Bank loan investors should take a look at the European distressed debt market and power project finance debt as opportunities narrow in the U.S., said speakers at a pair of conferences held simultaneously last week at the Roosevelt Hotel in midtown Manhattan. "There are fewer opportunities in distressed debt and an influx of capital," said Kevin Genda, managing director at Cerberus Capital Management, who spoke at Financial Research Associate's Buying, Selling and Trading Bank Loans conference and the Distressed Debt Investing Forum held by Strategic Research Institute.
A flood of capital helped deliver some eye-popping returns last year, but now prices appear out of control to many investors. One debt investor even commented he would rather play golf every day than pay the prices on offer. "Demand is outpacing supply and we are even seeing investors give back funds," said Jay Lifton, a v.p. with J.P. Morgan. The market will correct itself, but right now it is necessary to look beyond our borders, to Latin America and Europe," he said.
According to Jerry Madigan, also of J.P. Morgan, buysiders in the U.S. have already begun targeting the European space. He said J.P. Morgan is talking to over 50 U.S.-based hedge funds buying European bank debt. Some of the recent opportunities have been in situations such as Alstom, Rhodia and Marconi. Going forward there are expected to be several opportunities, including new "train wrecks," and the German market.
Schadenfreude
The last few months have seen the beginnings of the long-anticipated sell-off of distressed loans by German banks, which is the biggest market for distressed debt, Madigan stated. There are several key drivers including the impending Basel II accord and the removal of state guarantees for Germany's landesbanks. "The landesbanks were aggressive lenders and this will force them to realize losses," he explained. "Germany is like Japan in the 90s." In the last six-to-nine months, the German banks have been inquiring to sell and J.P. Morgan has already partnered with a U.S.-based investment fund to purchase a portfolio of busted German debt.
But there is still caution, partly driven by Europe's unfamiliar legal codes. "We are treading water to understand those markets and the culture before investing a lot of capital," said Jim Ford, managing director at Oaktree Capital Management, which has offices in London and Frankfurt.
Power Up
For those wanting to stay closer to home, the project finance market could provide some major upside. "Most investors have invested in merchant debt, but can now take one step further to power projects. There is $20 billion of debt tied to power plants," J.P. Morgan's Lifton said.
Investors can take a cue from the U.K. where Drax's bank paper rallied from the 50s to levels approaching par, one source said. There are projects in the U.S. that have been given to lenders by the merchant companies and now they are receiving FERC approval, these original lenders will start to sell. Teco Panda, GenHoldings, Boston Exelon, Southaven, Lake Road, La Paloma and Milford are among the potential plants whose debt will trade, the source added. The original lenders will sell because these plants are currently only being partially utilized, but others are betting on the improved forward power curve, he explained. "Increased power consumption will lead to the market moving into equilibrium and there are some that believe this will occur a lot faster than previously anticipated," the source concluded.
Bank Debt Shorting Alternatives Raised
Second-Lien Defaults Cited As Major Concern