Sun, sea and (di)stressed debt

Sentiment’s a funny thing. Although severe budget deficits still exist throughout Europe, there’s an increasingly pervasive sense that the worst is over, that the EU’s collective economy is on the (slow) road to recovery.

Many investors are turning their gaze towards continental Europe in search of attractive opportunities, lured by the promise of higher yield, wider spreads, and low-hanging fruit.  

Private debt funds are no exception. To them, Southern Europe has been a fertile hunting ground so far this year. Mezzanine specialist Hutton Collins last week invested €50 million in Italian healthcare IT company Dedalus Group. That deal came just two days after KKR Asset Management ploughed €100 million into Italian vending machine business Gruppo Argento as part of a rescue financing.

The KKRAM deal in particular illustrates what could well be a growing trend this year, which will see restructuring activity, particularly in Southern Europe, tick upwards.

The respondents of a survey published by Debtwire, Rothschild and Bingham McCutchen this week certainly supported that thesis. On a regional basis, 73 percent of the 100 hedge fund managers, prop desk traders and long-only investors surveyed said Southern Europe would yield the most debt restructurings. Given countries to choose from, 40 percent picked Italy, ahead of Spain (24 percent) and Ireland (23 percent).

A sudden fondness for Southern Europe also appears to have spread amongst investors across the Atlantic. Fortress Investments, for example, recently concluded fundraising for a fund that will invest in Italian non-performing loans. Having garnered more than $888 million for the fund, it looks as though the firm’s LPs share its enthusiasm for the opportunity.

There are cultural reasons why restructuring activity in the region should increase as the economy recovers and interest rates rise, as Bingham McCutchen partner Barry Russell points out in the report: “The stigma of undergoing an insolvency process remains strong in Southern Europe, meaning debtors will opt for out-of-court restructurings where possible.”

The supply of assets is also set to change.

So far, European banks have been loathe to write off bad assets. But as the litany of regulatory reforms – which have “real bite” according to one leading private debt fund manager – start to impact their balance sheets, banks seem to be loosening their grip on such assets. Rothschild’s Beltran Paredes agrees. “The behaviour of Spanish banks has completely changed. They are starting to sell materially to distressed investors their non-performing and sub-standard loans”, he said.

It makes sense for banks – the market is so awash with liquidity that the secondary pricing of such assets remains high, thereby easing the pain.

And it’s not all NPL portfolios either. Expect to see more deals like AnaCap’s €551 million acquisition of a (performing) loan book from Gruppo Monte dei Pashi di Siena which was announced two weeks ago – the financial services-specialist’s fourth Italian deal in 12 months.