The world’s largest investor in distressed debt says the anticipated avalanche in European bad loans has not materialized.
John Frank says investment managers tried to take advantage of substantial flow of loans
“A lot of folks, particularly a lot of American investment managers, raised a lot of money to take advantage of what was anticipated to be a very substantial flow of loans from those banks,” John Frank, managing principal of Oaktree Capital Group LLC (NYSE:OAK), was quoted as saying in a Bloomberg Briefs Hedge Fund report.
In 2014 EU lenders are expected to sell 100 billion euros (nearly $131 billion) of loans, which includes non-performing debt, PricewaterhouseCoopers LLP said in the report. While this is up from 64 billion euros in 2013 and the most since banks began selling troubled debt in 2010, the lack of anticipated volume is at issue.
Oaktree tops distressed-debt investor list
With $91 billion in assets under management, Oaktree, the world’s largest distressed-debt investor, is underwhelmed by the number of bad loans being offered by European banks to investors. “The avalanche anticipated didn’t materialize,” Frank was quoted as saying.
A Wall Street Journal report earlier this year noted that hedge fund and private equity investors had increased demand for distressed debt, bidding up prices of some troubled assets.
In the Bloomberg interview Frank noted that competition for assets has been increasing as his fund looks for additional areas where to put $10.2 billion to work, with a particular interest in shipping and real estate.
Distressed debt: Hedge fund returns
Other than Oaktree, hedge funds such as Lone Star Funds and Cerberus Capital Management have recently been searching for value in distressed debt as banks are reported to be cleaning up their balance sheets before stress tests. The stress tests are used to evaluate a bank’s ability to withstand another crisis similar to 2008 market crash.
Another factor motivating banks to sell off distressed debt is price competition among hedge funds driving up prices, a phenomenon the Wall Street Journal article noted earlier in the year.
“We continue to think Europe will provide a substantial quantum of attractive investment opportunities for all our strategies and in particular real estate, private equity and distressed debt,” Frank was quoted as saying.
“The prices have risen to the point where some banks are looking to sell because they’re seeing transaction prices that imply” a much smaller loss for certain assets, Ari Lefkovits, a managing director at Lazard, was quoted as saying last March in the Journal article. Lefkovits had moved to London in August 2012 in part due to the anticipated uptick in European restructuring activity, the report noted.