Distressed Debt Market Worth Up To €2.5T

Mar 26 2012 | 1:53pm ET

New research estimates the current market for distressed assets at €1.5 trillion to €2.5 trillion, to be liquidated or sold in the next few years.

James Gereghty, managing director and head of distressed investing at the UK fund manager Siguler Guff & Company, says his organization 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.

In a report compiled by the International Monetary Fund, the distressed debt manager Alcentra and Lloyds TSB pension fund, IMF Assistant Director Luc Everaert says his group is “concerned more than ever [for the Eurozone], as policymakers struggle with the very fundamental issue of what constitutes a viable monetary union.”

Damien Miller, portfolio manager with the distressed debt manager Alcentra, believes European banks will be slow to sever their lending ties with many of their corporate loans:

“Banks have historically been extremely loath to make the requisite changes required, so they can deliver their balance sheets.”

Gereghty adds that 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.’”

The report also questions whether the opportunity represented by distressed debt is being underestimated—viewed as too complex by many pensions and endowments. Says Mark Hoeing, managing director with the endowment fund manager Commonfund Capital: “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 Lloyds TSB, a leading UK commercial bank, believes “[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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