Key findings from the Seventh annual Distressed Debt Market Outlook:

• The bulk of debt restructuring in Europe is yet to come
• The UK and Spain top the list of most anticipated restructurings
• Senior debt tops the list as most attractive asset class in 2011
• Refinancings to present the bulk of primary activity this year
• Trade buyers to dominate exit environment for sponsor-backed firms this year
  

2010 will be remembered in Europe as the year the sovereign replaced corporate debt on centre stage, and Western European banks made their debut on the watchlist for distressed investors. Troubles started in Greece, but soon infected highly-indebted European peripherals. Sovereign woes remain far from resolved as we enter 2011.

Debtwire, in association with Cadwalader, Wickersham & Taft LLP and Rothschild, have published the seventh annual European Distressed Debt Market Outlook 2011, which was released on 1 February 2011. The survey canvassed the opinions of 100 hedge fund managers, long-only investors and prop-desk traders in Europe, as well as 30 private equity practitioners on what the distressed space holds for 2011.

While a large number of debt restructurings are complete, over half of survey respondents said the bulk of restructuring is yet to come. In total, 20% of respondents from the Distressed Investor survey expect financial restructurings to peak in the first half of 2011, while the greater share (35%) expect it to occur in the second half of the year.

Senior debt is the instrument considered to offer the most attractive investment opportunities in 2011 by the largest number of respondents (37%).

“2010 saw a collapse in the number of restructurings ending up in senior lender ownership. In 2008/09, around half of companies ended up as senior-lender-owned zombies. In 2010, this fell to under 10% reflecting rising valuations, mezzanine creditor fightbacks and dry powder in the private equity community.”
Andrew Merrett, Rothschild

“A comparable number of private equity investors and the majority of distressed investors believe that peakrestructuring lies ahead. That senior debt is seen as the most attractive investment class for new money perhaps gives a greater insight into investors’ true instincts. To us, this indicates investors’ desire for a buffer in over-levered capital structures, and that investors remain concerned over future insolvencies.”
Richard Nevins, Cadwalader

“A key expectation from this year’s Distressed Debt Outlook is a fundamental shift in the landscape for private equity investors in 2011. Refinancings will represent the bulk of primary deal flow, and trade buyers will dominate exits for private equity firms, according to respondents. Given the number of refinancings entering the hands of high yield bond investors, this could signify the right-sizing in European leveraged loan issuance.”
Carrie-Anne Holt, Managing Editor, Debtwire

Debt renegotiation in 2011

The clear majority of survey respondents (59%) in the Distressed Investors survey said that the most prevalent form of debt renegotiation will be an amend-and-extend or forward start arrangement. A large number of respondents also said that new money injections will feature highly on the list of debt renegotiations in 2011.

Key drivers behind primary market activity: Refinancings

With the wall of debt maturities approaching, refinancings were named by 68% of respondents as the key driver behind primary market activity over the course of 2011. Seventeen per cent of respondents name M&A activity as a key new deal driver, however, pinpointing the numerous distressed opportunities opening up to cash-rich corporate players.

Additional findings:

•  Divergent creditor attitudes were named by the largest proportion of respondents (50%) as one o the greatest obstacles completing financial restructurings in the Private Equity survey.
•  The UK is expected to be the country where the largest number of debt restructurings will take place, closely followed by Spain.