Forbes-Nixon recalls how fi ve years ago his teams identifi ed that value broke in the mezzanine paper for a UK gaming company, and also had confi dence in the management team. Alcentra bought mezzanine in the 20s, which converted into equity at a valuation of six times EBITDA versus competitors on eight times. “Management executed well, including an internet roll-out, and a takeover bid from a listed competitor is now going through competition clearance” Forbes-Nixon says.
Senior, secured debt can sometimes meet the return target for the distressed credit strategy – when there is equity attached. A French retailer defaulted in 2014 after what Forbes-Nixon views as a ‘perfect storm’ cut its EBITDA by 90% to €50mm, enumerating “There were management missteps, a weak French economy which hit the retail sector hard, combined with the fact that last autumn was the warmest in years, and the Charlie Hebdo terrorist attack also discouraged shopping”. But today Alcentra is excited about the turnaround story, has good visibility on earnings, and sees upside in the equity attached to the super-senior and reinstated loans.
Another example of how senior creditors gained ownership was an Irish telecoms group. Alcentra owned €150mm of senior debt and a restructuring committee was formed with fi nancial advisers and lawyers to provide assistance. Junior creditors were ‘crammed down’ to a de minimis amount, with the second lien getting about 9 cents recovery while the senior got 85 cents, as well as the equity upside. “This was an asymmetric situation where we had downside protection of the senior debt plus unlimited upside from the equity” says Forbes- Nixon. Indeed as Ireland’s economic resurgence gathers steam, the company has seen a tremendous re-rating to seven times EBITDA – and the de-stapled equity could even be listed.
If some hedge fund strategies have found 2015 to be their worst year since 2008, Alcentra is animated by the extraordinary opportunities on offer in Europe. THFJ
FOOTNOTES
1. Performance is shown net of fees and expenses, and includes the reinvestment of dividends and capital gain distributions. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or fi nancial developments. Investment return and principal value of your investment will fl uctuate, so that when your investment is sold, the amount you receive could be less than what you originally invested.
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