May 9, 2019 / 4:10 PM / 2 months ago

Hedge funds target European loans as downturn looms

LONDON, May 9 (LPC) - A number of companies financed in Europe’s leveraged debt markets have attracted the attention of global hedge funds, which are lining up money in preparation to profit when the impending downturn hits.

Syndicated loans in struggling companies have lost up to a quarter of their value within a six week period since the end of the first quarter and as much as half their loan value since the end of the third quarter in 2018, according to LPC data.

This has attracted the attention of hedge funds that are buying small portions of the debt in order to gain access to information on the private companies.

Hedge funds are also positioning to profit from the first downturn for direct lenders (which emerged as a response to the financial crisis), which have provided highly leveraged and risky unitranche loans to companies.

“Lots of funds are raising money convinced a downturn is coming. Some credits are struggling and there will be huge demand for deals when they get into trouble,” a trader said.

A senior banker added: “Unitranche and direct loans haven’t been through a full credit cycle yet. Every direct lender colloquially says they have at least two or three duds in the portfolio and the hedge funds are busy trying to work out what they are.”

As some hedge funds are restricted from buying sponsor-backed loans themselves, banks are buying up paper in order to gain access to information on borrowers and advise the funds in return for fees which companies could default.

Banks are also selling some of that paper to hedge funds via a sub-participation process, to avert the attention of sponsors that wouldn’t want the funds buying into portfolio companies.

Hedge funds don’t want to sit on huge piles of unused cash as it is expensive and are holding conversations with investors to make sure money is available when they want to buy up the loans.

Hedge funds gearing up special situations groups include the likes of Anchorage, Apollo, King Street Capital, Oaktree and SVP, bankers said.

King Street declined to comment. The rest of the funds were not immediately available to comment.

“Hedge funds are calling investors so when they are ready to push the button they will be flooded with cash. Easily, €100m a pop from each investor. It will be there immediately. They are buying one or two million blocks of loans in different borrowers to access information and monitor developing special situations,” a senior banker said.

There is a void on many loans between the mid-90s percent of face value where CLO investors are forced to sell and the mid-80s or below where hedge fund buyers would play.

FALLING PRICES

A TLB in Ireland’s online car rental company CarTrawler was quoted at 84% of face value on May 7, from 99.3% at the end of 2018. UK aerospace engineering group Doncasters’ term loan fell 14.25 points within six weeks to 76.5% of face value on May 7, from 90.75% at the end of the first quarter, according to LPC data.

Other drops have been more pronounced. Spanish olive oil bottler Deoleo’s term loan was quoted at 29.4% of face value on May 7, 36.6 points lower than 66% at the end of September.

Deoleo, which sells one fifth of the world’s bottled olive oil, has been hit in recent years by an increase in raw material costs that could not be fully passed on to customers and a general decrease in appetite for olive oil.

German managed hosting provider PlusServer was quoted at 50.3% on May 7 from 98.2% at the end of the third quarter 2018, while loans in Italian ferry company Moby were quoted at 35% from 73.5% during the same period. (Editing by Christopher Mangham)

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