(Bloomberg) -- The head of performing credit for one of the world’s largest distressed debt firms, Oaktree Capital Management, says there are pockets of opportunity in junk bonds for investors willing to look past more volatility and wider credit spreads in 2023.
“There are some bargains to be had,” Armen Panossian, who is also the chief executive of Oaktree Specialty Lending Corp., said in an interview with Bloomberg TV. “The percentage of BB rated high-yield bonds is the highest it has been in 10 years with 60% of the market being lightly levered and offering attractive return with dollar prices on those instruments in the seventies and eighties.”
Higher quality tiers of junk bonds are attractive in dollar price and absolute yield terms, Panossian said. Gains in US junk bonds extended across ratings in the last week, following a fresh injection of cash into the asset class and a host of commentary from Federal Reserve officials supporting a slower pace of hikes.
Panossian expects the sector to deliver a strong performance over the next two years, reserving default concerns for lower-quality CCC-rated bonds. The US corporate high-yield benchmark has sold off roughly 11% so far in 2022.
“If you look at the maturity schedule for high-yield bonds, only 6% of that market matures between now and the end of 2024,” said Panossian. “It’s really the CCCs and lower rated securities that are maturing in the near team and therefore, there will be some level of defaults.”
Oaktree will also be hunting for bargains in the distressed debt space, co-founder Howard Marks said earlier this month. The default risk, according to Panossian, lies mainly in the private credit and leveraged loan space.
“Especially highly levered transactions with LBO sponsors, we will see some level of defaults and losses associated with those credits,” said Panossian. “They were aggressively capitalized over the last two or three years and have the added cost of higher cost of borrowing with floating rates rising as rapidly as they have in the last 12 to 24 months.”
The $1.4 trillion private credit market has more than doubled in size in the past five years, taking advantage of sidelined investment banks looking to offload billions in hung loans off their books.
“Certain types of private credit markets are experiencing dislocation given the banks have stepped away from large-cap direct lending to leveraged buyout sponsors,” said Panossian, who oversees part of Oaktree’s $163 billion in assets under management. “So there is a widening in the pricing we’re seeing in direct lending as well as a tightening in the legal protections that are available.”
--With assistance from Jonathan Ferro.
©2022 Bloomberg L.P.