Credit investors, who are notorious for their pessimism, are starting to feel a little better about the world.
At least those with a lot of cash are, and they could be at the leading edge of a nascent rebound.
Blackstone, the world’s largest manager of alternative assets, is a prime example of this. It just unleashed the greatest amount of its cash in a quarter on corporate debt, private equity and real estate in the three months ended Dec. 31, seeking to take advantage of depressed debt values and more desperate conditions specifically in oil and gas companies.
Blackstone's credit unit, GSO Capital Partners, has $15 billion in dry powder, "a record amount of funding at what in their view will ultimately be the best time to deploy capital in the credit market since 2009,'' Michael Chae, the firm's chief financial officer, said on an earnings call last week.
This highlights a reality that’s playing out across the capital markets: the worse things get for a growing number of companies, the better cash-heavy investors feel. Howard Marks, co-chairman of Oaktree Capital Group, said in December he has the most investment opportunities since Lehman Brothers Holdings collapsed.
“We’ve seen versions of this movie many times before with always the same outcome, outsized returns for someone,” Stephen Schwarzman, Blackstone's chairman and chief executive, said on the earnings call.
The interest comes after the worst selloff in speculative-grade debt since the financial crisis. Average yields on dollar-denominated notes have soared past 9 percent, from 6.8 percent a year ago, although few bonds actually trade with such yields. Instead, the market has become increasingly bifurcated, with the universe of distressed bonds swelling to a face value of $361.5 billion, and energy-related notes yielding almost 18 percent on average, even as higher-rated bonds still carry relatively low yields.
We're not at the bottom for riskier securities. The U.S. default rate is still expected to rise, possibly significantly in the next year, with Moody's predicting it will reach a six-year high of 4.4 percent this year. Speculative-grade debt will likely remain under pressure, with yields on some bonds rising even more.
The opportunity is pretty idiosyncratic at this point, and definitely not broad based. Even Blackstone's credit unit experienced an 87 percent decline in profits in the fourth quarter, which it shrugged off as a paper loss that would disappear as oil prices rebound and companies make their debt repayments.
But some behemoth investors like Blackstone still have a lot of cash on hand and need to put it to work. The more they start deploying it, the more they'll start paving the path to a floor for riskier debt prices.
(Disclosure: Peter Grauer, the chairman of Bloomberg LP, recently joined Blackstone's board of directors.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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