The Future of Distressed Assets and What is Coming Next?

[Music] hello everyone and welcome to this panel on distressed assets um as we've just heard we're facing an incredibly tough um world right now with borrowers and corporates around the world facing difficult conditions and this panel um will discuss where they see the opportunities where they see the main um headwinds facing the economy so we've got a panel of financial advisors based in the region um Global Investors and we're going to start with the um vision from mubashir who has 20 years experience in the distress assets space um what would you say are the key headwinds right now facing um the economy that are creating distressed opportunities thanks Laura good afternoon everyone to put this into perspective uh the opportunity set has exploded and continues to do so just to give some statistics there's about 80 billion euros of debt that's trading north of a 16% yield in Europe that number is up by a third compared to 6 to nine months ago similar number in the US is about 240 billion just given the size of the market and this is just in the secondary market and what's driving that are four factors rates inflation the consumer and Banks retrenching if we take each one in turn rates this is the fastest increase in rates that only I've seen in my career and that's having an impact on business's ability to service that debt just to give you a statistic prior to the rates increase interest as a percentage of eitaa was less than 20% today it's closer to 40 to 50% and that's before we take into account issue number two which is inflation operating costs capex they've all gone up 30 to 40% which is again impacting and and business's Top Line have not increased as much so this is having an impact on businesses uh cost structures and then if you take issue number three which is uh the consumer the consumer is struggling just to give you some examples of my own my energy bills gone up 3x over the last 18 months my mortgage rates gone up by 4X with the result that consumers are buying less and you're seeing especially in the in the chemical sector that's impacting uh the end demand for products and you're seeing destocking which was last seen at the end of 2008 and then on the banks side they're retrenching from lending particularly in the midm market so that combination of factors is impacting the uh supply of distressed in special situations sure thank you um let's now turn to bees um what so you um are responsible for the fund Services business at ssnc what are your investors saying what are your clients saying yeah um yeah ssnc is the world's largest fund administrator so we're servicing over 3,000 clients about three trillion of assets with about 7 and a half thousand people so definitely my perspective is uh a Global Perspective um we do an annual survey of investors and uh I have copies of this for anyone who wants me to send them one um and that we do it annually it's very interesting to compare compare year after year what's happening we see investors telling us 2 51 LPS globally with a significant number from this region telling us they want to increase their allocation to Alternatives in general um specifically within that we see reduced appetite for hedge funds but an increased appetite for private equity and private credit and debt in particular so from that perspective despite the conditions in the market today with inflation and high interest rates and certainly some parts of the world um economy slipping um we still see more money coming into this asset class um combine that with consolidation in the industry uh amongst investment managers and I have a number of larger investment managers who are looking to buy um firms in this region who specialize in this area that gives you an indication of the size of the appetite globally um you know on top of that I see a growing Trend um of increased regulation and capital requirements on banks which will force them to dispose of portfolios of loans um and and the appetite to buy them is coming from my clients on the private credit and private Equity side thank you so o overall I I I do think the conditions are really good in terms of more Capital flowing in um I think my colleagues here are going to talk a little bit about returns and that's obviously an important factor sure so before we move to the Middle East specifically where would you say that key sectors and geographies are for you m and and VES um what would you tell us m m um sure so because of the factors that I mentioned the impact is widespread across a lot of Industries because rates uh the cost increase that's impacting loads of indust Industries specifically we're seeing in the chemical sector we're seeing uh for other reasons the c commercial real estate sector geographically uh the UK Germany are really struggling and um and the US whilst the opportunity set has increased it's not as bad bad as it is in certain parts of Europe and that's manifesting itself into situations where companies are just simply not being able to refinance themselves um and that's creating its own opportunities we will eventually see some of those companies that can't refinance themselves some will succeed and others will end up going into restructurings uh and they'll have have to negotiate with their with their creditors absolutely so we've talked about the global picture now let's now turn to the Middle East uh very specific region um Vias you've been in the region for quite some years you've got a good um a good picture of it what would you say how would you say This Global Dynamic is manifesting um so I think in the Middle East and I think many of people over here are from release um you know I think things are quite different clearly you know so there's I I feel there's a duality so at one level there's a fair bit of Tailwind coming through because of the Surplus that these economies have been having for last 18 to 24 months based on the you know obviously high oil prices and the Surplus is now being invested significantly in infrastructure and a lot of policy changes Etc um the headends are probably not as