Private debt maturity wall “remains imposing”
The maturity wall in sub-investment grade private debt “remains imposing”, according to a new analysis by Oaktree Capital.
In a quarterly roundup, Robert O’Leary, co-chief executive and portfolio manager, global opportunities, at Oaktree, warned that a “meaningful percentage” of companies may be unable to refinance their debt in the coming year as a number of loans reach maturity in a higher-rate environment.
O’Leary said that while debt costs are moderating, he still believes that the corporate credit market is bifurcating. He added that although “the majority of companies will likely be able to comfortably refinance their debt in the coming year, a meaningful percentage may struggle”.
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“Since the global financial crisis, there has been an unprecedented build-up of all forms of debt, particularly lower-rated credit,” O’Leary said.
“Beyond the sheer scale, one other major feature of the debt build-up in recent years was the drastic loosening of terms in credit documentation.
“While the maturity wall in sub-investment grade debt has shrunk recently, it still remains imposing. And given that a meaningful number of issuers facing near-term maturities have weak fundamentals, we anticipate that liability management exercise (LME) activity will only increase in the coming year.”
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He added that in order to successfully navigate this environment, credit investors will require “legal acumen and adequate resources to parse through extremely complex legal documents.”
Oaktree noted that the rise of LMEs could add risk to the private debt market, but they can also generate opportunities for experienced investors.
LMEs allow borrowers to raise new debt that is either senior to the existing debt or backed by collateral that had previously been pledged to the existing debt. Investors could incur losses if this collateral is less secure than previously thought.
The asset management firm highlighted mezzanine finance and opportunistic real estate as two areas of potential growth in the year ahead.
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