Vultures loom over British house builders

The funds, which look for profit in distressed assets, have been attracted by prices as low as 20 pence in the pound for the debt of some of Britain’s well-known house builders, one trader said.

Discounts offered at banks such as Lehman, Deutsche Bank or Merrill Lynch average about 50%, distressed traders said. “In due course, I would expect the debt to trade down significantly,” said Peter Baldwin, a partner at law firm Jones Day, which specializes in debt restructurings.

Vulture funds buy cheap debt in the hope its value will increase in the short to medium term. Others look for companies in danger of breaching bank loan covenants that open up the opportunity to gain control through a debt-for-equity swap. The vulture funds are currently focusing on leverage buy-outs - acquisitions that are largely financed by debt - as they are more vulnerable to the credit crunch.

House builders Crest Nicholson and McCarthy & Stone are two examples where funds are offering to take the debt off the books from the original lenders, the trading sources said. Crest Nicholson Plc became a private company last year, when it was acquired by Castle Bidco Ltd, a 50-50 joint venture between HBOS and West Coast Capital. McCarthy & Stone also became private in 2006, with HBOS being its principal shareholder.

Billions of pounds have been raised over the past few months to invest in distressed assets, from hedge funds and private equity firms such as Oaktree and TPG. These investors are keenly waiting for the holders of the loans to sell, but some banks look set to hold onto these assets as selling at a deeply discounted price would mean further write downs on top of hundreds of billions already made.

Barratt Developments said on Thursday it had agreed a new £400 million loan with its lenders, which includes changes to its bank covenants to avoid a breach. Other investors, such as Collateralized Loan Obligation (CLO) funds, may be forced to sell their loans as they are not allowed to invest in distressed companies, creating liquidity in the secondary markets. “The markets are starting to move although we haven’t seen trades yet, but if there’s a move it means the trades are about to start,” a trader at a distressed debt trading desk said. “This has all started over the past week.”

British home prices fell 2% in June, the sharpest annual pace in at least two decades, according to data from HBOS, the country’s biggest mortgage lender. (China Daily)