Public Fixed Income

Distressed Debt: Despite Challenges, Opportunities Persist

March, 2020 – 4 min read
Recent market and economic volatility may be the trigger that distressed debt investors have been waiting for, but capitalizing on opportunities will require a different playbook than those of past cycles.

For investors trying to time their entry into distressed debt strategies, the last several years have proven tricky. Despite the elongated credit cycle and concerns about loosening terms in credit issuer documentation, defaults have remained low by historical standards across the high yield and leveraged loan markets. Some of this is surely a result of historically low interest rates, which have, in many cases, enabled otherwise troubled issuers to ride out the cycle without running into liquidity problems. And while the emergence of the coronavirus as a formidable threat to global growth prospects likely means that interest rates will not move higher in the foreseeable future, it may also prove to be the trigger that drives weaker issuers into stressed or distressed situations.
 

Where Stress in the System is Likely to Appear First

Most immediately, issuers with supply chain reliance on China look most exposed, although this is likely to propagate into other regions in the weeks and months ahead. The knock-on effects from supply chain challenges and increased working capital requirements will inevitably impact a wide array of corporate debt issuers. For those companies that were already teetering on the edge—or geared to perfection—liquidity issues could quickly follow. Beyond that, a general slowdown in economic growth has the potential to impact issuers across almost every industry, particularly if sustained for more than one or two quarters.

Additionally, the substantial growth of the private credit market over the last decade will naturally result in more middle market issuers running into stressed situations this cycle. Weaker documentation, higher leverage levels and a proliferation of new entrants are likely to be key factors contributing to the growing distressed opportunity in this space.  

Similarly, the collateralized loan obligation (CLO) market looks set to be a source of stressed or distressed opportunities in the months and years ahead as CLO managers trim their exposure to downgraded (CCC-rated) loans in order to meet required ratings tests. And while the latter is more of a technical problem than a fundamental one, the impact is the same: distressed debt managers have the opportunity to buy assets at discounted prices because of technical selling pressure.

Want to read the full article?

View PDF

Bryan High

Head of Global Private Finance

Stuart Mathieson

Head of Europe & APAC Private Credit & Capital Solutions

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints