Europe’s sovereign-debt crisis and concern about a double-dip recession in the U.S. have distressed-debt investors split on whether to buy the riskiest securities amid an expected rise in defaults, according to a survey of 100 asset managers and traders.
Common shares were rated the most appealing investment opportunity by 37 percent of those surveyed and least attractive by 34 percent, Debtwire’s North American Distressed Debt Market Outlook 2012 showed. Investors are taking a “wait-and-see” approach while reassessing their appetite for risk in the face of economic instability and political and regulatory changes, according to the survey.
Europe is seen as the most “dangerous cloud” over the markets, with 69 percent of those surveyed naming the region’s two-year-old crisis as the most significant factor affecting distressed investing and trading volumes. That’s a 10 percent jump from last year’s outlook as European finance ministers push bondholders to provide greater relief for Greece.
“If you go back a year, there was perhaps more hedge fund confidence that they were going to be able to figure out and master the European problem and profit from it,” said Timothy DeSieno, a New York-based partner at Bingham McCutchen LLP, which co-sponsored the survey. “There are a few heads hanging these days having realized the governments have gone to such extremes that they’ve beaten hedgies back more than they might have expected a year ago.”
A euro zone default would cause an increase in U.S. default rates, according to 34 percent of investors, while 31 percent said it would result in a double-dip recession. Among the riskiest European sovereign debt, 42 percent of respondents put Ireland as the most important component of their strategy, followed by Greece and Spain.
“No matter where I go in the world, or which emerging markets conference I’m at, the agenda is largely taken up with Europe and what’s happening there,” DeSieno said in a telephone interview. “CFOs are trying to hoard cash and make conservative investment decisions, and prepare for what might be a massive repeat of illiquidity.”