Troubled debt funds shine in Covid recovery

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Financial Services Update

Hedge funds seeking to profit from disaster-stricken companies are enjoying their best year since the financial crisis, as the market rebound driven by stimulus measures has pushed up the price of debt that has been defaulting.

Distressed Debt Fund -Experts who specialize in dealing with bonds and loans issued by troubled companies-rose for the 10th consecutive month in July, expanding the annual return to 11.45% as of the end of July.

According to data from data provider Eurekahedge, this is the strongest performance over the same period since 2009 and marks the best performance of any major hedge fund strategy in 2021.

This outstanding performance underscores the speed at which the economy has recovered from the worst of the pandemic, thanks to the huge stimulus measures of central banks that have aligned with the rapid vaccination programs of developed countries.

Debt funds usually make short-term investments in bonds that have nearly defaulted or defaulted, provide emergency loans, and even control disaster-stricken borrowers through the courts.

Giuseppe Naglieri, deputy chief investment officer of Värde Partners, said: “When Covid hit, we started a bad cycle and the default rate rose sharply, but the performance of this business cycle is very different from the past,” Värde Partners, valued at 15 billion U.S. dollars Distressed debt fund.

Companies in this field, including Oaktree Capital, Strategic value partner, Apollo and Elliott Management tend to get involved in times of economic recession and market turmoil, and then hope to take advantage of the trend to recover-this is a profitable bet.

This strategy has worked rapidly in the past year and a half due to the dramatic recovery of the market due to the aggressive actions of the central bank and the frenzy of government spending.

also, Private equity firm Naglieri said that they have strengthened, using their money to support the companies they invest in, indirectly helping distressed debt funds in the process.

Private equity firms tend to burden companies with large amounts of debt to increase returns, but this may cause problems when an economic recession strikes. The partners of Värde pointed out that sometimes they would give up the investment instead of doubling the investment, but the situation has changed recently.

“The biggest difference is the provision of liquidity, not just the central bank and the government,” Narieli said. “Shareholders’ willingness to support their company is greater than in past cycles-probably because it is caused by a virus, so it is considered temporary.”

HFR, another industry data provider, set the average return on non-performing debt at 13.9% for the year ended July, while the average return on hedge funds was 9.5%. Last year, the rate of return for distressed debt participants was 11.8%.

Winners include Jason Mudrick’s Mudrick Capital Management and Victor Khosla’s strategic value partners. According to investor documents they have seen, their distressed debt hedge funds have achieved returns of 26.2% and 15.5%, respectively, in the year to the end of May. .Financial Times

A significant rebound in the entire market boosted returns Corporate debt marketThis has reduced borrowing costs across the board, and even helped cruise companies, airlines and hotel groups to raise billions of dollars to tide over the difficulties.

According to ICE data, the average yield of US junk bonds has plummeted from a peak of over 11% during the most turbulent coronavirus market last year to below 4% for the first time on record this summer. Even the low point before the financial crisis was only about 7%.

The average yield of corporate bonds rated CCC or lower by major credit rating agencies – extremely risky debt that is already on the cusp of default – has plummeted from a high of nearly 20% in March 2020 to near historical lows Of about 7%. A penny this summer. Oleg Melendiev, director of high-yield bond strategy at Bank of America, described the current environment as a “credit killer.”

A line chart of three Cs and below (percentage of total return) shows that the riskiest US corporate bonds have returned well after the pandemic lows

However, the rebound in the credit market has helped many companies that might have fallen into the clutches of distressed debt funds, thus limiting the scope of further opportunities. Some investors are also looking for returns elsewhere, believing that the best days for bad debt strategies may be over.

UBS’s hedge fund investment arm stated in its third-quarter strategic outlook that it plans to reduce its exposure to non-performing debt, “in view of the substantial rebound in corporate credit and more attractive long-term biased opportunities in other areas of the credit market”.

Preqin, a private market data provider, also pointed out in its latest outlook that “compared to last year, investors’ interest in non-performing debt and special circumstances has decreased because opportunities are more difficult to obtain than expected”.

The histogram of the number of funds shows that direct loan funds are growing faster than distressed debt funds

However, many Bad debt Experts emphasized that they have steadily raised and deployed funds in good times and bad times, and still believe that the aftershocks of the coronavirus pandemic will bring plenty of opportunities.

Narieri said: “In addition to the surface, there are many things to do.” “When you look at the average level of the market, it doesn’t look very interesting. But when you dig deeper into individual companies and industries, in fact, A lot of things are happening.”

Twitter: @Robin Wig

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