CQS U.K. LLP, which oversees $10.5 billion, is buying more European distressed debt and expects hedge funds and private-equity firms to pursue similar investments as profit opportunities in the U.S. fade.
“We are allocating more capital to Europe,” Mark Unferth, CQS’s head of distressed debt, said in an interview in London. “You will see more U.S. distressed funds in Europe.”
Efforts by European governments to cut spending, the region’s uneven economic recovery and rising inflation are putting pressure on non-investment grade companies to restructure their debt. Standard & Poor’s said last month that the refinancing risk for highly indebted European corporate borrowers could produce a wave of defaults in 2012 and 2013.
Howard Marks, chairman of Los Angeles-based Oaktree Capital Management LLC, said in March the $82 billion money manager plans to increase investments in European distressed assets as a price rally eroded the return outlook for U.S. corporate debt. New York-based Kohlberg Kravis Roberts & Co. is also expanding such investments.
HSBC Alternative Investments Ltd., which has about $28 billion invested in hedge funds, is allocating more money to managers who buy distressed debt in Europe after concluding that a price rally has eroded investment opportunities in the U.S., Tim Gascoigne, the London-based firm’s global head of portfolio management, said last month.
‘Dribs and Drabs’
European distressed-debt funds have recorded an average return of 3.6 percent this year and 8.7 percent for all of 2010, according to Eurekahedge Pte, a Singapore-based data provider. That compares with returns of 4.9 percent and 28.2, respectively, for the same periods for funds in North America.
“The European cycle is behind the U.S. by anywhere between 12 to 18 months,” said Unferth, who is based in New York. “We will start to see European banks selling their distressed assets. Are we going to see a flood or is it going to be more dribs and drabs? It’s probably going to be somewhere in between.”
CQS sees opportunities in European chemical companies, retailers hurt by a decrease in consumer spending and auto-parts suppliers, Unferth said. European firms facing restructuring are typically “reasonably good companies with inappropriate balance sheets,” he said.
CQS is a London-based hedge fund founded in 1999 by Michael Hintze, a former Credit Suisse Group AG convertible-bond banker. It invests in distressed assets through a $60 million fund raised last year, and other fund strategies. The CQS Distressed Value Opportunities Fund gained 8.2 percent through February, according to the company.