Banking & Finance

Investment funds circle distressed companies

January 2, 2024, 4:01 AM

Person, Sitting, Furniture — It is predicted that companies will seek to refinance debt issued at previously lower rates

$50bn in non-performing loans
Wave of asset sell-offs predicted
‘Build-up of distress’ expected

Investment funds that bet on troubled companies are predicting a rise in Gulf businesses falling into distressed debt as global economic strains intensify.

Pockets of financial distress are beginning to emerge in the region, driven by high interest rates, sluggish growth and escalating inflation, industry experts say.

Blantyre Capital, a UK-based asset manager that focuses on equity and debt “special situations”, has set up a new office in the Abu Dhabi Global Market, the emirate’s international finance centre, in anticipation of a rise in distressed firms in the Gulf.

Founder and Chief Investment Officer Mubashir Mukadam told a panel at Abu Dhabi Finance Week in November: “It’s the weaker companies that go first. But eventually if the cycle hits the region, we’ll see more. We want to be ready for that.”

Mukadam said the Gulf’s economic resilience post-Covid has drawn substantial talent and capital, yet the region was still exposed to inevitable shifts in the global market.

“The opportunity set has exploded,” he said, with approximately €80 billion ($89 billion) of debt in Europe and $240 billion in the US, trading at high yields.

Build-up of distress

Vikas Papriwal, senior managing director at FTI Consulting, Middle East and Africa, warned that Gulf states remain susceptible to worldwide monetary policy despite benefiting from high oil prices.

Regional headwinds have been “delayed”, he said. But a “build-up of distress” was expected to come through as firms seek to refinance debt issued at previously lower rates.

The GCC is sitting on a total of around $50 billion in non-performing loans, Papriwal said.

He added that there had been an influx of primary credit and special situation funds at the Abu Dhabi Global Market in the past 12 to 18 months, drawn by new opportunities.

Last January, Abu Dhabi Commercial Bank (ADCB), the emirate’s second-largest lender, offloaded a $1.1 billion (AED4.2 billion) non-performing loan portfolio to the New York-based hedge fund Davidson Kempner, marking the bank’s first major NPL sale and the UAE’s largest to date.

The portfolio was made up of 44 corporate loans to local SMEs.

Subsequently, Grant Thornton and Asset Recovery Fund also purchased $357 million (AED1.3 billion) in distressed NPLs from ADCB.

Bloomberg reported in April that ADCB was also looking to sell an additional $3.68 billion of bad loans. However, the bank denied the report.

Papriwal said he expected “a few more” non-performing loan sales due to rising defaults. He said there were “increasing conversations” between banks and private credit specialist funds about offloading and managing NPLs.

“The trend has started, and it’s not stopping here,” he said.

There were liquidity crunches in the retail and construction sectors, Papriwal said, and he predicted a wave of asset sell-offs.

“Mid-sized, and even some big-size, companies, which [are seeing] the liquidity cycle tightening, will have to start getting a lot of their non-core assets sold with much more impetus than we’ve seen before,” he said.