Junk Debt Demand Shrinks Losses for Wightlink Banks: U.K. Credit

Investor demand for U.K. junk-rated debt is helping banks that loaned money to Wightlink Ltd., the Isle of Wight’s biggest ferry operator, cut their losses.

Societe Generale SA sold over 60 million pounds ($100 million) of the loans at more than 80 pence on the pound, according to two people with knowledge of the sale, who asked not to be identified because the trade was private. It joins Mizuho Bank Ltd. and Erste Abwicklungsanstalt in selling the debt after the price rose from as low as 60 pence this year, they said.

The average yield on debt graded CCC and below has fallen to a record-low 8.21 percent, Bank of America Merrill Lynch index data show, as a recovering economy encourages investors to seek higher-returning assets. That’s enabling lenders to shed problem borrowing at smaller discounts. Wightlink owner MEIF Shipping Ltd., owned by a fund controlled by Macquarie Group Ltd., has been hit by the 2008 financial crisis, rising fuel prices and bad weather during summer months.

“Sales of non-core loans from banks are picking up and that trend will likely continue,” said Richard Thompson, a London-based debt adviser at PricewaterhouseCoopers LLP. “We estimate that funds have close to 100 billion euros ($136 billion) available to spend on loans.”

Karen Woods, a spokeswoman for the Portsmouth-based ferry operator, and Karen Smith at Macquarie, declined to comment on the debt sales.

Debt Extension

Wightlink operates nine craft on three routes linking the English Channel island of about 140,000 people to the south coast of England. Macquarie bought the company in 2005 and it borrowed 225 million pounds from banks the year after, according to filings with Companies House.

The loans were reorganized in 2010 and extended to 2018. Portuguese lender Banco Espirito Santo SA helped arrange the financing, according to its website.

The ferry operator carried 4.8 million passengers in the year to March 2013, 5 percent fewer than the previous year, and had debt of about 200 million pounds, according to the filings. MEIF Shipping’s losses climbed to 63 million pounds in the 12 months to March 2013, latest accounts show.

Fare increases and service cuts led local lawmaker Andrew Turner to back a campaign seeking to cut Wightlink’s debt. Lenders to rival ferry company, Red Funnel, agreed to restructure its borrowings in 2009, according to filings.

‘Value Opportunities’

“Banks know that restructuring can take a long time and if demand is strong and the prices are appropriate they will sell,” said Andrew Grimstone, a London-based adviser at Deloitte LLP. “Funds will see value opportunities and some go after them aggressively.”

Marie Luise Hoffmann, a spokeswoman for Erste Abwicklungsanstalt, Murray Parker for Societe Generale and Kim Cowling at Mizuho declined to comment on the loan sales.

Sales of loans by Europe’s banks will rise about 18 percent to more than 80 billion euros this year, PricewaterhouseCoopers LLP said in a May 29 report.

Royal Bank of Scotland Group Plc has set up a 38 billion-pound unit to sell or manage toxic assets and Erste Abwicklungsanstalt, the agency winding down failed bank WestLB, has sought offers for 9.7 billion euros of loans. Investors including Blackstone Group LP, Apollo Global Management LLC and KKR & Co. are among companies vying to buy the debt.

Distressed debt prices have risen because many investors are chasing the same assets, said Stuart Mathieson, head of European Distressed Debt at Babson Capital Management LLC in London. Reviews of bank assets by regulators means lenders are “more realistic about their provisions so you get a meeting point between them and the funds.”

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