(Bloomberg) -- Oaktree Capital Management’s David Rosenberg says higher interest rates will create a cornucopia of distressed-debt investment choices.
“You’re going to see a lot of what they call rescue financing,” Rosenberg, head of liquid performing credit at Oaktree, said in the latest Credit Edge podcast. “That’s going to be one of the greatest opportunities we’ve seen in a decade.”
A focus for the firm, known for distressed debt expertise in its management of $205 billion in assets, will be lending to industries that increased leverage with buyouts. “You think about technology, health care — sectors where you’ve seen more LBOs,” he said.
Click here to listen to the full interview with Oaktree’s Rosenberg
Highly levered companies with a lot of debt coming due can negotiate with lenders to extend maturities via an exchange. They also could tap private markets for new financing, which may involve moving assets away from existing creditors and repurchasing debt at a discount.
“It’s always great to be a liquidity provider when people are desperate for liquidity — you tend to be able to get very good terms,” said Rosenberg. “I always like to buy what people don’t want to buy.”
Debt-laden companies currently prefer to do debt swaps, or so-called liability management exercises, Rosenberg said. Tapping direct lenders is an option that troubled companies wield more “as a negotiating stick,” he added. “They’ll prefer to go with existing lenders. It’s much more efficient — you get an exchange versus having to go buy everything in the market.”
Creditor Concerns
Meantime, there’s been an in an increase in so-called creditor-on-creditor violence in the riskiest parts of corporate debt markets. This involves borrowers exploiting weak covenants to force losses on certain classes of debt holders.
Investors can protect themselves by more closely studying covenants and being better at picking companies that will be able to repay their debt, according to Rosenberg.
“As a credit investor, if I can avoid problems and everyone else has to own them, that’s generally the best way to outperform,” he said. “I love having things in the market that can blow up — that I can choose not to own.”
He’s steering clear of the energy and consumer discretionary sectors, for example. He sees scope for oil and gas prices to fall as US supply ramps up and demand eases. And he expects retail spending will be pressured by financing costs remaining elevated.
“If rates do stay a little higher for longer, that does start to stretch a consumer,” said Rosenberg. “Specialty retail, automotive, things that people can buy but don’t need to buy is an area that I’m very cautious on.”
Oaktree also expects more stress in private debt, a market forecast to expand significantly from $1.6 trillion with the addition of asset-based finance.
“If you just hung a shingle a week ago and said, I’m going to start a private credit fund, you’re probably going to have a lot of trouble in your portfolio,” said Rosenberg. “If you’ve been doing this for 10 or 20 years, you’d probably be OK.”
On the podcast, Rosenberg also discussed:
- Private credit pay-in-kind debt deals and stress at business development companies
- The outlook for mergers and acquisitions, including LBOs, under the new US government
- Structured credit, including collateralized loan obligations
- Investing in European credit
- The biggest risks for debt investors, including growth, volatility and geopolitics
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