Distressed debt funds are waiting for a downturn

ON NOVEMBER 4TH the share price of Kier Group, a troubled British builder, fell by nearly 10% on reports that banks were trying to offload its debt at a steep discount. The rumour remains unconfirmed—sources close to the firm and one of its biggest lenders dispute the claim—but investors may have felt a sense of déjà vu all the same. After the sudden downfall of Carillion and Interserve, Kier is Britain’s third construction giant to face a battle for survival in less than two years. And each time the groups’ fortunes have worsened, hedge funds eager to snap up their debt at bargain prices have begun to circle.

Funds that buy “distressed” debt, which typically yields ten percentage points or more over Treasuries, are becoming familiar villains. They pounced on Thomas Cook, a travel group, and PG&E, a Californian utility, shortly before they went bust this year. They tend to circle around ailing oil firms and shops disrupted by e-commerce, notes Christine Farquhar of Cambridge Associates, an investment firm. And they snap up portfolios of dud loans from banks. If their target ends up recovering, they pocket big profits. If it does not, they often gain regardless, as they are usually first in line for liquidation proceeds.

Yet distressed specialists are frustrated. Convinced that a recession was just around the corner...

via The Economist: Finance and economics Business Feeds

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