U.S. distressed investors are focusing across the Atlantic for restructuring opportunities in light of recent regulatory changes and a slower economic pace in Europe. They say terms tend to be more favorable for creditors in Europe than they are in the U.S., prompting them to scour the Continent for potential investments. “The expansion of the European Union has created complexities and complexity equals opportunities,” said William O’Donnell, managing director at Mellon HBV Alternative Strategies, which has $1.2 billion in primarily distressed assets. “‘Buy it when they riot’ does apply,” O’Donnell said, speaking at a distressed debt conference last week in Las Vegas (for complete coverage of the event, see pages 6-7).
Nick Alvarez, managing director at Alvarez & Marsal in New York, said he has been focusing on distressed plays in Europe and highlighted differences in the restructuring process from the U.S. “It’s a debtor-led restructuring process in the U.S. and while there are changes trending towards more of a U.S.-style restructuring in Europe, it’s still creditor-led,” he said.
Investors point to Italy’s credit environment as replete with opportunity for distressed and high-yield investors. “Investors are getting shy and the market is going soft and there are issues that need to be refinanced,” noted Finbarr O’Connor, senior managing director at FTI Consulting in London’s corporate finance and restructuring group. There are many high-yield bonds with short maturities which have to be refinanced and Italian banks are exposed, echoed O’Donnell. Changes to high-yield issues, often giving bondholders second lien rights, also make Europe appealing, they commented.
O’Connor sees opportunity in credits in Eastern Europe, specifically in Hungary and the Czech Republic, and also in Holland, and Spain. “Spain is a favorite of mine right now as insolvency laws will change in December and it’s not really on the radar screen,” he added. O’Connor emphasized there are 25 different sets of insolvency laws in the EU and investors need to understand the process in individual countries before they invest.
Alvarez and O’Donnell expect to see more private equity firms injecting capital into the European market. But Alvarez warned investors to be aware of the emphasis on job preservation in Europe. “Employee rights are large, when we were restructuring Levi Strauss globally, our European team was trying to close down plants in Italy and there were severance packages between 12 and 24 months,” he added, noting it is often lengthy and difficult to implement restructuring in Europe.