Oaktree's Marks Likens Distressed Conditions to Post-Lehman

  • Investor has seen many bonds slide to 60 cents on the dollar
  • Oil slump means producers may lose credit lines, seek money

Oaktree Capital Group LLC, the world’s biggest distressed-debt investor, has the most investment opportunities since Lehman Brothers Holdings Inc. collapsed, said co-Chairman Howard Marks.

“Post Lehman there was too much to do and now there is again,” Marks said Tuesday, referring to the financial crisis that followed the collapse of the investment bank in September 2008. “For the credit investor we have our first opportunities in several years. It’s been a long, long time."

After Lehman’s bankruptcy, Oaktree deployed billions of dollars in distressed debt, reaping a handy profit. Its Opportunities Fund VII, which did the bulk of the investing, has so far distributed $22 billion to clients on $13.5 billion of drawn capital, according to its recent third-quarter earnings statement.

Oaktree’s top executives, including Marks and co-Chairman Bruce Karsh, had bemoaned a dearth of distressed-investment opportunities since at least 2013, when the Standard & Poor’s 500 index was still in the middle of a four-year run-up. That changed in August, when investor concern that China’s economic growth was slowing quicker than expected sparked a selloff in stocks and high-yield bonds. Energy companies have been hit particularly hard as oil prices continue to slide.

“What you saw in the third quarter of this year could well be a harbinger of things to come in the next year or two,” Karsh said in October. “We’re in the later stages of this credit cycle. We saw the psychology beginning to really roll over and change and people starting to get fearful. We started to see a lot of cracks.”

Debt Slides

Marks, speaking Tuesday at Goldman Sachs Group Inc.’s U.S. financial services conference in New York, said he’s seen many bonds across industries slide to 60 cents on the dollar from 90 cents since September. Los Angeles-based Oaktree is spending a lot of time studying oil and gas companies, he said.

High-yield bonds tied to energy companies have slumped 25 percent since June of last year. Brent crude on Tuesday briefly fell below $40 a barrel for the first time in almost seven years after the Organization of Petroleum Exporting Countries effectively abandoned any limits on output.

“Hedges were in place that have worn off; companies will lose their credit lines,” Marks said of oil producers. “Some of the price declines and some of the weakness makes the prospective buyer very happy.”

Oaktree has prepared by gathering $10 billion in a pair of new pools, together called Opportunities Fund X. The next distressed cycle may be spurred by continued slowing in the Chinese economy, higher interest rates in the U.S., a shift in investor psychology or an increase in corporate defaults, Karsh, who started Oaktree with Marks and five other partners in 1995, said in October.

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