Distressed debt funds are circling
Updated: Jan 14
Ahead of an expected credit crunch when government business support ends next year and as major banks pull back on mid-market lending, the distressed debt funds are growing.
Among the latest to the market is independent Arbitrium Capital Partners, which plans to lend to local mid-market companies and has $40 million under management so far and the potential to raise up to $300 million in a closed-end fund.
Mukhtader Mohammed is looking to raise money for a fund that will lend to businesses failing due to coronavirus. Dominic Lorrimer
"I think the mid-market in Australia is under-serviced," says co-founder Mukhtader Mohammed, a former Deloitte employee involved in the Virgin Australia administration, adding he considers mid-market to be companies with between $50 million and $750 million pre-COVID revenues.
"COVID has brought this whole thing together... the demand or gap in the market has been there for a while. We tend to see family offices servicing distressed debt at the smaller end of the SME scale and global funds looking to finance loans of $100 million."
Mr Mohammed and co-founder Daniel Liptak estimate that 50,000 or so mid-market businesses will be looking for about $10 billion of financing after the government support rolls off in March next year.
COVID-19 has only exacerbated what was already coming, says Mr Liptak.
"It's a need and requirement through the cycle, driven more by regulatory capital requirements and banking cycles," he says.
King & Wood Mallesons' head of national restructuring and insolvency practice Tim Klineberg agrees the distressed debt market is likely to pick up in the new year.
"I think you will see an easier path to transactions on bigger deals as the uncertainty drops away, the government moves away and things become clearer," he says.
"It's likely to be liquidation for many at the smaller end of the market, and transaction candidates in the bigger end of the market. Funds setting up will be another source of capital to facilitate that."
Mr Klineberg said offshore money was available to be put to work, but said structuring that could present challenges, particularly from a tax perspective.
"I think there is a real impetus for investment now. In terms of opportunity, you've got the exit of bank lenders from the market, a lot more private capital around and in the new year you should have a good investment environment where asset prices are a little bit depressed, interest rates are low and there is capital around," he said.
"It's an unprecedented situation and we are expecting a very significant uptick in investment in the next 12 months in distressed investment in Australia."
Mr Mohammed said as well as opportunities in the retail and property space, the fund was also seeing possible investments in aviation-related services, discretionary healthcare, hospitality groups and some in the oil and gas sector.
The fund won't consider investments in gaming, which it says is a specialised sector, or property development, which it believes is a saturated market.
The fund plans to offer loans of between $20 million and $100 million over three and four years, and will consider structured debt, convertible notes and equity warrants. In most transactions, the fund will expect to end up with an equity piece.
Unlike many other debt funds, this fund won't guarantee a yield. Instead, it anticipates the net return on each three- to five-year loan would be above 10 per cent per annum, with an equity kicker.
Mr Liptak said the fund will take a conservative position on asset backing.
The Arbitrium team will also include Blake Ammit, former Partner at FC Capital and former CEO of Hanbury Group.
Link to live article here.