Will the vultures circle?

As secondary prices for leveraged loans and high-yield bonds have fallen to record lows, there have been persistent hopes that distressed debt investors would come into the market with significant funds and provide a floor for falling prices.

Such interventions have yet to happen, leading to speculation that the cavalry may not be coming after all.

Until July 2007 received wisdom suggested that distressed debt investors were desperate for assets, after five years of ever decreasing default rates, and would snap up sub-par credits.

Despite significant price falls in the first quarter in particular, there is no evidence that distressed investors have stepped into the market in any meaningful way, leading at least one source to speculate whether the investor class really does represent a viable pool of liquidity.

“Their fire power could already be gone,” said one secondary market trader. “They have sat dry for five years, who’s to say they have not tied that cash up already?”

However, restructuring expert Matthew Prest, a managing director at Close Brothers Corporate Finance disagreed: “Big players are not utilising their distressed buckets at the moment. Investors have so far taken the view that there is more to go in terms of price declines. There are no prizes for buying into distressed situations early.”

Prest is convinced distressed investors have liquidity, but are holding out for real stressed opportunities: “Financial sector woes are only just beginning to feed into the mainstream economy. Housing-related businesses and consumer businesses are going to start feeling the impact of restricted personal credit.”

The truth may be that restructuring funds will wait for pain in the real economy to seep back into financial markets, and not vice versa, before committing to the market.