Distressed-Asset Vultures Watch—and Wait—Over Europe

Banco Espírito Santo put €2.5 billion ($3.6 billion) of loans on sale in January, hoping for bids from hedge funds. Seven months later, the Portuguese lender has sold only half the loans, which funded the construction of roads, airports, and sports stadiums. Money managers who balked say the assets were offered for just 5 percent less than face value, making it difficult for them to earn a profit. “We passed on that trade,” says Galia Velimukhametova, manager of GLG Partners’ European Distressed Fund. “We are waiting for a situation where price expectations are much lower.”

Hedge funds and private equity firms that have raised money to buy assets from European sellers crushed by the sovereign debt crisis may have to wait awhile. Banks have little incentive to offload bad loans because selling them at a discount would trigger losses. Meanwhile, low interest rates imposed by the European Central Bank help indebted companies meet their payments, keeping the default rate in Europe at an historic low. “There’s a level of frustration among investors,” says Robert Boulding, a consultant at PricewaterhouseCoopers in London. “They expected a tsunami of deals from European banks, and the reality has been very different.”