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Investment Trust Insider: the glory days for distressed debt funds?
by James Carthew on Dec 17, 2012 at 11:22
In last week’s article I followed up on one I wrote back in January 2011 that looked at a few recently launched debt funds. One of these was NB Distressed Debt (NBDD).
When I wrote the article, NBDD was trading around $1.07 – a decent premium to its asset value at the time, which was about 99 cents – just below its issue price. Since then the situation has reversed – the share price is just below $1 and the net asset value (NAV) is $1.07.
NBDD does not pay any dividend so, after two and a half years shareholders have seen no return on their investment since launch (in June 2010). Obviously this is not a great situation, so I thought it might be worth having another look at NBDD today.
NB Distressed Debt was one of the largest new issues of recent years and has expanded twice, with a C share later in 2010 and the issue of around four million shares as subscription shares (converted this time last year). Its market cap now is £273 million.
It was quite an easy sell to investors. We were clawing our way out of a recession that had its roots in the bursting of a credit bubble. Otherwise decent companies had been persuaded to take on excessive debt. Even those companies managing to pay interest might struggle to roll over their debt when it fell due.
The amount of debt that needs rolling over is vast. For most of it, the crunch time is 2013 and 2014 but there should have been plenty for NBDD to target over the past couple of years.
Snapping this debt up at a discount, from banks that were supposed to be desperate to shrink their books, then working to restructure balance sheets and put those companies back on an even keel should have been quite lucrative. In theory, it should have been easy to get the issue proceeds invested and then start reaping the rewards.
However, banks are still dragging their feet about cleaning up their balance sheets. In July, KPMG reckoned there was about €1.5 trillion of non-performing loans in Europe alone.
The investment strategy is to concentrate on asset rich companies – those where the collateral would survive a restructuring of the debt. Purchases would be of debt at the top of the structure and the aim was to be in a position to control or significantly influence the underlying companies. The fund might end up with equity in the underlying company through a debt-for-equity swap but there is also the chance to make money from a debt restructuring.
The intention was to build a portfolio of 40–50 holdings and to be fully invested within nine months.
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