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Insight22%New Mexico SIC distressed debtallocation in 2018GSO builds out its distresseddebt team with two key hiresContrarian targets 400m forlatest distressed RE fundGSO Capital Partners hired twodistressed debt professionals as the firmlooked to increase its focus in that area.The New York-based credit managerbrought on Robert Carroll as a managingdirector and head of distressed trading,the firm said. GSO also hired AdamMaitin as a vice-president on the tradingdesk. Carroll will oversee the distresseddebt trading activities across all of GSO’sdistressed vehicles.Contrarian Capital Managementre-entered the market with its fourthreal estate distressed fund. TheGreenwich, Connecticut-based firm istargeting 400 million for its ContrarianDistressed Real Estate Debt Fund IV,according to a source. The fund helda first close on more than 132 millionand will follow a similar strategy to itspredecessors and invest in US-baseddistressed commercial real estate.DECJAN 19FEB 75mLASERS commitment to GoldenTreeAsset Management’s third distresseddebt fund 200mAmount earkmarked for distresseddebt by Contra Costa CountyEmployees’ Retirement AssociationMAR10%Gross return posted by OaktreeCapital Management distressed debtstrategy in 2018CDPQ backs Edelweiss’ seconddistressed debt fundEdelweiss Alternative Asset Advisorsheld a final close on the second ofits distressed fund series, EISAF II, on 1.3 billion in capital commitmentswith Quebec City-headquarteredCanadian pension fund, Caisse dedépôt et placement du Québec, actingas anchor investor. EISAF II is targetingan internal rate of return between 16and 18 percent, net of fees. The vehiclehas a four-year investment periodwithin a nine-year fund life. EdelweissFinancial Services’ executive directorand co-founder Venkat Ramaswamy toldPDI that the fund will invest in stressedassets, targeting turnarounds in thecorporate and real estate markets.Contra Costa County earmarks 200m for distressed debt,buyouts 4bnContra Costa County Employees’Retirement Association revealed that itcould commit 200 million to its privateequity programme – an allocation thatincludes investments in distresseddebt and special situations vehicles.According to meeting documents,the northern California pension fundheard plans for commitments of 25million- 50 million to two to fourfunds. The focus would include NorthAmerican distressed debt funds andUS buyout funds, including vehiclesfocused on small-cap and midmarket transactions, as well as thoseconcentrating on large-cap deals.June 2019Deployed by Oaktree from closedend funds in Q4 2018 400mReported target for ContrarianDistressed Real Estate Debt Fund IV Distressed Debt & Special Situations 5

InsightEditor’s letterThe importance ofselectivity in uncertain timesAndrew Woodmanandrew.woodman@peimedia.comWhen Brookfield Asset Management bought a 62 percent stake in OaktreeCapital Management this year, not only did it bolster its private debt offering asa combined asset manager, but it also revealed a growing appetite for distresseddebt and special situations.Howard Marks, Oaktree’s co-chairman, told PDI that the sale is as significant now as itwould have been a year ago, or a year from now. But it is hard to ignore the fact that the timingis fortuitous. Bruce Flatt, CEO of Brookfield Asset Management, told PDI that while Oaktreecan thrive in any environment, it can excel at a time when “stress in credit is robust”.2018 was a good year for Oaktree’s distressed debt and special situations strategy. Thestrategy posted gross returns of 10 percent, compared with 12 percent for US privatedebt, beating other alternative assetmanagers in similar categories. Limitedpartners demonstrated their appetite fordistressed debt and special situations in2017, when funds with a distressed debtfocus raised a total 66.6 billion. While thiswas already a strong year for private debtfundraising, funds with a distressed debtfocus accounted for around one-third ofthe capital raised.Much of this investment has been madein an anticipation of a downturn yet tomaterialise. With growing pressure on managers to put the dry powder to work, there is adanger that scrutiny will suffer. That is where the emphasis on quality comes in.Managers need to be able to show discipline when choosing where to invest. In the longterm, investors will favour those with consistency, expertise in their chosen sector or geographyand the ability to prove a strong track record. A downturn is sure to unveil a groundswell ofopportunities, and early investors will be rewarded, but until that happens, those focused ondistressed debt and special situations must be able to show it can also be an all-weather strategy.“ With growingpressure being puton managers toput capital to work,there is a danger thatscrutiny will suffer ”New York130 West 42nd StreetSuite 450New YorkNY 10036T: 1 212 633 1919London100 Wood StreetLondonEC2V 7ANT: 44 20 7566 5444Hong Kong19F On Hing Building1 On Hing Terrace CentralHong KongT: 852 2153 3240Private Debt InvestorPublished 10 times a year byPEI Media. To find out more aboutPEI Media visit thisisPEI.com PEI Media 2019No statement in this magazine is tobe construed as a recommendationto buy or sell securities. Neitherthis publication nor any part of itmay be reproduced or transmittedin any form or by any means,electronic or mechanical, includingphotocopying, recording, orby any information storage orretrieval system, without the priorpermission of the publisher.Whilst every effort has beenmade to ensure its accuracy, thepublisher and contributors acceptno responsibility for the accuracyof the content in this magazine.Readers should also be awarethat external contributors mayrepresent firms that may havean interest in companies and/ortheir securities mentioned in theircontributions herein.Cancellation policy You cancancel your subscription at anytime during the first three monthsof subscribing and you willreceive a refund of 70 percentof the total annual subscriptionfee. Thereafter, no refund isavailable. Any cancellation requestneeds to be sent in writing tothe subscriptions departments(subscriptionenquiries@peimedia.com) in either our London orNew York offices.Printed by Hobbs the Printers Ltdhobbs.uk.com MIXPaper fromresponsible sourcesFSC C020438Andrew Woodman6Private Debt Investor June 2019

