View from City Road: Euro Disney leads way to a new debt market

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The Independent Online
It is curious that the failures of one American import to Europe, Euro Disney, are the driving force behind the success of another, the market in distressed debt.

Until now, mainstream British bankers have reacted warily to the enthusiasm in the US for the flourishing market in the debt of troubled American companies. This is understandable, as American insolvency laws allow 'vulture funds' to buy IOUs issued by such companies. The vultures make their profits by demanding a payoff before agreeing to a rescue plan.

The potential for financial blackmail has worried the Bank of England, as well as MPs investigating the Maxwell debacle, which has left in its wake a lot of distressed debt.

But Midland Bank's recent decision to sell off Fr130m ( pounds 14.73m) of its Euro Disney debt at 60 per cent of face value could be the event that changes perceptions of the new market place this side of the Atlantic.

In the UK it only got going two years ago as a result of the Brent Walker restructuring, with flamboyant brokers such as Gary Klesch talking up the prospects of a liquid secondary debt market in a range of troubled companies.

But the decision by one of the big four clearing banks to unload a large chunk of debt signals the increasing willingness of bigger players to use the market. It also gives a boost to liquidity, a shortage of which has until now been the greatest obstacle to the market's development in the UK.

American institutions have led in the creation of the UK market, including Bankers Trust, Continental Bank and Lehman Brothers. They now sense it may finally be gaining critical mass. And there is plenty of other Euro Disney debt waiting to be unloaded.

The market in Third World debt went through a similar slow evolution a decade ago. At first a handful of active traders were regarded with deep suspicion because it was a small and illiquid market. But once larger banks began to see the market as a place in which to manage their exposure to Latin America, it quickly took off.