* LTRO to boost bank profits, reducing need for loan sales
* Managers waiting for opportunities since credit crisis
* Some funds sit on cash levels of up to 50 pct
* Distressed funds lost 1.8 pct last year - HFR
* Restructuring opportunities seen better in U.S.
By Laurence Fletcher
LONDON, March 7 Hedge funds stalking
distressed assets in Europe may be left with slim pickings after
a trillion-euro cash injection from the European Central Bank
(ECB) eased the pressure on banks to dump some of their weaker
Many fund managers, who have been scenting prey since the
credit crisis began, had been hoping European banks would sell
off assets such as corporate loans and project finance debt to
comply with Basel III global capital adequacy rules, the thrust
of which comes into force next year.
However, some managers think the opportunity may have gone
for now after the ECB flooded markets with 530 billion euros
($695 billion) of cheap cash last week, on top of a 489 billion
tranche in December, to try and head off a second credit crunch.
Many believe the cheap money, lent via the Long-term
Refinancing Operations (LTRO) at 1 percent for three years, will
make life easier for banks by allowing them to boost their
profits and avoid asset firesales for the moment.
"Distressed opportunities in Europe are further away than
the consensus thinks," said Girish Reddy, founder and managing
partner at Prisma Capital Partners, which manages around $7.5
billion in assets.
"The LTRO is allowing banks to rebuild their balance sheets
through profitability. The can is being kicked down the road."
The ECB's actions could signal yet more waiting for
distressed funds, which typically buy the bonds and other
securities of companies facing tough times and approaching or in
"Managers fixated on classic distressed (assets) don't have
much to do," said one fund of funds manager who spoke on
condition of anonymity. "European banks probably feel a bit of
breathing space right now ... It (the opportunity) is
potentially there but it hasn't happened (on a) large scale."
After enjoying double-digit percentage gains in 2009 and
2010 on the back of rebounding asset prices, distressed funds
lost 1.8 percent in 2010 in a tough year for hedge funds,
according to Hedge Fund Research.
Some have been sitting on cash levels of as much as 50
percent for a couple of years whilst still charging fees to
clients, said one hedge fund investor.
Anecdotal evidence suggests they could find themselves in a
similar position for some time to come. According to data from
Citi, distressed funds cut their leverage by 6.8 percent between
December, when the LTRO was announced, and January, even as
other hedge fund strategies increased borrowing.
"Some investors will lose patience with these type of
funds," said the investor, who added he was "staying away from
the space" for now.
"Investment levels in funds are still not picking up
materially," the investor added. "The LTRO definitely adds to
that feeling of comfort (for banks)."
Distressed funds account for only a small proportion of the
$2 trillion hedge fund industry, and the bulk of the distressed
funds operating in Europe are U.S.-based firms with European
offices, such as Avenue Capital, Anchorage Advisors and King
Street Capital Management.
Managers say such funds can still find opportunities in the
U.S. in the wake of the LTRO, but the smaller group of funds
focusing solely on Europe may have to make do with smaller
"They are trying to do industrial bankruptcies rather than
European bank deleveraging. There will be enough to do, but not
to the size people expect. It won't be multi-billion, but more
like $1-2 billion transactions," said Prisma's Reddy.
Distressed managers were left sorely disappointed by the
opportunities on offer from 2008 to 2010, as banks, on the mend
from the financial crisis, proved unwilling to take major hits
and sell assets at fire-sale levels.
Many funds had also been banking that a much-discussed "wall
of maturities", stemming from the enormous debt piles backing
the leveraged buyouts of the 2007 boom, would push lenders to
become a lot tougher on ailing borrowers, creating a wave of
One of the most active funds in this area in Europe, Oaktree
Capital, returned money to investors from its distressed
investment fund in early 2011, in what many took as the clearest
signal that opportunities were thinning.
Many in the industry saw last year's euro zone debt crisis
and looming banking regulation as putting fresh pressure on
banks to reduce their groaning balance sheets and raised hopes
that long-awaited distressed opportunities would finally appear.
Though budget hotelier Travelodge entering talks with its
lenders was one such event, Prisma's Reddy said "in Europe it's
not happening as much" as in the U.S., where managers were
finding opportunities in companies such as American Airlines and
However, the LTRO could yet have a silver lining for
"Somewhat counter-intuitively, the faster that European
banks can recover, the quicker they will be able to recognise
impairments on their problem loan assets, so distressed
investors should want to see banks generate higher profits,"
said Iain Burnett, Head of Distressed at BlueBay Asset