s ability to act as a gateway to continental Europe at risk. Among the distressed investors that use London as their sole Europe office are Marathon Asset Management and Oaktree Capital Management.

Oaktree’s Howard Marks, co-chairman of the firm, said on Friday’s edition of “Bloomberg Markets” he expects the UK and EU economies to slow down and said there was a psychological effect that causes people to spend less.

However, he cautioned against drawing sweeping conclusions in the immediate aftermath of the Brexit vote.

“I also think at a point in time like today, it is extremely hard to think you know what the future holds,” Marks said. “I think the most important thing in our business is to know what you don’t know. I don’t think anybody knows what the long-term implications of this are.”