GSO Capital Partners LP, the credit unit of Blackstone Group LP, has doubled rescue lending since August as Europe’s debt crisis pushes more companies to the brink of default, according to co-founder Bennett Goodman.
The fund has committed to invest $2 billion in distressed borrowers, Goodman said in an interview in London. The fund has allocated more than $1 billion since Standard & Poor’s cut the U.S.’s top rating on Aug. 5. Europe may account for a third of its holdings when it’s fully invested, he said.
“Europe will be a key investment opportunity because there are good countries and good companies out there even when the European Union faces real risk of becoming smaller because of the sovereign debt crisis,” Goodman said. “We have a good backlog of transactions so the $3.25 billion fund should be fully invested early next year.”
The potential breakup of the euro amid fiscal imbalances from Greece to Ireland has closed access to capital markets for the neediest borrowers, with sales of new high-yield bonds in Europe tumbling by two-thirds to $9.7 billion since Aug. 1, according to data compiled by Bloomberg. A market for distressed debt in the region that may reach $2 trillion in coming years is luring Los Angeles-based Oaktree Capital Management LP and Leon Black’s Apollo Global Management LLC.
Standard & Poor’s expects a surge in defaults next year and in 2013 as the economy slows, with the rate of non-payment for borrowers rated below investment grade in Europe rising to between 5.5 percent and 7.5 percent next year from 3.8 percent.
GSO was the lead mezzanine investor in the acquisition of EMI Group’s publishing unit from a Sony Corp.-led group last week. EMI is being broken up after it was seized by Citigroup Inc. from private-equity firm Terra Firma Capital Partners in February. The 114-year-old music label of the Beatles failed to meet covenants on its loans. Citigroup wrote down the value of EMI’s debt to 1.2 billion pounds ($1.9 billion) from 3.4 billion pounds after the takeover.
The credit manager provided Sony with about $800 million across the capital structure for the EMI deal. Blackstone said it’s raising a second mezzanine fund in a July 21 earnings call.
“GSO solved Sony’s financing needs in a challenging market environment,” Goodman said.
Spanish 10-year bond yield rose to a euro-era record of 6.76 percent today. Italian bond yields remained at about 7 percent -- the threshold that led Greece, Portugal and Ireland to seek bailouts. The crisis has toppled four elected governments, with the last two, in Greece and Italy, falling last week.
Europe’s credit crisis has become more of “a political issue than an economic issue that will require political will of Germany and France to deal with,” Goodman said. “The notion of having a common currency without a common sovereignty is really difficult to carry out. If policy makers had allowed Greece to default six months ago we wouldn’t have been in this situation today. Instead, they let it fester and now it looks extremely difficult to control.”
Politicians in Europe have missed the opportunities to prevent a European credit crunch as the region’s banks face “serious shock” from the collapse of Italy’s bond market, Azad Zangana, Schroders’ European economist in London said in a research note on Nov. 10.
GSO, which has more than tripled its assets since becoming part of Blackstone in 2008, may start raising a new rescue fund after the existing one is fully invested, according to Goodman. It agreed to buy Dublin-based Harbourmaster Capital Management Ltd. last month to become the largest manager of collateralized loan obligations in Europe.
The name GSO comes from founders Goodman, Tripp Smith and Doug Ostrover, who worked at securities firm Donaldson, Lufkin & Jenrette and Credit Suisse Group AG before setting up the firm in 2005.
Goodman began working with Michael Milken at Drexel Burnham Lambert Inc. in 1983. Five years later he joined Donaldson, Lufkin, helping to make it the No. 1 underwriter of high-yield securities during the 1990s. Smith and Ostrover joined Goodman in 1992. Credit Suisse bought Donaldson Lufkin in 2000.