As Distressed Debt Market Size Decreases Trade is Getting Crowded

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Debtwire has released its Distressed Debt report for 2012. The report, which relies on interviews with investors in the distressed field, suggests that the U.S. distressed market shrank in recent times. That leaves specialists in the distressed debt field without many opportunities to invest in.

The most dramatic example of the disappearing distressed debt market contained in the report was the amount of investors calling indicating that field as a core strategy. The number of investors in the field dropped to 15 percent in this report compared to 27 percent in 2012, and 36 percent 2011.

Contradictory evidence showed 62 percent of respondents indicated that they had between 21 and 60 percent of their assets in distressed assets. that number was just 30 percent in 2012.

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Distressed Debt 2

The Debtwire survey is compiled from interviews with 100 investors in the distressed debt field. The responses from the 2013 survey sometimes directly contradict those from the 2012 survey, and quite often, as above, contradict themselves. That contradiction according to the foreword, indicates confusion in a limited market with scant opportunities, but a lot of hype, in 2012.

While 15 percent of respondents indicated that their core strategy was in distressed investments, 41 percent called themselves multi-strategy vehicles, 16 percent indicated that they dealt in equity as a core, 11 percent of the respondents were involved in Capital structure arbitrage, and 11 percent were event driven.

44 percent of respondents indicated that more than 81 percent of their assets were in distressed debt. The report speculates that the low number of respondents calling multi-strategy, and equity their core strategies are simply flexible distressed funds that got into equities because of the asset class’s strong showing in 2012.

None of the respondents expected the default rate to head north of 4 percent in the coming year, and 46 percent expected it to fall lower than 3 percent. Despite that, 485 expected the number of large defaults, among companies with more than 150 million in debt, would increase in the year ahead. In the 2012 report 16 percent of respondents said that the default rate would likely head north of 4.1 percent.

Distressed Debt 1

The response of the survey participants to the a question about the effectiveness of recent European stability programs, 41 percent of respondents said that the continent has done enough to avert crisis, while the majority, 59 percent, said there was still a way to go to stave off that possibility.

Despite the huge numbers of investors who think that Europe is still at risk, investors saw more opportunities in North America and Latin America than in the stable countries in Western Europe. Close to 14 percent of respondents thought that the distressed nations of Europe and PIIGS, would offer opportunities in the distressed debt market in 2013.

Target Returns Distressed Funds

Despite the expected problems in the market, respondents to the survey seemed to expect greater returns for 2013 than they did at the outset of 2012. 7 percent of respondents thought that their primary distressed fund would return more than 20 percent in the next year, compared to no managers in 2012.

There’s a great deal more information in the full report, analyzing the distressed market. The report can be found on the Debtwire website, here.

The bottom line is that investors seem confused about the future of the distressed market. In order to achieve better returns,  more managers in the industry are branching out, though they are holding high amounts of capital in the distressed market.

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