Market volatility creates distressed debt opportunity
Oaktree Capital Management closed the largest distressed debt fund ever raised at the start of this year, attracting $16bn (£12.2bn) in capital.
Strategic Value Partners is reported to be targeting $6.5bn for its latest distressed debt fund, and Ares has set a $7bn target for its third special opportunities fund, originating loans to companies in tough situations.
With the tariffs announcements from the US changing every day, and the unpredictability of what President Donald Trump’s next move will be, it certainly seems like the opportunity is ripe for distressed debt investors – at least those that have the dry powder to deploy. According to MSCI, distressed debt funds had a little more than $57bn of dry powder at the end of September 2024.
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Following the tariffs announcement on 1 April, David Hamilton, managing director and head of Moody’s Asset Management said that the tariffs heightened corporate credit risk, “increasing the likelihood of defaults and wider spreads.”
“The growing risk of a credit slowdown among medium- and small-sized companies could escalate into broader macroeconomic challenges,” he added. “The uncertainty dial just got turned up to 11.”
In a recent memo, Howard Marks, the founder and co-chairman of Oaktree noted that “fear of defaults (not unfounded) has caused risk compensation in the form of yield spreads to increase substantially, leading to a meaningful increase in the available yields on credit. At the same time, we anticipate a higher incidence of distress and increased demand for bespoke capital solutions, meaning we’re likely to invest our latest opportunistic debt fund faster than otherwise would have been the case”.
Read more: Distressed exchanges to hit all-time high of $50bn this year
Meanwhile, Patrick Warren, vice president at MSCI Research told Alternative Credit Investor: “One of the things we saw during Covid was distressed debt funds called down quite a lot of capital. Obviously, there were opportunities there. There was also deleveraging, but those were the two things that we saw. Distressed debt out of all of the private capital strategies was the heaviest capital caller at that point. So certainly it is one of those asset classes that kind of can take advantage of big downturns like the one that we’re seeing now.”
