Silver Creek outlines distressed opportunities

The firm’s credit business has told clients it is evaluating a number of increasingly attractive investment options, such as European NPLs, BDC portfolios and energy credit.  

Lucrative opportunities in European non-performing loans (NPLs), business development company (BDC) asset sales and structured credit are being created by market volatility and dislocation, Silver Creek Capital Management has told clients.

In a memo, the firm said that an estimated €159 billion of European NPLs were sold in 2015, more than double from 2012 and the highest level to date.

Silver Creek, which invests in debt funds via a manager-of-managers’ structure, has been investing in European NPLs since 2011. Of the $2.5 billion in credit capital, about a third has gone toward these assets, said Peter Duncan (pictured), managing director at Silver Creek.

Sales are expected to remain high in 2016, although with most of the large portfolios from Spain’s ‘bad bank’ Sareb and the US National Asset Management Agency (NAMA) having been sold off, activity is likely to be smaller.

“The focus is shifting to Italy, the Netherlands and other less mature markets. Italy is a particular growth area as volumes of Italian CRE-backed loans increased 12.5x in 2015,” Duncan and Mary Bates, director of credit strategies, wrote in the research paper.

They also pointed out that one of Silver Creek’s underlying managers, which leads some of the largest NPL transactions in the market, posted a 16 percent return last year.

On the BDC front, shareholder activism could also lead to portfolio sales, Duncan said. According to Wells Fargo research, BDC stock prices in mid-January implied that 60 percent of BDC loans would default, which is highly unlikely. Even when defaults peaked in the last downturn in 2008, the default rate was less than 10 percent.

“However, we expect BDC activism, which draws attention to shareholder unfriendly activity, to continue,” the memo said.

Silver Creek pointed to TPG Specialty Lending’s proposal to terminate the advisory agreement at TICC Capital Corp, although other BDCs are also facing shareholder criticism, lawsuits and potential sales, including Fifth Street Asset Management’s two BDCs, American Capital and Prospect Capital.

“The BDC space has continuously shot itself in the foot. There have always been bad actors and people that abuse the external manager model and act in a way that benefits the manager rather than shareholders. The activism going on right now is exactly what the space needs. A break-up or wind-down of a large BDC has got to happen,” Duncan said.

Such wind-downs will likely result in opportunities for other private debt managers to buy portfolios at a discount.

In the CLO space, the primary markets are “becoming dysfunctional”, the research said. Only about $1.28 billion in CLO volume has priced year-to-date (YTD) ending 8 February, compared with $7 billion for the same period last year.

“The YTD volatility, coupled with the risk-retention rules is making it difficult to price the equity component,” Silver Creek said.

“Taking a more holistic view towards credit, Silver Creek believes that we are on the cusp of a great distressed opportunity – one that combines opportunities in NPLs, corporate distressed, BDC activism and structured credit.”