Oaktree Capital Management sees a significant opportunity in distressed credit as higher interest rates persist, ending an era where over-leveraged companies could easily refinance. According to Brook Hinchman, a managing director at Oaktree, over $200 billion of high-yield and leveraged loan debt is currently trading below 90 cents on the dollar with a yield-to-maturity above 15%. Much of this debt stems from buyout deals in 2021 and 2022, indicating a substantial volume of distressed assets.
Danielle Poli, another managing director at Oaktree, also highlighted the impending "maturity wall" and the pressure on borrowers as funding costs remain high, especially if the Federal Reserve continues to raise rates. This environment is creating what Poli refers to as a "distressed moment" for companies facing debt maturities in the coming years. Oaktree emphasizes that this situation allows credit managers to be more selective, avoiding underperforming assets while pursuing opportunistic investments.
The current market exhibits aggressive bifurcation, with CCC-rated loans experiencing widening spreads of over 300 basis points this year, contrasting with the resilience of higher-rated credits like BB-rated loans. This indicates market participants' clear view that the weakest credits cannot withstand elevated interest rates and will struggle to refinance through traditional channels. Software and IT services, which comprised over 40% of overall distress in the senior loan market, are particularly vulnerable due to concerns about AI rapidly antiquating certain business models. The overall sub-investment grade credit universe, totaling around $6 trillion, presents a large absolute volume of dislocation, creating opportunities for selective, opportunistic investors.
