The end of the decade of “easy finance” will open opportunities for mispriced debt

New era of rising interest rates and monetary tightening will provide more opportunities for distressed debt than the Covid-19 pandemic, industry experts say Citywire Selector.

David Nazar, who runs the ML Ironshield Credit fund, and Reji Vettasseri, senior portfolio manager for private market solutions at Decalia, said many companies may need to refinance their debt at the end of an unusually long period. of “easy money”.

“In the high-yield space in Europe, interest charges are roughly double. If you usually borrow at 3% or 4%, then you borrow at 6% or 8%; it’s a very big change,” Nazar said. “It was surprising and what is even more unusual is how little time it took, which is a few months.”

Nazar, whose fund is a leader in the Alt Ucits – Bond Strategies sector with a return of 59.6% over the past two years, forecasts a peak in defaults in the coming months, when economic pressure would be more persistent than during the Covid-19 pandemic.

“The opportunity for distressed investments is to understand that market players don’t specialize in distressed and distressed credit. You can catch valuation errors and make money out of it,” he said.

“What happened with Covid-19 was that it was very steep and, although we made money from that, it is a different type of situation. Rather, it is a multi-year recalibration of all appropriations.

Vettasseri also said troubled credit is becoming a more interesting space. “The last 10 years of struggling investing hasn’t been the easiest. We’ve been through a decade of very easy funding. It was actually pretty hard to find things being traded at a level that wasn’t fair, what distressed investors are looking for.

“Now that’s potentially a more interesting environment than even the Covid-19 environment was.” That’s not to say this opportunity has fully developed across the board, but I think it’s one to watch.

Vettasseri said the best opportunities would start to emerge towards the end of the year. “Over the next year or so you may see some of this financial restructuring opportunity, but we are still very early in this cycle.” The best opportunities are probably in six months.

“One of the hardest things about distressed investing is timing. There are dangers in being overly enthusiastic,” he said, adding that a rule of thumb was that ” the first fruit to fall is the rotten apple”.

Henri Jeantet, event credit specialist, Citywire’s A-rated CIO and founder of Syquant Capital, said the pace of rate changes was now a huge challenge for companies seeking financing.

“Until recently the timing of a deal was not very important. Now it is going to make a difference because rates can change so quickly,” he said.

Jeantet, which manages the Helium Opportunits fund, indicated that there are opportunities in particular on the bond market for event credit at the moment.

“What we see in terms of stress in the bond and debt market is by far stronger and higher than what we see in the equity market. I’m not saying equity doesn’t present certain opportunities. , but overall I think the best opportunities so far are in credit.