acute necessarily as as as as been mentioned Basher you you've talked to uh pesh because um you know but we do have head bins and and there is a delay I suspect because you know for 15 years because we all many of the economies are pecked to the dollar for 15 years you've had a very low rate of interest regime um you know lot of liquidity in the market Etc and then you know as maash mentioned you know things have really ramped up uh so we have imported that monetary policy into this into this Market um 15 years we were seeing a lot of paper being written um you know at relatively low pricing a lot of that is going to come to get refinanced and I think that's kind of where we're going to see that that buildup of the stress coming through uh I mean just data points wise you know npl today in the GCC is sitting at about 50 billion dollars so clearly not not the size that you've seen but clearly still significant um and you know you got to deal with with with some of that uh coming up now the one thing good has been that our utility Bild bills haven't really gone triple which is which is good news so that's some positive so yes so you can see you know it's a good mix of of situation but it's obviously very Dynamic market and the one other thing I'll just maybe briefly mention is you've also seen in the last 12 to 18 months a number of private credit and special situation funds uh moved here in adgm uh you know and a lot of that is also because there's that opportunity that's coming up in the market um that of course These funds are going to lend one the expertise and also liquidity and two we can talk a bit more about that later but let's first turn to naven again you as a financial adviser based in the region you have a very good understanding of what the key headwinds are where the key opportunities might be what are you seeing in the past few months and what are you expecting so I think the macro position of the GCC remains very strong particularly the UAE uh and also Saudi Arabia um what we've seen is that it's taken a lot longer than expected for interest rates to really bite and have a fundamental impact on corporates uh and that has the interest rates hasn't been they haven't been it hasn't been a trigger for restructurings in the region thus far I think that will have that will likely have a greater impact in time uh over the course of 2024 uh inflation has been uh more subdued versus Western Europe and in the US so that hasn't being a trigger either um but we are seeing Pockets uh of stress uh but it's very difficult in the Middle East to to to formulate specific Trends if we look at the the credit Market what we are seeing on the new money side is that the banks are generally more focused on healthier investment grade credits and I think it's much tougher uh for the midm market uh to raise financing today so I think it's going to be a much more difficult Dynamic for corporates coming to refinance over the next 12 18 months particularly on that midmarket side I think again that does lender significant opportunity for private credit what we're seeing as well in Saudi Arabia is a dynamic where the banks are being forced to um lend in Mass to support Vision 2030 uh these these situations uh these projects coming up are generally with recourse from Ministry of Finance or PF uh which uh which helps but a lot of these structures are not um well let's say not uh not structured in a way well thus far not haven't been structured in a way which has been too palatable for International Banks um International lenders that will likely change but in any case with local banks in Saudi Arabia looking and being very focused on these opportunities I think that's drawing up liquidity for the mid Market yeah uh we're also seeing in Saudi Arabia um the banks having to grow their mortgage books quite significantly yeah uh what we saw yesterday we saw Saudi real estate refinance company issued DCM which was taken up by local banks uh what they were doing is basic basically buying mortgages from the local banks and then packaging these up and issuing bonds which are taken up by the local banks right uh thereby creating some systemic risk so there are these nuances uh and partic particularities of this Market which are creating opportunities but I do think those opportunities are fundamentally quite different what we're seeing in in the rest of the world right very very specific to this region one of the big topics I guess the key trends every time you talk about distress in the Middle East is nonperforming loans I feel like that's something that's come up quite a bit uh because there's been some Landmark transactions that you alluded to earlier in the year um maybe because you can tell us a bit more like what is this like the big opportunity going forward or what what what are you seeing in this space so I think the opportunities probably going to come from maybe multiple sources but two specific ones would be you know sectors right so if I just maybe focus on that just a little bit so you know maasha talked to certain sectors and and more systemic across many sectors I think the the problems are going to be more restricted here so clearly you'll have sectors like chemical Etc which are going to be by the global supply chain Etc impacted here too but if you look at real estate on the other side right I mean that sector by and large is doing generally all right for the time being there's a lot of money coming into into this Market but if you look at sectors like retail you know um that's kind of clearly know construction is another sector because of Legacy payment type issue so so that's that's one realm of U of of of where this comes from the other one you know going back to Nine's comment about uh the the midsize companies and even some big siiz companies which have the liquidity um cycle tightening will have to start getting a lot of their non-core assets sold much more inputs than that I've been I've been here 16 years but much more imputs than we've seen before um so I think these are the some of the areas in which we think in the Middle East uh some of the opportunities is