In detail: distressed debt research

Credit Suisse's Head of Distressed Debt, Pierluigi Volini, introduces his team's work

Where does your team fit in?

We analyse companies in a distressed financial condition, which means companies with an amount of debt which is not sustainable in the long term. We form a view on the risks and potential rewards of investing in their loans or bonds which we communicate to our trading team within the bank and to our clients who are interested in investing in distressed debt. We might recommend they invest "long" in the loan or bonds, meaning they should buy the debt in the hope it will rise in value, or "short", meaning they should borrow the debt instrument and sell it in the hope that its value will fall before they need to repurchase it to return it.

How do you decide whether to recommend a particular corporate debt product?

First, we look at the dynamics and prospects of the industry the company operates in. Second, we analyse the company itself. What's going wrong, and can it be fixed? Next we analyse the company's capital structure, that is, how much debt the company has and of what kind - there are different types of debt available in the market on different terms. For example, debt can be a loan or bonds, and secured by assets or unsecured. Which of the company's debt instruments are the best investments? The final pillar is legal analysis, both of the contractual rights of the debt instrument we're looking at and the national legal framework which governs it. The rights of investors in a distressed debt instrument issued in France will be very different to those of investors in British or German-issued debt.

Can you give an example of a distressed company whose debt looks like a good "long" investment?

A few months ago, we recommended the bonds of Greek national telecoms company OTE. These bonds were trading at a very low price because the market was worried about the amount of short-term debt the company had that needed to be refinanced and the possibility of Greece leaving the eurozone. We decided that the market was overestimating the risk of Greece leaving the eurozone and that refinancing the company's short-term debt would be possible through asset sales, meaning the bonds were a good investment.

What's happening in distressed debt at the moment?

Because of the macroeconomic situation, there are currently a significant number of companies in financial distress. However, this fact is not necessarily translating into opportunities for distressed debt investors. This is because banks are often reluctant to sell the debt of now-distressed companies they hold because doing so often means they have to record a loss. However, if the current underwhelming growth in Europe continues, banks will have to raise capital so will be forced to sell, meaning opportunities for distressed debt investors will increase.

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