State of the economy spurs a decrease in distressed debt investing
01 February, 2017
New York, NY (February 1, 2017) – With underwhelming GDP growth in the United States and macroeconomic uncertainty, investors are showing less enthusiasm to increase their capital allocations to the distressed debt sector. According to Cortland Capital Market Services and Debtwire’s North American Distressed Debt Outlook 2017, which interviewed 100 distressed debt investors, only half of respondents have increased their allocations to distressed investing in the past 12 months, a decrease from last year’s 68%. Investors are holding back, and this cautionary approach seems to be carrying over into future plans for 2017.
While a majority of respondents indicated that they will be allocating the same amount of capital to distressed debt as they did last year, those planning to increase their allocations for the new year has dropped off when compared to last year’s survey. Furthermore, those planning to decrease their allocations for 2017 has nearly doubled.
One main reason for the decline in investors focusing on distressed debt stems from slow economic growth. This reasoning is given by a private equity respondent who states:
“The markets are still in a slow phase of recovery, and the rise in the number of corporate defaults is impacting our decision to invest in the distressed opportunities that exist right now.”
Another reason for the decline can be attributed to recent losses in the market. An energy-focused respondent explains by saying:
“We had hoped to increase our allocation toward alternative investments and distressed investing in 2017, but we suffered losses due to the collapse of energy prices and energy-related debt and this has affected our plans.”
A final factor to consider when it comes to the cautionary approach investors are taking is recent political upheaval.
“Increasing domestic and global economic uncertainty resulting from the election of Donald Trump and his initial executive actions are likely to drive increased protectionism and tension between the United States and its key trade partners,” said Jason Hutton, Director at Cortland Capital Market Services LLC. “This backdrop complicates the outlook on distressed investing in 2017 – and survey participants seem to agree — though such dislocation and volatility could present great opportunities for distressed investors.”
Key findings of this report include:
• The percentage of respondents planning to increase allocations dropped from 54% last year to 36% this year, and the percentage of respondents planning to decrease allocations nearly doubled from 11% to 21%.
• More than half (53%) said the outcome of the election would be the first or second most important factor influencing their distressed decision making in the year ahead, followed by the US economic outlook (30%) and commodity prices (28%).
• Oil & gas (54%), financial services (49%), and industrials (47%) are expected to be the top three most-targeted sectors for distressed investing – all generally in keeping with last year’s top sector choices.
Launched in 2003, Debtwire is the premier global news and analysis service covering the leveraged credit markets, with a specialized emphasis in the areas of distressed and restructuring. Debtwire is part of the Mergermarket Group’s Fixed Income division, which also includes Xtract Research – the worldwide leading provider of covenant research, and Creditflux – the leading news and data source for CLOs.
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