going to come I mean the npl I mentioned earlier that is about 2% of of the of the asset B so it's still in a in a good place but it is going to certainly most likely likely go up what I think we finding is obviously we we've talked we've heard about I think we're talking about it even last year the ADCB U npl book sale which I think it's kind of first of probably a few more coming down the track uh simply because Capital requirement is going to increase and you'll automatically see that um you know banks will have to start thinking about how you offload and get liquidity into the system um there the private credit uh special SS funds are also coming in there are many more conversations uh happening now with the banks to look at specific opportunities or npl Book Sales so I think that's kind of where the trend has started and I think it's not stopping here I think it's going to it's going to probably Contin on the point about Investors moving in um you're opening an office VES here um tell us a bit more about what you see yeah um thank you yeah we we just opened our office here in adgm and um you know we we see this as a major hub for our business over the next decade um we directly service some of the Sovereign wealth funds in the region we've been based in Dubai for over 20 years but Abu Dhabi from a fund servicing perspective looks more attractive uh in the future our software technology business is still going to be hubbed out of Dubai um but to you know to the point of my colleagues here um you know look there's cycles that take place and you know we're in a place now where you know there's a lot of dry powder um sitting in these Glo Global private equity and private credit funds um it will the the mandates are usually discretionary and so in the global funds that we we tend to service they have discretion over where to operate and spend that Capital we'd see more of that Capital coming into the region um obviously my my concern there is that the local players have an advantage they know the market I think some people will get their fingers burnt in the cycle that's going to happen but to be honest that's sort of like the way life is right and and so you know I don't see any shortage of capital coming into the region the market here is um still buoyant um in terms of the economies uh compared to Europe and and and the US and so it's it's naturally going to draw draw more Capital so and in in that process you know we see people succeed and some people fail and it's it's normal M what would you say as well as a as from the investor perspective like what opportunities are you seeing if or or do you think it's something in the long run that will offer um in the region yeah like PES we're we're setting up uh our office here I think it's too early uh from an opportunity perspective here um most of the opportunities we're seeing today globally are in Europe and in the US uh and I think the the region has done a phenomenal job after covid in terms of keeping the economy very buoyant and attractive attracting uh talent and and capital here uh but I do think you know in this connected world that we live in uh inevitably there may be a Slowdown we're seeing some initial stages of that you know few and far between and typically it's the weaker companies that go first but eventually uh you know if the cycle hits the the region then we'll see more and being ready and prepared to work through some of those issues help these businesses uh navigate capital structure issues help help them turn around not only just fix their balance sheet but also fix their operations uh we want to be ready for that sure makes sense and what sort of opportunities again could you spell it out nine for us like what things are you seeing um right now that you think could be interesting to people like bashier and bages going forward yeah maybe I start off with what's not particularly interesting which is uh for my perspective npls because I think this topic is spoken about you know at noria but reality is when you think about portfolio sales today I don't think there's realism on valuations at all right so we work through with banks and go through you know npls on a line byline basis but I think as it stands today uh on a general basis uh we can talk a lot about that ADCB trade but on a general basis I don't think there's realism on valuations today of those portfolios but maybe that changes and there specific situations where it may be different yeah but I I think this expectation that we'll see a huge wave of npl portfolio trades and the way we saw it in Italy and Greece I don't think that's realistic today when it comes to specific uh line items specific names and trading in the secondary um we're seeing a bit more of this right uh particularly in Saudi Arabia we're seeing some situations over here um you know there was one situation over here which where there was a where there was a trade pre Covenant breach as well which you ready see over here generally it's post the payment defaults everything in traditional em style happens much later post the payment default right or seeing one situation which was actually prec Covenant default as well 12 months out to a covenant default but that lender saw it um that's quite interesting and it shows the growing increasing maturity of the market right but I I think there's a lot of talk about uh the npl piece whereas I think the primary bit is extremely interesting over here if you look at the UAE I think last mile financing is in the real estate real estate space and general real estate special sits opportunities remain very interesting yeah uh buying out uh promoters so a a a a JV for example where one sponsor wants to buy out another sponsor these types of acquisition financing situations where the return profile makes sense I think it's very conducive uh to private credit um in Saudi Arabia and also here uh as we all know we often see very interesting projects um with good quality uh Contracting firms as an example um with contracts with very very uh very strong credit worthy uh Ministries doublea rated single a rated Ministries uh but the receivable