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Distress investing: Debt could magnify risks of market dislocations

In considering distressed opportunities, investors will need to discern whether companies are permanently impaired or can be turned around

    • Unprecedented monetary stimulus in the aftermath of the global financial crisis and during the pandemic should provide fertile ground for distress investing. Excess capital is often misallocated and leads to wasteful and ill-advised investments.
    • Unprecedented monetary stimulus in the aftermath of the global financial crisis and during the pandemic should provide fertile ground for distress investing. Excess capital is often misallocated and leads to wasteful and ill-advised investments. PHOTO: REUTERS

    Sebastien Canderle

    Published Tue, May 30, 2023 · 04:13 PM

    WITH recession expected in many economies, distressed situations will be an important source of deals for prospective investors. What will matter is whether the targets are permanently impaired or can be turned around.

    Two real-life scenarios from the debt bubble of the early aughts and the ensuing credit crunch provide helpful guidance.

    Cyclical volatility or dislocation

    UK investment firm Candover bought hygienic products producer Ontex for one billion euros (S$1.4 billion), or 8.1 times earnings before interest, taxes, depreciation and amortisation (Ebitda), in 2002. The debt package, comprising senior and mezzanine loans, totalled six times earnings.

    CFA Singapore InsightsPrivate equity

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