Debtwire, in association with Bingham McCutchen and Macquarie Group, announced the findings of its seventh annual North American Distressed Debt Market Outlook survey. The survey’s findings show that investors are only cautiously optimistic for 2012 despite the recent increase in restructuring headlines and market volatility.

The survey outlines 2012 as a “wait-and-see” period for investors to re-assess risk appetite in a vastly different global environment that is being shaped by a constantly changing political landscape, regulatory changes and economic instability.

“It is unlikely that defaults will meaningfully increase without an uptick in interest rates or a worsening of economic conditions,” according to Mick Solimene, senior managing director, Macquarie Group. “However, given that the European financial crisis remains unresolved and could still result in spill-over effects in the US market, a number of players are increasing their distressed allocations to remain poised to capitalize on new opportunities as they arise.”

According to the report, this year’s outlook is polarizing in terms of how investors will allocate their funds. Common shares are considered both the most and least attractive opportunity for distressed investors in 2012 by 37% and 34% of respondents, respectively.

“A relatively equal proportion of respondents think common equities will be the worst, and the best, opportunities for 2012. Can they both be right?” asks Bingham partner Michael Reilly, co-head of the firm’s global Financial Restructuring Group. “The contrasting views seem to reflect the risk in the market based on macroeconomic uncertainty, the sovereign debt crisis and short-term political fixes. Bears see the risk that the problems will linger; bulls see the reward in undervalued equities.”

Second lien loans jumped from 14% of respondents’ favor in 2011 to 32% in 2012. “The improved view toward second liens this year, away from first liens last year, represents a marked shift, and may reflect perceived stability in typical first lien asset coverage at 1-3x EBITDA, and more upside, and risk, for typical second liens at 4X EBITDA and above,” explains Bingham partner Ed Smith, co-chair of the firm’s Financial Services Area.

Key findings: