International hedge funds are increasingly targetting troubled firms in Australia, from cotton or macadamia farms to cattle stations and vineyards, expecting a nascent distressed debt market to generate double-digit returns.

Agriculture and mining, which combined account for around 12 percent of Australia's A$1.5 trillion ($1.35 trillion) economy, are two sectors particularly targetted by distressed debt investors -- sometimes known as vulture funds.

"There are many opportunities in investing in distressed debt in both sectors," said Vince Smith, leader of corporate restructuring at Ernest & Young in Sydney.

"In agriculture, it's seasonal, it's based on geography and environmental conditions, whereas mining is a lot more subject to global pressure like commodities prices."

Funds active in Australia include Oaktree Capital, Fortress Investment, Apollo Global Management, and Bain Capital's Sankaty Advisors.

An Ernst and Young report said around half of Australian listed companies in mining services issued profit downgrades in the first half of the year and more pain is expected as a long boom in resource investment fades.

Parts of the farming sector have also been hit hard by declining property values, drought and natural disasters, with insolvency experts forecasting further distress.

Lactanz Dairy, one of Western Australia's largest dairy enterprise, and Murrawee Farms, a large fruit grower, are among a growing list of embattled companies that could interest hedge funds, particularly from Hong Kong and the United States, which are sitting on piles of cash and looking for high returns.

Ernest & Young's Smith says interest is mostly in struggling small to medium-sized companies with turnovers of A$25 million to A$200 million, with a view to taking controlling stakes.

The new investors create value by restructuring balance sheets in riskier ways than banks would usually consider -- including loan-to-own deals where impaired debt is converted to equity.

"Once they have debt or equity in the company, they can start to influence the management of the company," said Ernst & Young's Smith.

Distressed debt investors typically look for returns in the range of 10 to 15 percent if performance of the assets improves as expected.

Turnover in Australia's distressed debt market amounted to around A$8 billion at face value this year, a trader estimated.

While tiny by international standards it accounts for 85 percent of the trading activity in Asia where distressed debt is less common, according to John Nestel, the chair of the Turnaround Management Association.

The relative lack of distressed debt business in Asia is one reason an increasing number of hedge funds are setting up operations locally, but another attraction is Australia's stable political and economic environment and transparent legal framework, said Scott Atkins, a partner at law firm Henry Davis York.

Hedge funds are also eyeing a potentially far larger slice of the market here -- portfolios of impaired loans held by banks. Analysts estimate between A$20 billion and A$40 billion of distressed debt is held by Australian banks.

There is growing talk that Australia's major lenders could start offloading distressed loans as early as next year to free up capital due to the implementation of stricter global capital and liquidity rules.

"If one starts, others are expected to follow," said Nestel, who is also a partner at Herbert Smith Freehills law firm.

Banks are reluctant sellers of impaired loans as they dislike to be seen abandoning relationships with clients by selling their loans to distressed-debt investors.

"Banks can't hold the debt forever and if the client can't find a solution to pay down the debt, then this type of solution becomes required," said Michael Fingland, managing director of turnaround specialist Vantage Performance.

Market sources say the price tag of such portfolios can be as low as 30 cents on the dollar, depending on the quality of the assets.

Analysts and investors pressing banks to offload bad debt and its related holding costs could also encourage the sale of impaired loan portfolios, noted Nestel.