State of the Credit Markets 2024: Top Ten Takeaways from Armen Panossian and Bob O’Leary

Summary

• In December 2023, Oaktree co-CEOs Armen Panossian and Bob O'Leary stated the current credit environment is the most attractive since the Global Financial Crisis due to market size, elevated yields, and investor protections.
• The addressable market for opportunistic credit across high yield bonds, BBB-rated bonds, leveraged loans, and private credit grew from approximately $3 trillion prior to the financial crisis to roughly $13 trillion today.
• Skilled performing credit investors may generate attractive yields while avoiding defaults by selecting from hundreds of U.S. high yield bond and leveraged loan issuers that are expected to remain stable despite rising broad market defaults.
• Investment banks held about $40 billion of debt on their balance sheets in 2023 that required clearing at a discount, leading to reduced syndication and a significant expansion in large-cap private credit opportunities.
• Large-cap private credit deals involving companies with $100 million or more in EBITDA or enterprise values of one billion dollars or more saw spreads in the 550-650 basis point range, allowing private credit firms to potentially earn 11.5% to 12.0% coupons.
• Over $800 billion of U.S. high yield bond and leveraged loan debt is maturing in 2024, 2025, and 2026, with roughly $1.4 trillion maturing globally, creating refinancing risks as the syndicated market becomes more selective.
• Commercial real estate represents the most acute risk area due to an existing maturity wall, vacancies, and rising borrowing costs, while floating-rate borrowers who took on debt in 2018-2021 face increased costs from 5-7% to 11-13%.
• An unprecedented wave of liability management exercises is expected over the next three years driven by poor debt documents, potentially leading to aggressive actions by sponsors to pit creditors against each other.
• Volatility around Treasury auctions is anticipated due to supply and demand imbalances, with foreign buyers potentially tapped out and the U.S. budget deficit creating challenges for rolling debt.
• Opportunities in loan portfolio sales and risk transfer transactions are expected to increase as banks seek to shed embedded losses from poorly underwritten debt issued prior to 2022.
• Competitive dynamics in rescue lending favor creditors because demand for capital from sponsors will outstrip constrained supply as CFOs begin seeking refinancing solutions for 2025 and 2026 maturities.
• Oaktree expects well over half of its opportunistic credit investments over the next two years to be large rescue financings requiring speed, size, and certainty of execution, leveraging its reputation and capabilities to dictate pricing and legal terms.