Distressed debt: Here to stay
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BANKING

Distressed debt: Here to stay

The trends of 2006 show how the market will adapt and grow over the coming years.

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site

In the middle of 2006, European distressed debt investors were feeling as if they had won tickets to the World Cup, but when they turned up in Frankfurt, they were then turned away at the gates. With European default rates almost non-existent in 2005 (save for Concordia, the Swedish bus company) Germany had promised to be the place to be in 2006. Banks began restructuring their debt by selling off non-performing loan (NPL) portfolios to comply with the Pillar 1 capital adequacy requirements of the Basel II Accord and estimates of the potential size of non-performing German assets were in excess of €300 billion ($394 billion), comprising 60% of Europe's total.

In addition, the German distressed market looked set to heat up as the small and medium-sized corporations known as the Mittelstand, often referred to as the backbone of the German economy, became financially unstable. This instability was caused by increasing costs and greater international competition, both of which had a negative impact on the German market as a whole, ultimately leaving the smaller banks feeling vulnerable. In 2006, Germany was the sick man of Europe and needed cash, and distressed investors were willing to provide it.

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