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New distressed debt fund poised as billions go bad

Thursday, November 19, 2020
Opalesque Industry Update, for New Managers - Distressed debt and special situations specialists Arbitrium Capital Partners formally opened its doors in Sydney today, poised to find turnaround deals among the thousands of Australian companies that may be at risk of default from March 2021 as COVID support packages are removed.

With nearly 20% of the $300m fund size in committed capital, founders Daniel Liptak and Mukhtader Mohammed said deal flow is strong, as banks and other lenders face degrading risk profiles in otherwise solid companies impacted by COVID.

"Our investment universe comprises companies with pre-COVID revenues of $50-750M with over $100 billion in aggregate corporate debt," said debt and restructure specialist Mohammed. "Australia is in a recession for the first time in nearly 30 years. Given the decline in earnings and growing working capital challenges brought on by COVID-19, there is growing uncertainty that non-investment grade loans to Australian mid-market corporates may be at risk of default in the next six months as government fiscal measures expire. Many of these companies have really good fundamentals and make excellent turnaround prospects, so funds like ours, with a mandate to invest in high risk loans, see very strong opportunities."

At present, mid-market corporate Australia is underserviced by specialist credit funds that can provide patient capital with turnaround capabilities. However, interest in corporate debt in Australia is growing, with global funds looking for local deals, said Mohammed. "Australia has a thriving medium enterprise community for many decades, supported by strong regulatory and political frameworks," he said. "Unfortunately, many of these companies simply haven't been able to meet fixed cost demands with the hit taken to topline revenues - but they're still good companies that are likely to recover provided they can find support in a post-stimulus landscape. We tend to see family offices servicing distressed debt at the smaller end of the SME scale, and global funds looking to finance loans of $100m and over, so there is this a giant gap in the middle that we will play a part in addressing."

Liptak, a hedge fund veteran, said alternative debt vehicles would play an important role in helping good Australian companies continue to trade and employ people.

"The true magnitude of 2020 loan default rates are not going to crystallise until next year," he said. "The mid-market companies we're focusing on are the engine room of Australian economy, and many well-managed companies will need patient capital with a risk profile outside traditional lenders tolerances. Our model offers a lot of benefits on both sides of the table."

The Arbitrium team is expanding with two additional partners with decades of experience in distressed debt, funds management and banking, and working with stressed/distressed loans through multiple credit cycles. Further, the Arbitrium Advisory Board comprises of corporate leaders with deep experience in banking, funds management and restructuring.

While COVID is the current catalyst for accelerating stress in corporate loan profiles, the Arbitrium team have worked with stressed and distressed loans throughout multiple business cycles," said Liptak. "There is always demand for a stressed/distressed credit strategy."

The fund invests in illiquid loans and looks to enhance returns through conversion to equity via warrants. It will open a Dublin structure to enable offshore investors to access the strategy.

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