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AnalysisEXPERTQ&ADavid Forbes-Nixon, co-founder, chairman and chief executive atAlcentra, and Eric Larsson, co-portfolio manager of the special situationsteam, discuss energy, retail and other opportunities amid economic strainWhere to ramp upin a slowdownQAre macro conditions a tailwindfor the European distressedmarket?David Forbes-Nixon: We are in the verylate stages of the longest credit bull marketin history, and whilst we do not forecast arecession, there is clearly a slowdown takingplace. Christine Lagarde of the InternationalMonetary Fund said recently that two yearsago about 75 percent of the world’s economieswere growing, but now about 70 percent areslowing. Europe is seeing an economic downturn due to geopolitical risks and other factorswith some countries suffering a great deal,such as Italy, where there is a large number ofnon-performing loans on bank balance sheets.8Private Debt Investor June 2019SPONSORALCENTRAFurthermore, the leveraged loan market ispriced to perfection. Leveraged loan multiplesreached 5.4x last year, compared with a peak of5.2x before the Global Financial Crisis.Eric Larsson: Because everything is priced toperfection, one does not need to see a big missin performance relative to a borrower’s target,before it can become stressed.QSo, opportunities are increasing?DFN: The market is very fragile. Wewitnessed this late last year, when there wasenormous volatility on very little news. Taking 2018 as a whole, 135 European high-yieldbonds traded down 10 points or more, butonly five traded up 10 points or more, partlybecause of the announcement of the end ofquantitative easing and the lack of dealer capital to support their deals. Compare this to2017, when only 13 traded down and 63 traded up to a similar degree. Also, the EuropeanCentral Bank currently holds about 10 percentof all European triple-B corporate bonds: thiscould create an enormous potential opportunity for investing in fallen angels – bonds thathave fallen from investment-grade to highyield ratings, perhaps in part because they are

Analysisno longer supported by the ECB buying andalso due to performance and market issues.Another way of measuring the increasingopportunity is to look at the overall amountof stressed and distressed syndicated loans andhigh-yield bonds outstanding in Europe – securities trading below 80 cents in the euro orat a yield to maturity above 12 percent. Wemeasure this every quarter. The total for thefourth quarter of last year was up 31 percent,or 23 billion, from the previous quarter, to 70 billion.QQQWhich sectors have particularlyinterested you recently?EL: Our biggest single industry exposure atthe moment in our special situations businessis in energy. We have been active in both exploration & production and services. We do notprofess to have better knowledge than anybodyelse about what will happen to oil prices, so ourfirst aim is to try to take this out of the equation. Then it comes down to valuations. Westrive for entry points sufficiently low so that,on the basis of probability-adjusted outcomes,we are comfortable that we can at the very leastsell the debt at the price at which we boughtit. On the services side, we look for companiesthat will benefit from ongoing demand, evenallowing for the fact that E&P activity will goup and down over time.“The European CentralBank currently holdsabout 10 percent ofall European triple-Bcorporate bonds:this could create anenormous potentialopportunity forinvesting in fallenangels”DAVID FORBES-NIXONALCENTRAHow about retail?DFN: We are not making primary loansto retailers in our direct lending or syndicatedbusiness, and we are pretty cautious about retailers in our distressed business too. However,there are certain companies that can be interesting, if you buy into the debt at an extremelylow multiple and in some cases then convertthat debt to equity. You have to cherry pick thebest companies and may need to replace management teams and implement operational andfinancial restructuring measures.What countries do you like?EL: Generally, we focus on northern andwestern Europe, because the jurisdictions aremore favourable to creditors. We do not exclude southern Europe, but the fact that theyhave less creditor-friendly restructuring andinsolvency regimes is surprisingly often nottaken into account in the pricing: a deal in theUK with certain leverage may be priced in asimilar fashion to a deal with the same leveragein Italy, despite the fact that the process in theUK may take two months, but in Italy it maytake two years.It can be difficult to perform restructuringsin France, but they do get done, and they getdone in favour of senior creditors, though youhave to be well-connected in that market toget the results you want. To explain, a handful of law firms and court-appointed peopleare involved in these interactions, and theydo things in their way. If you know them, andhave dealt with them in the past, as we have,you know how they work, which way they willpush the cases and so forth, and you can anticipate and adjust your strategy accordingly.DFN: We like to have local people who knowthe jurisdiction, and know the people to dealwith when we are investing in a credit in aparticular European country. We have theadvantage that we can tap into the expertiseof the 30 European analysts who work for thebroader Alcentra group in Europe in additionto our dedicated special situations team of 10professionals, plus our three lawyers, who areall experts in bankruptcy law and leveragedfinance documentation. Alcentra has 17 years’experience of doing this, and I personally havebeen involved in the European leveraged finance market since 1987 and the distresseddebt market since its inception in 1992.QSo, the legal side of distressedinvesting is very important?DFN: We spend as much time analysing theJune 2019“Our biggest singleindustry exposureat the moment inour special situationsbusiness is in energy.We have been activein both exploration &production and services”ERIC LARSSONALCENTRAlegal and documentation risk as we do on thecredit and cashflow of a company. The UK isprobably the best bankruptcy jurisdiction inEurope from a senior secured lender perspective and is similar to the US in terms of higherrecovery rates. In the UK, if you are the seniorsecured lender, and you have fixed and floating charges on the assets and cashflows, youwill not find yourself challenged successfullyby other creditors in a UK bankruptcy courttrying to subordinate your claim. As well as theUK, Germany, the Netherlands and Scandinavia are also quite creditor-friendly jurisdictions.QMost recently, where haveopportunities been increasing?EL: We were interested to see, when compiling our Q4 2018 numbers for stressed and distressed debt, that German companies accounted for 11 percent of the total – the highest totalfor Germany in three years.I think that reflects troubles in the German economy, including the existence ofnumerous sectors that export a great dealto China and other Asian countries, whoseeconomies have been slowing down.When it comes to sectors, we think theremay be cyclical opportunities in the future inautos and industrials. It is illuminating that inthe sell-off of debt in the last quarter of last yearand first quarter of this year, a couple of autocompanies entered our distressed universe – Ido not think that is a coincidence, and I thinksome sectors will come back in a way that wehave not seen for a long time. n Distressed Debt & Special Situations9

