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OPINION

Special opportunity funds take advantage of the stress through loan to own

Negotiations are already under way between new lenders playing the loan-to-own strategy against stressed portfolio companies in rival managers’ private equity funds.

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Regulators may be granting forbearance from recognizing loan impairments to keep credit flowing, but European banks’ large first-quarter loan loss reserves still exceeded analysts’ expectations.

HSBC took a $3 billion charge for the quarter and could reserve from $7 billion to $11 billion for loan losses for the whole of 2020. Barclays took a £2.1 billion impairment saying that low credit losses so far simply do not reflect the impact of the coronavirus Covid-19 pandemic. BBVA took a €2.6 billion provision, Societe Generale €820 million, and Deutsche a much more modest €506 million.

Euromoney is surprised that bank analysts are surprised. We are, after all, facing the swiftest and steepest economic collapse since the great depression and at a time of record high private and public debt to GDP.

Startling

Far more startling is the low expectation for defaults among high-yield issuers implied by market pricing at the end of April – perhaps 10% for US issuers and as low as 6% for European issuers that tend to have higher credit ratings, according to analysts at Deutsche Bank.