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Bruce Richards discusses the rising opportunity in distressed debt
Key Takeaways
- Bruce Richards sees market dislocation in the coming year, leading to an increased opportunity set in distressed debt. Default rates have already risen fourfold over the last year and debt downgrades have outpaced upgrades by a ratio of 3 to 1.
- Even high-revenue companies may now be grappling with heavier debt servicing costs and face rising default risks. This creates an interesting opportunity for restructuring and investment deals.
Hello, I'm Bruce Richards, I’m the CEO, managing partner and chairman of Marathon Asset Management. Founded the firm 25 years ago with Lou Hanover, we're a global credit manager focused on investing in the credit markets throughout the world, with 180 professionals in six different offices.
In the coming year, we believe there's going to be dislocation, and a significant amount of distressed debt opportunities that avail themselves to investors. There's a really good probability of a soft landing and we see downgrades now outpacing upgrades by 3 to 1, we see default rates going up by four fold over the last year. There's a lot of interest now in dislocation and distressed. And my recommendation to you is focus on that sector, because there's going to be really interesting opportunities there.
If you go back to 2008, the size of the total global credit markets, U.S. and Europe was 1.7 trillion in size. Today it's 5.1 trillion, three fold increase in just 15 years. And that's presenting opportunities. A lot of companies, really good companies have over levered balance sheets. And while they have strong revenues, they have too much debt, while they have strong revenues and they're generating attractive even EBIDTA, the debt service is becoming too significant. In fact, there are single B and some double B companies, that are now burning cash just to service their debt. And so what you've seen is the rating agencies, Moody's, S&P and Fitch downgrading companies at a ratio three downgrades for every upgrade and first comes downgrades and then comes for certain companies defaults. And so we think the default rate, which has already quadrupled over the last year and a half, will increase from here somewhat significantly as we move more towards a growth to a soft landing that we think comes next year.
But irrespective of the soft landing, hard landing or no landing at all, the simple fact of the matter is the Fed has increased rates 525 basis points thus far, and those interest payments are becoming punishing for some of those over-levered companies. So the ability to buy a company with overleveraged balance sheet and go through a restructuring process and invest in that company and fix the balance sheet by restructuring its debt represents, we think, a very attractive opportunity, in this next generation, this next year or two years.
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