Just three months ago, everyone was a believer: bonds traded well above par, Europe's recovery was on track, and Portugal's banking system was a shining example of how Europe's bailout program worked (and Goldman was pitching SPVs full of this crap to any and all greater fools [11]). Today - the ugly truth is exposed as Bloomberg reports, Espirito Santo International debt attracted potential buyers at just 2% of face value. Of course, the words "contained" are trotted out to explain how this is a one-off and not at all representative of the rest of the European banking system. But... Howard Marks' Oaktree Capital seems to disagree - "We continue to think Europe will provide a substantial quantum of attractive investment opportunities for all of our strategies and in particular distressed debt," as a record amount of bad loans are being offloaded by European banks ahead of the stress tests.
From 120-plus to 2 for ESI bonds in 4 months...
[12]
Espirito Santo International debt attracting potential buyers at 2% of face value, Reuters reporters, citing a person familiar to report Banque Privee Espirito Santo had told clients of potential buyers via letter.
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We think this is a great example of the reality in which every trader/investors finds themselves now:
Either everything trades at par when the truth is hidden...or
Trades at 2 cents on the dollar once the veil falls;
There is no inbetween
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And it seems firms like Oaktree are building funds to take advantage of the 'lifting of the veil'...
John Frank, the managing principal of the world’s largest distressed-debt investor Oaktree Capital Group LLC, says he’s underwhelmed by the record amount of bad loans being off-loaded by European banks.
While disposals accelerated this year, the flow of new assets into the market is more of a “trickle” than the flood the Los Angeles-based firm initially expected, Frank said in a phone interview.
Europe’s lenders will sell 100 billion euros ($131 billion) of loans including non-performing debt this year, according to PricewaterhouseCoopers LLP, up from 64 billion euros in 2013 and the most since they started shedding problem assets in 2010.
“A lot of folks, particularly a lot of American investment managers, raised a lot of money to take advantage of what was anticipated to be a very substantial flow of loans from those banks,” said Frank. “The avalanche anticipated didn’t materialize.”
Oaktree, which manages $91 billion, is among international investors including Lone Star Funds and Cerberus Capital Management LP that have piled into Europe in search of bargains. Banks are tidying balance sheets before stress tests that will determine their ability to withstand another crisis while the European Central Bank reviews the quality of their assets before taking over as the region’s banking supervisor in November.
A rise in the price of some soured loans is also encouraging banks to sell off the debt, according to Richard Thompson, a partner at PwC in London.
Competition for the assets is increasing, according to Frank, encouraging the firm to look for additional areas in which to invest the $10.2 billion it set aside for European purchases. Areas of focus include shipping and real estate, he said.
“We continue to think Europe will provide a substantial quantum of attractive investment opportunities for all of our strategies and in particular real estate, private equity and distressed debt,” said Frank
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So are you a "believer" greater fool, 'knowing' you can exit before the veil is lfited... or preferring like Oaktree to keep powder dry for the inevitable collapse?
