Funds operating in the distressed debt market face headwinds at present although some niche areas can thrive, wealth managers said as this publication reported on a large European deal involving Deutsche Bank and a Romanian bank.

Funds operating in the distressed debt market face headwinds at present although some niche areas can thrive, wealth managers said as this publication reported on a large European deal involving Deutsche Bank and a Romanian bank.

Yesterday, it was announced that AnaCap Financial Partners, a specialist European private equity firm, together with H I G and Deutsche Bank, had completed an acquisition of a €495 million ($665 million) portfolio of non-performing and sub-performing loans from Volksbank Romania. Funds advised by AnaCap will jointly acquire the entire portfolio with H I G and Deutsche Bank.

The portfolio of 3,566 loans in total is backed by a mix of primarily residential, commercial real estate and development land. APS Romania will be appointed as master servicer, a statement from the entities said. The deal was described as the largest of its kind in Romanian history, brought about by pressure on European financial houses to restructure and spin off “junk” assets to clean up balance sheets and meet tougher capital rules.

WealthBriefing asked a number of financial institutions what they thought of the distressed debt market in the current monetary and economic environment, and drew a mixed response on the sector’s prospects.

“While we see attractive opportunities for private market funds in certain areas of European distressed debt, we see less encouraging prospects for hedge funds active in distressed generally. This is primarily due to the different investment horizons and liquidity constraints associated with the two strategies,” Nils Beitlich, chief investment officer, head of hedge fund strategy at UBS Wealth Management, said.

“Distressed debt focused hedge funds must offer a higher liquidity compared to their private market counterparts, and thus are more reliant on the liquidity of the underlying instrument. This forces them into a closer relationship to the overall high-yield-cycle. We consider substantial spread compression as unlikely at this point in time, constraining the opportunity set and managers' ability to deliver attractive returns without significant leverage. This increases downside risk and is a key reason we are cautious on this strategy,” Beitlich continued.

“This picture is different for private debt funds which are less constrained than hedge funds by liquidity,” he added.

Didier Duret, CIO Private Banking at ABN AMRO, said there is a lack of appetite and performance in distressed debt. He said this situation exists because the current conditions of low corporate default rates and relatively easy access to finance have reduced the opportunity field for the category.

“There is also the explicit competition from event-driven strategies that are more liquid and diversified by nature, more attuned with the recovery expectation, and the restructuring and M&A intense activity. Distress is more a matter of special situations than an investment theme,” he said.

Recovering Romania

After a prolonged correction following the financial crisis, the property market in Romania is now showing strong signs of improvement. Gross domestic product and unemployment have recovered on the back of labour market reforms in 2011 and an IMF financing package.

House prices, which crashed by 38 per cent since their peak in mid-2008, are now on the rise, with the areas surrounding central Bucharest and other main cities increasing 4 per cent for 2013, AnaCap said.

Distressed debt funds, sometimes dubbed "vulture funds", typically look to buy securities trading at a significant discount to their par or face value and wait for conditions of issuers to improve to the point where they can be sold for a profit.