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Double dip fears and sovereign debt crisis still impact investors - Distressed Debt Market Survey

Thursday, January 27, 2011
Opalesque Industry Update - Ongoing macroeconomic and sovereign-related issues still have a lot of room to run in 2011, according to the sixth annual North American Distressed Debt Market Outlook Survey released today by Debtwire, Bingham McCutchen LLP and Macquarie Capital.

While equity markets are offering attractive opportunities, distressed plays still exist if you look in the right places. Nonetheless, 78% of respondents to this survey are cautious and do not plan to increase their distressed debt allocation in 2011.

“Despite the moderate economic recovery anticipated by most economists, investors will continue to stress the downside when evaluating investment opportunities,” said David Miller, a managing director at Macquarie Capital. “Lingering concerns about unemployment, housing, and the European sovereign debt crisis will cause investors to remain cautious and focus on the ability of companies to withstand additional economic shock.”

What a difference a year makes
Unlike last year’s projection of default rates between 12%-13%, agencies are now forecasting closer to historical averages of 3%. Investors in this survey are slightly more bullish with 41% expecting default rates to be between 3.1% and 4%, and an additional 22% of respondents expecting them to exceed 4%.

The attractiveness of various investing instruments has also changed. Last year, first- and second-lien loans were rated as the most appealing opportunities, while in this year’s survey, they top the least attractive list. In their place are common shares and convertible bonds.

“There is no longer a need to be at the top of the capital structure,” said Bingham restructuring partner Ronald Silverman. “Unlike last year where first- and second-lien loans were the place to be, fund managers are prepared to move away from secured debt and are ready to enter on the ground floor.”

2011 opportunities
In search of returns, respondents have once again shifted sector focus with a pullback in energy, and a surge in real estate predicted. Indeed, almost two-thirds of respondents think CRE defaults rates have yet to reach their peak.

The high yield/leverage loan markets are in a bubble, according to 55% of respondents, as there are few signs of issuances slowing down and respondents don’t expect it to burst until late 2011 or early 2012. Be on the look out for PIK-toggle notes and covenant-lite loans.

Additional findings:
- Over one-third (37%) of respondents expect to decrease their DIP lending activity in 2011, compared to only 11% that decreased DIP lending activity in 2010

- Nearly half (47%) of investors surveyed expect maturity extensions to be the most common catalyst for amendments in 2011.

- Respondents are split over whether the Volcker Rule’s limitation on banks’ prop trading will trigger new funds

The report, available for download, provides an in-depth review of emerging trends in the distressed debt markets, based on the predictions of 100 experienced distressed debt investors throughout North America.

(press release)

Full report available here: Source

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