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New report predicts greater distressed investor activity in 2008

Date: Thursday, January 24, 2008
Author: Hedgeweek.com

In the light of last summer's sub-prime-triggered credit crisis, European investors are now licking their lips over a feast of potential stressed and distressed opportunities in 2008 and beyond, according to a new report by Debtwire, Rothschild and Cadwalader, Wickersham & Taft. The report forecasts a marked increase in the number of corporate restructurings in light of deterioration in economic conditions.

'The lack of liquidity from the major commercial banks has caused the sub-prime crisis to spread far wider,' says Andrew Merrett, managing director and co-head of European restructuring with Rothschild in London. 'The refinancing option is much harder for many corporates, and those in difficulty will need to restructure, raise equity or sell assets.'

Richard Nevins, a partner at Cadwalader, adds: 'The increase in restructuring activity previously anticipated to become pronounced by late 2008 now appears to have accelerated due to the emerging indicators of a downturn occurring in the wider economy as well as in the credit and financial markets.'

The report, which draws on a survey of 100 European and US hedge fund managers, prop desk traders and long-only investors, finds that distressed investors are targeting higher returns in 2008 than last year.

Participants expect the severity and timing of any deterioration in the economic climate to determine when the wave of distressed credits breaks. According to 59 per cent of survey respondents, the second and third quarters of this year will see a substantial increase in stressed or distressed credits as economic conditions bite.

The origins of the credit crunch in the US sub-prime meltdown are expected to be mirrored by hard times ahead in European real estate, both commercial and residential, and participants forecast that the property, financial services and construction sectors will offer most opportunities for distressed investors in 2008. They also expect a retreat to the high ground of senior debt, ahead of mezzanine.

Over the past year there has been a dramatic change in sentiment amongst the distressed community as to which country offers the greatest opportunities to investors. The UK has far outpaced last year's front-runner, Germany, rising from 24 per cent in the 2007 survey to 59 per cent.

More that two-thirds of survey respondents, 69 per cent, expect central banks to increase liquidity in the market during this year, while three-quarters of respondents expect hedge funds to continue to move towards longer-horizon strategies and to acquire control of companies though equitisation.