Distressed debt: Private distress is most profitable
The dicier end of the leveraged finance market is the obvious place to look for distressed debt: maybe it’s just too damned obvious. A number of distressed debt investors and advisers are turning away from it, reasoning that it offers inflated prices and limited value. And there is another, even bigger credit market in transition staring buyers in the face – the $13 trillion European bank loan market, the biggest credit market in the world.
“We have a large team of distressed analysts and they are all incredibly busy,” says Iain Burnett, “but not in the mainstream area of the over-stretched LBO gone wrong. Success in this market is all about the illiquid, private deal flow and we have a sales and sourcing team spending all day talking to hundreds of banks across Europe.”
Burnett, who is executive director and head distressed debt analyst at Morgan Stanley, relates a deal his firm did recently in the bank debt of Ploucquet Holdings, a 150-year-old family-owned German textile firm. It had taken on bank debt to fund a capital expenditure programme that had not performed to plan. “We got calls from a couple of bilateral lenders – this company didn’t even have syndicated loans, let alone LBO financing – to price the debt and then take them out, which we did.” Buying the debt at a discount to par did nothing to resolve the company’s distress, so Morgan Stanley engaged with management, devised a restructuring plan and proposed to other lenders that they either join it or sell out.