BT Pension fund plans distressed debt investments

By Raji Menon

LONDON (Reuters) - 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 (261 billion pounds) 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 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.