AnalysisMapping out a newperspective in EuropeWhen Schefenacker – the world’sbiggest maker of car mirrors – raninto trouble in 2007, it becameclear that the German manufacturer wouldneed outside restructuring expertise and thatit would have to look to the UK. Its City ofLondon-based lawyers, Allen & Overy, movedthe corporate headquarters to Hampshire byincorporating a new English company andtransferring its assets and liabilities. Throughthis device, the business effected a rescue under the more flexible English legal procedures.According to Jenny Marshall, a partner in Allen & Overy’s London restructuring team, thisset the ball rolling.“The Germans said, ‘That’s not right –we’re losing business to England. We’re goingto make it easier to do restructurings in Germany,’” says Marshall, who notes the samesentiment is now gradually spreading acrossthe rest of Europe. “Reforms are springing uplike mushrooms across the whole of Europe.”10Private Debt Investor June 2019European Union memberstates are graduallyharmonising insolvencyand restructuringregimes. David Turnercharts the changingregulatory landscapeLooking at the pan-European trend, JoWindsor, partner and insolvency specialistat London-based law firm Linklaters, notesa trend towards greater convergence, with“the intention over time to flatten distinctions in the hierarchy from more to less creditor-friendly regimes”. This process is creatingminimum acceptable standards across the EU,say debt fund managers.“Regulations governing restructuring aredefinitely progressing in Europe as a whole,”says Nicolas Nedelec, a Paris-based managingdirector at Idinvest Partners. “It’s no longerthe case in international deals that a small localcreditor could leverage a position to get preferential treatment – we are in a more balancedenvironment.”Distinctions will be flattened further bythe EU Preventive Restructuring FrameworkDirective, agreed by member states in December 2018. This compels every nation tocreate rules that enable early restructuring, be-

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Analysisfore a company falls into insolvency. “The directive is an important step in creating greaterlegal certainty,” says Muge Adalet McGowan,senior economist at the Organisation forEconomic Co-operation and Development,in Paris, who notes that present procedurescan be complex, convoluted and lengthy insome countries.Analysts retain a healthy dose of scepticismabout the pace of change, however. “Even ifyou have the best insolvency regime on paper,if you don’t have an efficient judicial system, itwill not yield the results you want,” says AdaletMcGowan. Observers often lament the law’sdelay in Italy, for example, where insolvencycases can take years.“This will be very much a gradual process,particularly as member states are being offereda wide range of options when it comes to exactly how they will implement this directive,”adds Windsor of Linklaters.Moreover, the directive will not suit allcreditors. Member states must provide foran optional moratorium before the creditorsseize control of the company, to be granted bya

Diamonds in the rough Making the most out . A guide to the evolution of the market and investing in the asset class . London, and Bryan High, co-portfolio manager for the global special situations strategy in the