German distressed names are taking center stage with domestic banks unloading assets and trading activity picking up. Last week, a ¤10 million piece of fashion retailer Takko's bank debt traded at 88-90, joining a list of names that have recently swapped hands, including Karstadtquelle, auto-parts maker Schefenaker and telecom company Flowtex Technologie.
"People are increasingly trading distressed German credits and buying portfolios," said Stephen Rutenberg, an associate at law firm Sidley Austin Brown & Wood. Over the last two years attention has been on Germany, but in the past few months a more active trading market has taken shape.
The Basel II agreement has forced banks to unload their distressed loans and attractive yields are driving investors to Germany, added Claude Baum, a partner at Brown Rudnick that specializes in distressed debt. Less competition and a legal system that has more predictability than France, Italy and the rest of Europe, also contribute to the interest.
According to Diane Roberts, an associate in Sidley's London office, a higher proportion of German distressed credits and the phasing out of guarantees by the Landesbanks has forced banks to off-load distressed assets. There is a belief that there is a lot of good quality cash flows and collateral out there "and a huge amount of volume available in Germany," Roberts noted.
But investors eying Germany also face obstacles. The most challenging issue faced when trading distressed debt has to do with expectations over price. For Rutenberg, the lack of ability to securitize is also noteworthy and has dampened the ability of investors to buy and repackage some of these assets. Investors also have to deal with data protection and transfer of collateral issues and tax consequences, Roberts added.