60 Finance & economics The EconomistNovember 9th 2019
21O
n november 4ththe share price of
Kier Group, a troubled British builder,
fell by nearly 10% on reports that banks
were trying to offload its debt at a steep dis-
count. The rumour remains uncon-
firmed—sources close to the firm and one
of its biggest lenders dispute the claim—
but investors may have felt a sense of déjà
vu all the same. After the sudden downfall
of Carillion and Interserve, Kier is Britain’s
third construction giant to face a battle for
survival in less than two years. And each
time the groups’ fortunes have worsened,
hedge funds eager to snap up their debt at
bargain prices have begun to circle.
Funds that buy “distressed” debt, which
typically yields ten percentage points ormore over Treasuries, are becoming famil-
iar villains. They pounced on Thomas
Cook, a travel group, and pg&e, a Califor-
nian utility, shortly before they went bust
this year. They tend to circle around ailing
oil firms and shops disrupted by e-com-
merce, notes Christine Farquhar of Cam-
bridge Associates, an investment firm. And
they snap up portfolios of dud loans from
banks. If their target ends up recovering,
they pocket big profits. If it does not, they
often gain regardless, as they are usually
first in line for liquidation proceeds.
Yet distressed specialists are frustrated.
Convinced that a recession was just around
the corner, they have raised $136bn since
2017, more than they did in the four years
that followed the financial crisis, accord-
ing to Private Debt Investor, a financial-in-
formation provider. But they have strug-
gled to deploy the cash. Distressed-debt
funds currently hold $62bn in “dry pow-
der”—almost twice as much as they had in
2008 and close to the $75bn peak reached a
year ago, reckons Preqin, a data firm.
Two things are making their life diffi-
cult. First, despite choppy markets and a
commodity bust, the global economic ex-
pansion is a decade old and counting. And
just when funds think a downturn is finally
coming, interest rates are cut, allowing
weak borrowers to limp on for longer.
Meanwhile plentiful liquidity has led to
weakening covenants—clauses that re-
quire borrowers to keep overall debt levels
under control—making it harder for funds
to force floundering firms into bankruptcy.
So distressed deals are few and far be-
tween. And when they come up, competi-
tion is fierce. That is buoying prices, which
hurts returns. Weaker contractual protec-
tions make this worse: creditors often re-
cover less from restructurings, says Fraser
Lundie of Hermes Investment Manage-
ment. Distressed debt is also becoming less
liquid, and harder to trade, because passive
funds that track fixed-income indices fo-
cus on larger and safer companies. After re-
turning more than private equity for years,
the asset class has lagged behind it each
quarter since 2016, according to eFront, a
data firm. Internal rates of return are just
8.5%, net of fees, compared with 12% two
years ago.
The famine is “wiping out an entire gen-
eration of distressed professionals”, notes
a credit-fund manager. Trading desks have
lost staff; flagship funds have folded. Nick
Kraemer of s&p Global, a rating agency,
says default rates on speculative-grade
debt in America could top 10% in
mid-2020, up from 2.4% in June 2019, pro-
viding a reason to hope. But more easing by
the Federal Reserve could thwart that. And
structural factors, like weak covenants and
thin liquidity, will probably persist. Brit-
ain’s builders may flounder, but corporate
debt seems based on firmer foundations. 7Funds that bet on failing companies
are desperately waiting for a downturnDistressed debtVultures v zombies
B
illionaires havenever exactly been
popular with the radical left. But with a
member of the nine-zero club sitting in the
White House, and a decade of slow growth
in living standards, some Democrats have
taken to attacking billionaires to draw at-
tention to their argument for root-and-
branch economic reform. “Billionaires
should not exist,” says Bernie Sanders, a
presidential candidate. Plutocrat-bashing
has become part of the debate in Britain,
too, where an election will be held on De-
cember 12th. At the Labour Party’s cam-
paign opener Jeremy Corbyn, its far-left
leader, attacked the Duke of Westminster,
one of Britain’s wealthiest landowners, and
Rupert Murdoch, a media mogul.
Socialists argue that anyone who has
become fantastically rich has profited from
a rigged system. “Every billionaire is a poli-
cy failure,” goes the memorable phrase. To
assess this claim The Economisthas drawn
on data from Forbes, a business magazine,
on billionaires in the rich world, updating
an index of crony capitalism that we first
put together in 2014 (see chart).
In the past decade the wealth of the
world’s 2,200-odd plutocrats (which puts
them inside the world’s top 0.0001%) hasHave billionaires accumulated their
wealth illegitimately?The economics of billionairesThe lives of the
0.0001%
On the cover of Forbes magazine
BillionairewealthSources:WorldBank;Forbes;
TheEconomist *Incl.HongKongandMacauAdvancedeconomies,%ofGDP1816141210080620048
6
4
2
0Bycountry,2018,%ofGDP
0 10 20 30BritainChina*FranceGermanyIndiaUnited StatesSwedenRussiaTe c h Non-rent-seeking
Non-techRent-seekingcancelledthesummit. That poses the ques-
tion of where and when the leaders should
meet, itself a matter of negotiation. Given
Mr Trump’s tendency to improvise, China
wants to be sure there is a political win on
the table before it agrees to meet.
The Chinese may yet include more juicy
titbits for American businesses as part of
the mini-deal. But even if it is signed with-
out a hitch, the trade war will be far from
over. Hundreds of billions of dollars of Chi-
nese exports would still be affected by ta-
riffs and companies would still have to live
with the uncertainty of the old ones com-
ing back. Mr Trump would still have the fi-
nal word, and another one after that too. 7Buying American