Oaktree’s performing credit note for July had a hit-list of credit related potential opportunities. Here are some of the hits:
Yields have increased, but default risk remains low: In 2Q2022, yields rose in the U.S. and European high yield bond markets by 280 bps and 320 bps, respectively.26 (See Figure 6.) While analysts anticipate that default rates in the U.S. and European high yield bond markets will increase in 2022, they expect these rates to remain well below their long-term historical averages.27 Issuers’ fundamentals are fairly healthy despite the slowdown in economic growth, and near-term maturities are minimal following the 2020–21 wave of refinancings.
Broad market weakness may create compelling buying opportunities [in EM Debt]: Outflows from the asset class could cause the debt of companies with strong fundamentals to trade at dislocated prices. Extensive credit analysis may help investors identify securities that can offer favorable risk-adjusted returns. Companies that can generate consistent cash flow may be well positioned in an environment in which access to financing is limited.
Market weakness could create attractive buying opportunities [in convertibles]: Value-oriented investors may be able to identify bargains in this environment, as an increasing number of convertibles are trading below par. (See Figure 9).49
BB-rated CLO debt tranches have many sources of potential value: These instruments have attractive structural and credit enhancements as well as low sensitivity to interest rates increases. Structured credit continues to offer higher average yields than traditional credit asset classes. (See Figure 10.)
Weakness in real-estate-backed securities may create compelling opportunities for disciplined investors:We believe the risk/return profile for SASB CMBS and conduit CMBS is improving, but we also think disciplined credit analysis is necessary in this challenging environment.
Non-sponsor-backed [direct lending] deals may offer more attractive opportunities than the crowded sponsor-backed market: Investing in the former often demands specialization, an extensive network, and robust sourcing capabilities.
Yields on investment grade corporate debt have risen to attractive levels: The asset class’s yield rose by around 110 bps during the quarter to reach 4.7% as of June 30.64 (See Figure 12.)