Hedge Funds Hire in Distressed Debt to Bet on European Defaults

(Bloomberg) -- Hedge funds and private-equity firms are signing up European distressed-debt experts at the fastest pace in at least five years as slowing growth drives up corporate defaults in the region.

Investment firms hired 29 new analysts, traders and money managers specializing in distressed situations during the first half of the year on a net basis, according to a report by headhunters Paragon Search Partners. That compares to 20 over the same period in 2018 and a net loss of two the year before.

Europe’s companies are under pressure after a decade of central bank easing policies prompted them to binge on borrowing. With recession looming in Germany, Europe’s biggest economy, the region’s growth outlook is darkening. More companies are struggling to service their debt and the rate of corporate defaults is rising.

“We see growing signs that the credit cycle is turning and we’re heading into a European economic downturn,” said Duncan Priston, Head of European Distressed Credit at HIG Bayside Capital, which in June raised $1.5 billion for a second European distressed debt fund. “After many years of asset prices being kept high, we’re set for a material repricing of debt securities.”

Some of Europe’s best-known companies have found themselves in restructuring talks with lenders in recent months. U.K. tour operator Thomas Cook Group Plc agreed a debt restructuring last week with borrowers and Chinese investor Fosun Tourism Group. German industrial equipment maker Galapagos SA is in the midst of legal wrangles as junior creditors seek to avoid being almost wiped out in a plan to recapitalize the firm.

Funds that have recently hired staff for distressed debt strategies include Carlyle Group LP, Caius Capital and Orchard Global Asset Management. Intermediate Capital Group Plc also hired a managing director in special situations. Mudrick Capital Management, a U.S. firm founded by Jason Mudrick in 2009, has opened an office in London and made its first European hire.

Hedge funds and private equity firms are also gearing up for opportunities stemming from previous downturns in the credit cycle.

Regulators pressuring European banks to reduce the amount of toxic debt on their balance sheets left over from earlier downturns have created a market in non-performing loans amounting to 663 billion euros, according to European Banking Authority data. Cerberus Capital Management agreed to buy a portfolio of non-performing loans from Portuguese lender Novo Banco SA last month. Bain Capital Credit and Davidson Kempner Capital Management bid for a second portfolio.

“There are plenty of people expecting the credit environment to become more challenging,” said Peter Baldwin who joined law firm Macfarlanes LLP in June as part of an expansion in special situations and distressed debt. “We’ve seen low levels of distressed activity for a pretty prolonged period and at some point that has got to come to an end.”

--With assistance from Antonio Vanuzzo.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

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