Brexit Fallout Provides Few Crumbs for Distressed-Debt Investors

(Bloomberg) -- Distressed-debt investors are still waiting for bargains to appear in the wake of the Brexit fallout.

Yields on the riskiest corporate bonds in euros remain below levels reached earlier in the year, before the European Central Bank started buying company debt. That contrasts with sell-offs for stocks and European currencies following the U.K. vote to leave the European Union.

“Credit markets on the whole, especially for large-cap situations, continue to be expensive,” said Duncan Priston, who oversees European corporate distressed-debt investments at Bayside Capiral. “Prices have not yet adjusted sufficiently to adequately reflect increased risks to fundamentals,” Priston said.

ECB President Mario Draghi has helped prop up corporate bonds by buying investment-grade company debt, which has pushed investors into higher-yielding and riskier assets. Bank of England Governor Mark Carney has also pledged to inject cash, bolstering optimism that central banks will be able to contain any Brexit effect on economic growth and credit availability.

Monetary Policy

“You usually see a rise in distressed assets when the economy is in recession and lending standards get tighter, but we still expect growth in Europe,” said Barnaby Martin, a European credit strategist at Bank of America Corp. “In addition, Draghi and Carney are likely to ease their monetary policies further.”

The U.K. will probably only see a “shallow recession” in the next year, Martin said. Only one in nine economists sees the U.K.'s economy shrinking in 2017, according to estimates published after the referendum and compiled by Bloomberg.

The average yield on the lowest-rated euro-denominated bonds has fallen every day since Monday, when it rose to 19.4 percent, according to Bank of America Merrill Lynch index data. That compared with 18.5 percent on June 23, the day of the referendum, and a peak for the year of 19.9 percent in April.

Riskiest Bonds

Among distressed issuers, Solocal Group's 350 million euros ($389 million) of June 2018 bonds were quoted at 51 cents on the euro on Friday, little changed from June 23, according to data compiled by Bloomberg. Four Seasons Health Care Ltd's 350 million pounds ($466 million) of June 2019 notes were at 79 pence versus 81 pence.

A potential area for distressed-debt funds may be the riskiest type of bank bonds, which have been caught up in the wider sell-off. Additional Tier 1 notes from lenders including Royal Bank of Scotland Group Plc and UniCredit SpA fell at least 10 cents in the two trading days after the referendum. 

CVC Capital Partners sees “attractive investment opportunities” in European bank debt, Mark DeNatale, a New York-based partner, said in a statement on Thursday, announcing that the company had raised about 650 million euros for its global special situation fund.

The ECB has bought 4.9 billion euros of investment-grade bonds since starting purchases on June 8. That's helped push yields on highly rated notes in euros to a record low 0.93 percent, based on Bank of America Merrill Lynch index data. Yields on non-investment grade bonds in the single currency have eased back to 4.6 percent after surpassing 5 percent for the first time since April, the data show.

The slight rebound in markets in the past few days means distressed-debt opportunities may only appear once the U.K. invokes Article 50 of the Lisbon Treaty, the first official step in leaving the European Union, said Max Magliana, a credit analyst at Stifel Nicolaus in London.

“The sell-off lasted a couple of days, but now we're rallying,” he said. “Whilst volatility is likely to continue, the triggering of Article 50, if it ever occurs, may lead to a larger sell-off, which could eventually result in distressed debt opportunities.”

--With assistance from Harumi Ichikura and Sally Bakewell To contact the reporter on this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net. To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net, Neil Denslow, Abigail Moses