Europe's Distress: Bargains Find No Shoppers

With most credits trading at bargain prices, the new year brings with it a great time to shop for deals in the European leveraged loan market. This has been the case for some months, actually, and looking ahead into 2009, experts believe opportunities abound for distressed debt investors. Yet no one has really risen to the occasion, it seems, and although there are stories of distressed and special opportunities funds gearing up for action, sources don't think they'll make a serious move into leveraged loans for some time to come.

"For various reasons, the distressed market has been quiet over the past six months and continues that way," said Dan Hamilton, head of law firm White & Case's financial restructuring practice. "Earlier in 2008, funds put their money into performing debt, thinking that buying into strong companies with debt trading at 80 was a good deal. But investors didn't bank on prices falling further, so many have suffered losses and now don't have the money to put to work. Others, who have the money, believe the distressed debt out there is still too expensive, even though it's being offered in the 40s."

Let The Buyers Be There

In theory, most credits in the leveraged space make for great buys given the levels at which they are trading. But the interesting question, said Stephen Mostyn-Williams, founder and principal of London-based law firm smwlaw, is: Who is going to buy them? Most investment funds are suffering cash shortages, but Mostyn-Williams still believes there are some specialist distressed funds that do have the money to put to work-if they're willing to use it.

"Whether or not people choose to buy would depend on their strategy. Are they buying to trade, buying because they think the debt will come back to trade at par, or buying because they want the equity?" Mostyn-Williams said. "Theoretically, there are many reasons to buy, but no one really knows what's going to happen, so no one is really doing any buying."

Indeed, the anomaly of the present debacle has put even those investors who have cash to invest on hold. Things have been so bad, the magnitude of losses is unprecedented and many industries in Europe-in particular automotive, retail and chemicals-have been hammered by the economic slowdown, with further downturn expected. Market players are therefore bracing themselves for more to come, which is why distressed investors might not be getting as involved as they normally would in such situations, said Pablo Mazzini, senior director of leveraged finance at Fitch Ratings in London.

The funds that have been prepped to take advantage of the opportunities in the European distressed space have not made their entry into leveraged loans because, "Most companies have capital structures that are completely overlevered and investors are just not comfortable with that at this point in the economic cycle," Mazzini said. "The question is whether investors would want to buy debt at distressed levels now or wait for a deeper restructuring to happen. As yet, it's not clear what the choice would be."

There are instances where specialist investors have indicated their interest in a company's debt, such as with Irish luxury retailer Waterford Wedgewood. After receiving support from existing shareholders for a number of years, the company is in need of fresh funding to cover ongoing operating losses, but the sole new interested investor wants a deeper financial restructuring to take place before committing funds. "The business generates negative Ebitda so leverage metrics are meaningless," Mazzini said.

This is the case for many overlevered companies in Europe, where the indications are that things are headed downward.

"There are loads of different situations, but it's no secret that across the board, Ebitda is in a freefall in sectors such as retail and automotive," Mostyn-Williams said. "This time round, things are very different than in other down markets, and you constantly come back to this question of, 'What do you mean by distressed?' If you think that 60-where much of the leveraged market is trading-is the new par, there is a fair amount of debt out there from companies that you'd expect to repay their debt at par. There are recovery funds out there that want to just buy up paper because they think that 60 is a great buy. But then there are others who are probably wondering, 'Why buy now?' when there seems to be a consensual view that things are going to get worse."