End of “easy financing” decade will open opportunities for mis-priced debt

Distressed and event driven credit managers expect an uptick in activity with spiking rates leading to an end of an extended period of easy access to capital.

The new era of rising interest rates and monetary tightening will offer more distressed debt opportunities than the Covid-19 pandemic did, sector specialists have told Citywire Selector

David Nazar, who runs the ML Ironshield Credit fund, and Reji Vettasseri, lead portfolio manager for private market solutions at DECALIA, said many companies may find themselves needing to refinance their debt as an unusually long period of ‘easy money’ ends.

‘In the high-yield space in Europe, interest costs are pretty much double. If you’re used to borrowing at 3% or 4%, and then you’re borrowing at 6% to 8%; it’s a very large change,’ Nazar said. ‘It has been surprising and what’s even more unusual is the short amount of time it’s taken, which is a few months.’

Nazar, whose fund leads the Alt Ucits – Bond Strategies sector with a 59.6% return over the last two years, predicts a spike in defaults in the coming months, while economic pressure would be more persistent than during the Covid-19 pandemic.  ‘The opportunity for distressed investments is understanding that market participants are not specialised in stressed and distressed credit. You can pick up mispricing and make money out of those,’ he said.  ‘What happened with Covid-19 was it was very steep down and up and, while we made money from that, this is a different sort of situation. It is more of a multi-year recalibration of all credit.’

Vettasseri also said distressed credit was becoming a more interesting space. ‘The last 10 years of distressed investing hasn’t been the easiest. We went through a decade of very easy financing. It was actually quite difficult to find things traded to a level that that wasn’t fair, which is what distressed investors look for. ‘Now, it’s potentially a more interesting environment than even the Covid-19 environment was. That is not to say that that opportunity has fully developed in all areas, but I think it is one to watch.’

Vettasseri said the best opportunities would start emerging toward the year end. ‘Over the next year or so, you may see some of that financial restructuring opportunity but we’re still very early in that cycle. The best opportunities are probably six months from now.

‘One of the most difficult things about distressed investing is timing. There are dangers with actually being too gung-ho,’ he said, adding a rule of thumb was the ‘the first fruit to fall is the rotten apples’. Event-driven credit specialist Henri Jeantet, Citywire A-rated CIO and founder of Syquant Capital, said the pace of rate changes was the now a huge challenge for companies looking to secure financing

‘Until recently, the timing of a deal was not very important. Now, it’s going to make a difference because rates can change so quickly,’ he said. Jeantet, who manages the Helium Opportunités fund, said that opportunities laid particularly in the bond market for event-driven credit at this time. ‘What we see in terms of stress on the bond and debt market is by far stronger and higher than what we see on the equity market. I’m not saying that equity doesn’t show certain opportunities, but, all in all, I think that the best opportunities are in credit so far.’

Reji Vettasseri, DECALIA Lead Portfolio Manager Private Markets Funds and Mandates – Citywire Selector – July 4th, 2022