Distressed debt investors are looking at the financial services and healthcare sectors, but expect the better deals to start coming through towards the middle of 2009, a conference heard this week.
"We are seeing opportunities in markets that have been over-criticised, such as financial services," said Terry Hughes, a partner at Silver Point Capital, participating in a panel discussion at IIR's 5th annual Investing in Distressed Debt Conference on Wednesday.
Silver Point, a credit opportunities fund with some $9 billion under management, has recently invested in a factoring company which buys invoices from firms seeking to raise cash quickly.
Hughes also sees some interesting plays in the healthcare sector: "The key is finding sectors where the perception has been overdone."
Nathaniel Meyohas, vice president at private equity firm Sun European Partners, said he expected to see increased deal flow next year from any sector that relied on disposable income.
"But you need to find the right company - one that has a reason to exist. We are focusing on market leaders or strong brands."
Deal flow has increased sharply already, but he cautioned that the time was not yet right to take the plunge.
"In Europe we used to see 100 good opportunities a year. Now we are seeing 100 opportunities over two months - but they tend to be the least attractive assets," said Meyohas.
Private equity turnaround funds were warned yesterday by Northern Trust to exercise restraint as they trawl through the prospects when companies hit the buffers.
BETTER PICKINGS
As the most fragile companies tend to fail first, investors are inclined to wait for better pickings, with mid-2009 seen as the crunch time.
With only a dozen or so active distressed debt buyers in Europe, the rewards are expected to be high for those with the expertise to navigate European restructuring regimes.
Deal flow is expected to be particularly strong in the property, chemicals, auto and retail sectors, said Peter Marshall, managing director at restructuring advisory firm Houlihan Lokey Howard & Zukin.
As the distressed cycle is accelerating, one of the big issues is whether struggling companies will bypass restructuring and go straight to insolvency, said Christine Elliot, CEO at Institute for Turnaround, a professional body.
The use of so-called covenant-light debt terms in the last few years has meant restructuring advisory firms can have as little as 3-6 months to try and save a company from bankruptcy, rather than the more usual period of up to two years.
"So a greater number of companies which shouldn't fail will fail," said Marshall.
"There is also no clarity on exits because the M&A market is dead so investors may be reluctant to put their money in."
He cited the example of Germany's TMD Friction, a supplier of brake pads to the auto industry, which has recently been forced to file for insolvency for four German plants, due to strains on its liquidity and working capital.
"Auto suppliers are facing problems because EBITDA has fallen off a cliff and, in some cases, trade credit insurance is being withdrawn," Marshall said. "Where there is no new funding forthcoming, break up plays start to look sensible."
Marshall added that in the past the pain was mainly taken at the junior debt levels, but he is now seeing deal after deal where the senior levels were being hit.
"This means more companies will end up going down the insolvency route." (Editing by Simon Jessop)

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