BT Pension fund plans distressed debt investments

The UK's largest pension fund, the BT Pension Scheme, is planning to invest in distressed debt, in a sign that such once-niche investments are attracting mainstream investors.

The investment will form part of an increased allocation to a credit portfolio the scheme set up at the end of 2008 to exploit dislocations in the credit market.

"Even though people are talking about the outlook improving, we still think there will inevitably be a lot of bankruptcies and insolvencies," said Frank Naylor, head of investments at Hermes Pension Fund Management, the fund's executive arm.

"We will be able to get quite powerful returns," he said.

Distressed debt strategies performed poorly last year, but were up 10.51 percent in the year to date, according to the Credit Suisse/Tremont Hedge Fund index.

In the first half of 2009 investors were frustrated by banks' unwillingness to sell assets at bargain prices, but financing pressure is set to rise, with about $430 billion in leveraged loans maturing between 2012 and 2014.

The BT pension scheme has already invested some 3 percent of its assets in the credit opportunities portfolio, most of which was allocated to leveraged loans and mortgage-backed securities. At the end of March 2008, the pension scheme had around 31 billion pounds ($51.16 billion) in assets.

Naylor said the scheme had increased its allocation to the entire credit portfolio to 4 percent, with a part of this to be made towards distressed debt investments.

"As we move through the cycle, areas where we are likely to find the best value are changing all the time," Naylor said.

"A year ago, the opportunity probably wasn't as good but now distressed debt is a very good opportunity."

The fund's investments through the credit opportunities portfolio have been made using privately mandated fund managers, Naylor also said.

Over 2008, the BT scheme has slashed its exposure to equity markets to 35 percent from 46 percent, while it increased its exposure to bonds and cash to 41 percent.