days go north of 350 400 days I think these types of situations remain extremely interesting from mer receivable based uh financing perspective and I don't think we're seeing a lot of that today but I think that's quite that's definitely um that's quite that's quite an interesting space uh again I think acquisition financing talking to a lot of mid Market private Equity over here I say a lot that's not a big number but those that that are active over here they're very vocal about the difficulty of of of um of raising acquisition financing yeah um in a growth Market where uh that private Equity dynamic looks quite interesting from a returns perspective again it could make sense from a private private credit perspective so I'm going across the landscape distress stressed and and and and and Senior leverage private credit but I think it still remains very interesting um given given where rates are given where rates are today so these are some examples which are quite different to what we see in other markets but but still remain very interesting absolutely because would you add anything to that like other yeah I think I would just I would just maybe add that you know um when I when I you're talking to our clients I think there's one um I think there a couple of other topics that come up right then you're looking at uh situations so clearly you know one and peral issues being around information right because the reality is that as you're getting more and more um more more International and more more people who've kind of dealt with these situ in different markets coming into this Market um many companies are struggling to produce that sort of information and of course the other topic is being governance right which is you know how you get proper governance built into these process and the companies itself so there are there are a couple of challenges and hence there are probably certain sectors which you know which automatically probably don't qualify for uh for for um you know you private credit sector coming into this Market would uh um you would you Echo that this um difficulty I I I think the the global trend from investors is for more transparency and information and Report reporting from managers managers have a tough time with that they've been heavily criticized by Global Investors for not giving them what they need and and I and I think it's particularly challenging in the space of private credit to to produce that information to normalize the information from the underlying loans and and give it back to the Global Investors so I I don't think this region will be immune investors are getting very sophisticated very quickly um and so I think that will be a challenge for managers I would just add I also think we didn't talk about Deb we haven't talking about dip yet but I think there'll be um you know we have a few examples uh the HG situation NFC situation there's some good precedence now of dip financing and some of the local banks also recognizing it as a concept right um I think there's more that can be done for people to get more comfortable with de financing from a legislative perspective um also getting the trustees comfortable with con the concept um but I think there ought to be more dip financing opportunities but again it comes with the the existential question of whether we we think we're likely to see more more restructurings um again I think it's quite difficult forming specific Trends over here but possibly yeah yeah that's I guess one can talk about this as well but um what what what what are you I was just going to add uh that you know we've talked about the supply of special sets and how how it's increased globally on the demand side um you know if I reflect on what you said Vias about the the information asymmetry and the uh kind of just less information as a as a global investor the way that we would calibrate this is uh we'd take that into consideration we'd take into consideration I know there's a panel later on uh about the jurisdictional and legal aspects of investing we'd Factor those in in terms of the expected return that we would want for a situation that you know perhaps has um you know Le less or Worse information uh in in um in you know in a legal regime which is not as has less precedent than for example in the US or the UK quotes So the return requirements are going to be different and so the demand for those opportunities is also going to be calibrated the more opportunities there are globally uh the that's going to factor into the kind of returns that one should expect for these types of opportunities in that region so right now it's not the most I guess as mentioned it's not the most attractive region partly because of this perhaps um I I think there's just fewer opportun you know right now there's a combination of um just fewer opportunities because the economy is a lot more buoyant uh and there's just a lot more opportunities elsewhere so you know people's eyesight is you know focused elsewhere and that may change change depending on what happens to the economy uh you know in in quarters to come and Beyond the economics I guess there's also like something in the ecosystem that some things that could be done right to encourage the ecosystem to develop um novine you've spoken about this before in terms of like maybe primary or secondary opportunities in the distress space yeah uh for special situations on the primary side um I think once the banks become less receptive to kicking them like kicking the can down the road by m and EXT stands or refinancing at skinny margins once that Dynamic ends um you know then it'll be more cond conducive to a primary lein SL special sits Market potentially um on the secondary side I think having a more standardized Dynamic to assignments transfers right even maybe going beyond the LMA template and having uh Banks trustees judges buy into that such that people do feel comfortable that if they're buying in the secondary it's going to be recognized in a court process that's going to help um dip similar sort of theme once it becomes en enshrined in a legislative manner into the insolvency