European distressed debt investors could benefit from double-dip

Alcentra head of special situations says second wave of global recession is likely, and predicts distressed debt opportunities in Europe.

Distressed debt investors should head for Europe if a double-dip recession materialises, according to the head of special situations at Alcentra, BNY Mellon Asset Management’s specialist high yield unit.

“It is highly likely we are heading back into a recession,” says Damien Miller, who fears a second downturn could be as early as two months away, striking in either Q4 this year or Q1 2011.

However, Miller says that for distressed investors, “opportunities are only going to get bigger,” with the European market in particular providing good opportunities for the next three to five years. Alcentra currently holds UK, German, Dutch and Swedish assets.

Miller says that compared with the US, the scarcity of European investors in the distressed space – he says there are fewer than 10 institutions with the appropriate track record – equals less competition for mispriced assets offering good risk-return. Fleetness of foot is also less crucial, as with fewer investors chasing them, mispriced assets tend to remain that way for longer.

Europe’s multiple legal jurisdictions also add to the high number of mispriced assets, with some investors remaining uncertain as to possible or probable outcomes in the event of a default.

“I like complex, difficult-to-understand situations, for the simple reason that many investors do not,” says Miller. The picture in Europe is further clouded because banks have frequently bailed out struggling institutions in the past, but are less likely to be able to do so should a double-dip occur.

Miller says increased European high yield issuance since Q2 2009 is “great news” in the medium to long term for distressed investors, as junk bonds and leveraged loans “do a great job of sowing the seeds of future distressed and highly leveraged companies".

According to data provider Dealogic, European high yield issuance in 2009 was the second highest on record at €40 billion, while issuance for the first half of 2010 was €19.2 billion. The volume of leveraged loans totalled €26 billion in the same time span.

Miller says investors are well placed to judge which institutions will hold out in a double-dip, having already seen how they coped during the crisis. But judgments must be made on a credit-specific rather than sector basis, as assets have been hit universally, rather than in just two or three sectors.

“There are very few sectors you can truly say have not been impacted. It makes this cycle much more interesting,” he says.