Brexit Creates Opportunity in Distressed Companies

Credit-focused hedge fund manager CQS sees distressed-debt opportunities spurred by Brexit and difficulties in the U.S. energy sector, even as low-interest rates stymie many asset managers that invest in troubled companies.

Brexit-fueled uncertainty is putting stress on everything from retailers and food processors to commercial real estate, fostering opportunities to create value, according to Ivelina Green, London-based CQS’s head of special situations. In the U.S., renewed challenges for energy companies — still struggling after the oil slump four years ago — are creating attractive entry points, Green said in a Bloomberg TV interview airing Tuesday.

“If you can get involved and you can bridge these companies through a cycle, you’re going to be creating them at some very interesting levels,” she said, referring to opportunities in the U.K. created by Brexit. “There are a lot of interesting opportunities in terms of good companies, wrong balance sheets, cyclical pressure.”

Some of the biggest players in distressed credit have struggled to post meaningful gains in recent years as easy access to debt financing and investor demand for higher-yielding assets has helped troubled issuers find new backers. Expectations of an impending turn in the credit cycle have also kept many investors on the sidelines awaiting more attractive valuations, Green said.

While CQS, which manages about $18 billion, isn’t waiting for a global slowdown to put capital to work, the hedge fund nonetheless is prepared to hold many of its recent investments through a downturn.

“We are going to be owning a lot of these companies potentially through a recession,” Green said.

While the amount of outstanding troubled-company debt recently hit a new cycle high of $188 billion, according to Bloomberg Intelligence, Green expects the supply of distressed debt to rise rapidly when the global economy turns.

Public high-yield markets in the U.S. and Europe are most primed for a crisis, she said, with the amount of outstanding junk-rated debt doubling in the past decade.

“There is definitely value there, you just need to have patient capital and realize that you might be in that investment for a prolonged period of time,” Green said.

via HSN