Ironshield Capital, the pan-European distressed debt and special situations manager led by ex-Bank of America man David Nazar, is starting to generate some eye-catching returns again this year in an increasingly fertile climate for European stressed, distressed and event-driven credit investing.
The Ironshield Special Situations Fund is up by over 11% to the end of October, having made 14% since July, and the firm’s principals believe that it is well-placed as one of very few dedicated European specialists to exploit what looks likely to be a highly attractive multi-year opportunity set across multiple European jurisdictions.
Nazar – the firm’s CEO and CIO – set up Ironshield in 2007 and launched the firm’s special situations fund, which runs around $100 million, in August of that year. He had previously led the European special situations principal investments group at Bank of America – and has two decades of experience in European distressed debt investing and investment banking, having also worked at Deutsche, Goldman and Salomon.
Taking together his track record at Bank of America from 2003 to 2007 and the performance at Ironshield since inception, Nazar has generated an annual return of some 17% over almost 10 years – with the fund annualising at around 9% over the past five years.
Nazar’s experienced six-strong team includes portfolio manager Amit Jain – formerly of Bank of America and Salomon Brothers, who has over 13 years of investment banking, leveraged finance and credit investing experience.
CFO and COO Roger Devlin was formerly the chief operating officer at Portland Capital – the real estate investment firm backed by high-profile investors including Sir Ronald Cohen and Lord Jacob Rothschild – after spending 10 years in prime brokerage at Bank of America. And investor relations head Adeeb Ahmed also worked in PB and capital introductions for 10 years at Morgan Stanley.
With the big European and US banks having axed their distressed prop trading activities in line with the new global bans on principal investing, Nazar and his colleagues believe the supply/demand equation has moved even more firmly in favour of the relatively few buy-side firms that are dedicated to European distressed investing – at a time when the number of distressed sellers and the volume of distressed assets are both rising fast.
“Europe comprises a whole array of different markets, cultures, risks, languages, laws and so on,” says Nazar. “You need to be on the ground, you need to have experience of doing deals in different countries and under different jurisdictions, and you need to have the contacts.”
Ironshield’s portfolio tends to be predominantly invested in the major western European economies such as the UK, Germany, France, Italy and the Benelux region – all countries where there is a clear process for debt restructurings, bankruptcies and credit work-outs.
“We prefer to be investing in places where the laws are at least predictable – even if they are not always creditor-friendly,” Nazar says. “It doesn’t matter how unfriendly to a creditor a jurisdiction might appear to be, as long as there is a process that you can understand and predict – because if you can predict it, you can price it.”
He believes that this on-the-ground, multi-jurisdictional experience offers a major advantage against some of the big US-based distressed groups that have recently raised large funds to target Europe – but which so far lack the required large-scale dealflow to enable them to deploy capital effectively.
A major upturn in distressed situations throughout Europe looks to be inevitable in the aftermath of the global credit crisis and the resulting need for massive financial sector and corporate deleveraging – and ahead of the fast-approaching and huge corporate refinancing maturity wall that is set to peak over the next two to three years.
But the precise timing of the opportunity set is being complicated by the somewhat understandable reluctance of bankers and politicians in Europe to make an already bad situation worse by tipping a whole swathe of major companies into bankruptcy, default or restructuring.
As a result, Ironshield is focusing on opportunities in the smaller and mid-cap space – where default rates are running at much higher levels than in the large-cap area, where the ‘extend, amend and pretend’ attitude of banks is not so pronounced, where access to alternative financing sources is more limited and where numerous restructurings are already taking place away from the public eye.
“This is not a normal economic or business cycle and it is very unlikely that things are going to play out in the same way as they did in Europe during the last distressed cycle 10 years ago – which is what a lot of people seem to be expecting,” believes Nazar.
“Last time round you had a short, sharp downturn followed by a massive recovery in credit markets, which bailed everyone out and enabled investors to make very good returns very quickly. But that is not going to happen this time – the whole credit bubble machinery is not there any more and you need to be very careful about the type of assets that you are buying and the price you pay for them.”
Although Ironshield can invest across the whole corporate capital structure spectrum from bank loans to equity, the team are currently focusing their attention on senior secured debt opportunities where loan-to-value ratios are reasonable and where there is a decent cushion of investment safety. The managers invest only in European corporate debt, avoiding the sovereign and financial sectors.
Given the time-intensive and hands-on nature of distressed investing, the portfolio is fairly concentrated – usually comprising about 15-25 positions, with an event-focused time horizon ranging from around three to 18 months – and the strategy employs no leverage.
Although Nazar is cautious about the amount of money – particularly from the US – that has been raised to chase what has so far been a limited amount of large-cap distressed and restructuring deals, he is confident that the distressed cycle will inevitably start to pick up steam in Europe as economic reality bites.
“In some respects the politicians and the bankers are trying to do the right thing by trying to engineer a Japan-style recession rather than a 1930s US-style depression,” says Nazar. “The whole establishment is trying to engineer an inflationary situation that can enable the necessary adjustments to take place over a protracted period of time.”
He adds: “But it is inevitable that you are going to get a lot of restructurings of corporate debt – and that this will be the mother of all distressed opportunities. Banks are already selling out of their smaller positions – and will increasingly start to do so in bigger situations as well, as long as the politicians can create islands of stability for them to sell into – and that generates very good opportunities for us as there are very few natural buyers in Europe these days.”