Increased liquidity foils European distressed investors

The volume of non-bank lending into Europe has been described as “extraordinary” in a recent report gauging attitudes towards the European distressed debt space, which suffered a difficult year as the expected wave of restructurings failed to materialise.

Heavily-indebted European companies were able to limp through 2012 largely unscathed, thanks to increased liquidity in the debt markets, and political measures to shore up the Euro restoring a modicum of confidence, according to Debtwire’s European Distressed Debt Outlook report. 

That increased liquidity came largely thanks to the increased provision of debt financing from alternative sources, the report said.  

“The volume of non-bank lending into Europe was extraordinary in 2012,” said James Roome, co-head of law firm Bingham McCutchen’s financial restructuring practice, in a foreword to the report. “There is every reason to think that trend will continue into 2013.” 

For distressed investors, high yield bonds remain the most attractive debt instrument, the report found, ahead of mezzanine debt, convertible bonds, private placements and asset-backed securities. PIK notes were the least popular, followed by CDSs, second lien and senior debt instruments were cited by the 100 distressed debt investors canvassed for the report as the most attractive instruments to secure control of credit in 2013. 

 “The distressed debt market experienced in 2012 was characterised by market uncertainties, critical elections and anaemic growth, and it seems that 2013 will bring more of the same,” said Andrew Merrett, European head of restructuring and co-head of financing advisory at UK Rothschild. 

“We can expect better liquidity in the credit markets in 2013 than we saw last year. With private equity funds’ dry powder and the high levels of cash on many healthy corporate balance sheets, 2013 will be an exciting year in the restructuring and distressed debt markets,” added Merrett. 

 Bond issuance is increasingly becoming the preferred route to workouts as well as working capital refinancing, according to the survey.  “With primary debt and equity markets so subdued, distressed investors in Europe will continue to scan the horizon for exit routes before being willing to invest heavily in restructuring opportunities in the secondary market,”Roome said.  

 The survey reported that some 28 percent of distressed debt investors thought amend and extend and/or forward-start facilities would be the most frequent form of debt renegotiation during 2013.  The same proportion of respondents pointed to break-up or asset disposals as the most likely type of renegotiation, a big change on last year’s survey when only six percent  of respondents picked this as the most likely option.  

Almost a third of investors thought that more than 25 percent of sub-investment grade companies would face restructuring, while 18 percent thought that 20-25 percent would go down this road. In addition, 48 percent of respondents thought that between 10 and 20 percent would restructure, according to the survey. The unwillingness of banks to take losses through sales or write-downs means that amend and extend will still be the favoured solution in 2013.  

Roome said the distressed market would feed on businesses unable to access markets, austerity-hit companies, and banks selling debt at a discount. “Some hedge funds will continue to ride the tail of the sovereign wave which boosted their returns in 2012. There will always be plenty of people trying to make money on sovereigns but they will have to get their timing right to do so.”