law and people are comfortable with how that works I think once that's done um that's going to be much more conducive and supportive to to more de financing I think what the Min what Ministry of Finance are doing over here in bringing Consultants advisors lawyers into a room and brainstorming what the new insolvency regime would look like I think that's really helpful getting the perspective of Market participants and ensuring that there's a healthy secondary Market is one of the many themes to make sure that works well uh so that's another I think that's another important point so it's a bit about the legislative piece it's a bit about um connecting the dots and the EOS system between Ministry of Finance bankruptcy commissions and and Market participants as well which I think is working quite well over here actually because would you want to come in on that no I think I I just would just add that I think with more and more players establish you know like both both both of yourselves establishing presence on the ground I think that's going to help also because many times you know going back to n and just adding that you know these forums are extremely important here and let's say in the market like Saudi because I I think number of things will have to change right it's not going to be just one or two Le you know a lot of documentation type regulatory type stuff will have to change around to create that ecosystem so the more voices can be in that conversation the better the outcome is going to be I think that's what we finding you know is is is kind of now maturing I think price Discovery is important right so having the funds here having our broker friends here as well talking to the banks and getting a sense of what's realistic from a price perspective that's quite helpful um and from an external perspective what what I can see is there are a lot of strides being made to create that ecosystem to bring the restructuring law firms here here to host a session like this uh all of that is very helpful to build that ecosystem to facilitate more of those restructurings more of the turnarounds uh so you know if the in you know if the economy does turn and you do have uh more of those types of situations the ecosystem will be here to deal with them which is I think a very very good step that's that's being taken I what would you also add to this competion how can we expand forward we're doing this look you know look what I see um coming here to Abu Dhabi um several times now is very sophisticated setup I think it would it's a setup that would give confidence to investors and and to managers coming in um you know represented by my colleagues here the expertise is here in the region um that's that's a foundational step that investors will be looking for so I I don't really see a lot stopping the growth of this asset class in this region you know uh private equity in general I would say I think the macro challenges have been touched on you know investors getting nervous about valuations in general um and investors getting a little bit nervous about the growth of these continuation funds right and and so hopefully that bubble gets burst at some point and and and there are real exits that happen sure thank you well we're close to time but I think we've got time for one or two questions if there's anyone with oh hand up is there a mic that we can get to you're ready yeah question you you want to start with that um there are opportunities they're just not as many uh and and what you will typically see in a cycle is the US us will go first Europe will come second and then the rest of the world will follow so unless this cycle is different that's what we're expecting um and whilst there are opport there still are opportunities companies get into trouble irrespective of the market environment be it because of mismanagement over leverage technological change regulatory change uh and that happens irrespec of so there are opportunities it just not not as many as we're seeing in you know the us or Europe yet and that that's the the operative word so so just just maybe I'll give you my dimension on on I think the two uh sectors in my mind are s dealing right so real estate is booming for all the factors that I think we know about right there's a lot of money coming to region uh there's in fact I think these regions have probably been net importer of talent right I mean just globally if you think about the populations that we've seen increase I think that's kind of uh quite an outlier construction on the other hand has very different Dynamics right and construction is not only for residential units or any of that that's a much bigger spend but also that competition is just not local contractors right they also have international contractors coming in but also don't forget that you know there are many more cycles that that sector has gone through and and and in my mind many many of the players and that participants have been still dealing with some of the challenges from the previous cycle so there's some Legacy payment type issues ETC margins are thin variation orders are a bit of an issue there's increased competition and so on so I think the two sectors in my mind have a different Dynamic I don't know if you had anything else you wanted to add no I I agree um Contracting has its specific nuances I think the extent of the receivable days here has always been a problem so that working capital Dynamic is often being the trigger for for restructurings over here and then general cost overall and some mismanagement but that's not always the case I think receivables generally is what we see as the trigger uh real estate continues to perform well but what I was referring to in the real estate space was specifically in relation in relation to Last Mile financing where see you got a sponsor who's you know buil something three quarters and you need the the the remainder finish off but they've done a runner or something like that well on that note um I think we're out of time um thanks so much to the panel for a really insightful discussion and thank you all for listening Round of Applause okay