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Distressed debt: Small is beautiful for distressed investors

Acute mid-market refinancing need; New funds target sector

"The best period for buying distressed debt in our careers was 12 to 18 months ago," declared Apollo Management’s Leon Black in February this year. "Now there are opportunities for restructurings on a selective basis but it is not as easy as it was a year ago." This view is supported by the drop in the S&P/LCD rate of default figures, which have seen the default rate for large US corporates slump from a peak of 11% in the fourth quarter of 2009 to 3.75% today.

But the story is very different in the mid-market, which has been left largely untouched by the revival in syndicated lending and the boom in high-yield bond issuance. While large and middle-market corporate default rates tracked each other relatively closely until mid-2009, the fall in large corporate defaults has been against a continued rise in mid-market casualties – with defaults in this part of the market now approaching 12%.

Patrick Flynn, managing director at Neuberger Berman Fixed Income in Chicago

"Small corporations are where steep discounts still exist and this is where the opportunity in distressed investing is"

Patrick Flynn, Neuberger Berman Fixed Income

"One view is that the markets have fixed themselves and distress is over," says Patrick Flynn, managing director at Neuberger Berman Fixed Income in Chicago.

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