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The days of easy money are over – access to credit at favorable terms has become limited, driven by Fed tightening, slower corporate growth, and overleveraged balance sheets. As debt maturities approach, many companies will face higher cost of debt servicing and stricter loan agreements. Tighter loan standards, in conjunction with higher borrowing rates, have already led to an increase in default rates in the first half of the year.1
The market for below-investment-grade credit has tripled in the last 15 years.2 Distressed is a cyclical strategy that performs well during an economic slowdown when credit availability tightens. We believe we are in the midst of a significant distressed investing opportunity. Even if default rates reach only half the level witnessed in 2008, the distressed credit market presents an opportunity set even larger than during the GFC.
Distressed investing opportunities tend to be episodic. We believe we are currently in a window of investing opportunity.
Head of Investment Products
1. Source: Moody’s, “Corporate defaults jump with higher interest rates, slowing GDP growth and financial-stability risks,” April 14, 2023.
2. Source: Marathon Asset Management, “The 2023-2024 Credit Cycle: Public & Private Credit Outlook & Opportunities,” Q1 2023.
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