Well performing Euro zone economies cannot provide much of a boost to their suffering fellow members, states the International Monetary Fund as a new report challenges if the opportunity in European distressed debt has been underestimated.
Luc Everaert, Assistant Director for the International Monetary Fund and the person charged with formulating the International Monetary Fund’s policies for the Euro zone has said in a new report titled Investing in Distressed Debt released on Monday 26th March that: “the IMF is concerned more than ever [for the Euro zone], as policymakers struggle with the very fundamental issue of what constitutes a viable monetary union”.
With Euro zone finance ministers searching for the magic pill to return the region to growth, the onset of BASEL III banking regulation is likely to do little as corporations hard pressed for cash look to alternative providers for a life line in a difficult time.
James Gereghty, Managing Director and Head of Distressed Investing at the UK fund manager Siguler Guff & Company, says that a review conducted by his organisation to quantify the magnitude of the distressed debt problem has estimated that €1.5-2.5 trillion of European distressed debt is outstanding, most of which will be liquidated or sold over the course of the next few years.
Damien Miller, Portfolio Manager with the distressed debt manager, Alcentra, believes however European banks will be slow in severing lending ties with many of their corporate loans: “Banks have historically been extremely loathed to make the requisite changes required, so they can deliver their balance sheets. The attitude in Europe has been to ‘lie and cheat’ where possible, in regards to addressing these issues”.
Siguler Guff estimates approximately €15 billion has been raised by dedicated funds keen to buy in on the opportunities with an additional €15 billion targeted to be raised by other fund managers.
Gereghty comments: “In the market today, we are experiencing significant changes to the banking regulatory frameworks of both the U.S. and Europe”
Gereghty goes on to say with central banks heightening their activity to stem the corporate default rate, “…these dynamics have increased market uncertainty and contributed to distressed pricing of assets”. “Therefore, we also believe that the opportunity will likely be episodic by nature, meaning the opportunity will exist for a moment in time due to unforeseen systemic or structural impediments to “business as usual”.
With successful distressed debt investing however being seen as complex, many pension schemes and endowment funds, the typical allocators to distressed debt, remain uncertain how prevalent and easy to identify the good opportunities are. Mark Hoeing, Managing Director with the endowment fund manager, Commonfund Capital, states, “The challenge is finding enough micro situations where you feel there’s a repeatable pattern of value investing and value enhancement”
Stuart Stephen, Group Pensions Director with one of the UK’s largest commercial banks, Lloyds TSB, believes that, “[pension] trustees need to be convinced about the position of distressed debt within their asset allocation. It is not an obvious ‘shoe-in’ at the moment”. Stephen does believe however that, “it needs to be further addressed in the future”.
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