Bargain hunters seek out cheap debt
London takeover finance house Intermediate Capital Group is thought to be readying itself to start picking up debt from distressed sellers in a move to profit from the turbulent financial markets.
With the credit market in crisis, vast amounts of high-quality corporate bonds have come on to the market due to a forced sell-off by hedge funds.
Intermediate Capital is said to be one of those bargain hunters now looking to snap up tranches of the debt.
Yields in high-quality assets including bonds issued by Barclays and HSBC have been rising as the assets have been dumped amid the carnage of last week. Many are trading at significant discounts.
Barclays and HSBC debt is worth about 95p in the pound while riskier, but still arguably good-quality, assets such as Alliance Boots debt is at 94p in the pound and estate agents Foxtons and Countrywide are trading at discounts - 80p and 85p in the pound respectively.
There are bargains across the Atlantic with bonds issued to fund the $7.4bn (£3.7bn) takeover of Chrysler by distressed debt investor Cerberus Capital trading at less than 95 cents in the dollar.
Listed hedge fund Tetragon is also eyeing discounted debt.
Fund founder David Wishnow said the banks were reducing their exposure to debt and that meant opportunities ahead.
"All the major banks have warehoused large quantities of debt. They need to reduce this exposure which will take some time, but is beginning to happen,î he said.
Other companies such as distressed debt investors Citadel, Apollo and Strategic Value Partners have already become buyers of London-listed debt.
Bargain-hunters are unfazed by recent falls and point to the significant amount of capital waiting on the sidelines.
The new sovereign-wealth funds of nations like China and other international investors currently have significant capital deployed in US Treasuries but have said they will start shifting to other, higheryielding investments including corporate bonds.
Nor are hedge funds on this side of the Atlantic as strapped as some of the hard-hit US funds. By some estimates, Europe's biggest, most liquid hedge funds are holding up to 40% of their assets in cash and can be expected to move back into the markets across asset classes as bargains emerge.
A factor helping the bargainhunters is the near standstill of many bond markets. In Asia at the end of the week, only the highest-rated debt was trading. That means the vultures can drive a hard bargain.
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