The outdated loan-to-own schemes of aggressive debt restructuring funds bring lackluster returns, claim industry experts
By Philipp Habdank, Frankfurt
Credit relief resources need to undergo a transformation
Some debt restructuring funds buy outstanding debts of troubled firms, aiming to swap them for equity during a restructuring process and gaining control of the company. However, these "loan-to-own" methods are no longer fruitful, industry insiders say.
"The classic loan-to-own approach is outdated," asserts an anonymous German distressed investor. Numerous funds are currently grappling with difficulties in securing fresh capital from investors for such strategies. "It's no secret that things aren't great," the fund manager laments. Fundraising is slow, and there are insufficient attractive investment opportunities, they complain.
Transparency in debt restructuring remains a pressing issue, with many countries resorting to secretive or confidential partial debt restructurings with select creditors. This practice keeps market participants in the dark, shaking confidence and hindering effective debt management and restructuring. Improved transparency in loan contracts, lending terms, and restructuring agreements is essential to provide lenders and investors clear insights [5].
Low-income and developing countries often have high-risk or unsustainable debt profiles, putting investors in a challenging position. These countries depend on concessional cash flow from multilateral development banks (MDBs), necessitating increased funding and MDB shareholder capital [1][3].
Market conditions also play a role, with lenders and investors remaining risk-averse, influencing pricing of debt and potential returns [4]. The prevailing cautious investment environment complicates the execution of loan-to-own strategies.
In brief, challenges for debt restructuring funds using loan-to-own approaches stem from limited debt transparency, novelty and complexity of debt instruments, vulnerability of debtor countries, and unfavorable market conditions. Addressing these challenges requires enhanced transparency, increased concessional financing availability, regulatory changes, and improved debt data to decrease uncertainty and build investor confidence [1][2][5][4].
Business experts are questioning the efficiency of traditional loan-to-own strategies, as they claim these methods, often used by debt restructuring funds, are no longer yielding substantial returns. The challenge for these funds lies in securing fresh capital from investors, as the current market conditions for investing in such strategies are not favorable. Furthermore, the lack of transparency in debt restructuring and the complexity of debt instruments add to these difficulties, making it essential for improved transparency and greater regulatory changes to increase investor confidence and enhance business opportunities in the finance sector.
