The Roundup: Top Takeaways From Oaktree's Quarterly Letters - 3Q2022

Summary

• Rising interest rates and weakening global economic conditions caused the distressed liquid credit universe to expand meaningfully in 2022 for the first time since the early pandemic months.
• The combined amount of U.S. high yield bonds and leveraged loans trading at distressed levels reached a two-year high of $140 billion in June before climbing back to $125 billion at the end of August.
• Global outstanding corporate debt including high yield bonds, BBB-rated bonds, leveraged loans, and middle-market direct loans has risen to $12.2 trillion, more than four times the December 2007 level.
• Banks hold roughly $70 billion in "hung bridges" in the U.S. at the end of August, representing bonds and loans related to recent mergers & acquisitions that have been unable to sell in the syndicated market.
• U.S. loans returned -1.2% in the first eight months of 2022 while U.S. high yield bond prices fell by 11.0%, with European loans returning -2.7% compared to a -12.7% drop in European high yield bonds.
• Gross issuance of new loans in 2022 declined by approximately 68% compared to the first eight months of 2021, while demand for floating-rate assets remained high due to rising Treasury yields.
• Emerging markets corporate high yield bonds are on track for their worst performance since 2008, with yield spreads currently at 600 basis points compared to over 1,400 basis points during the 1994 and 1998 dislocations.
• Multifamily real estate remains resilient during economic downturns due to short average lease terms, low annual capital requirements, and access to debt financing from Freddie Mac and Fannie Mae.
• Industrial real estate has benefited from the rise in e-commerce and limited supply of industrial-zoned land in prime locations, with properties featuring short lease terms able to increase rents to keep pace with inflation.
• Middle-market loan prices began adjusting in mid-June 2022, with coupons for senior middle-market loans increasing by approximately 50–100 basis points due to rising interest rates, slowing economic growth, and tightened credit standards from large banks.
• Transportation infrastructure assets such as railways, ports, highways, and transit systems are better protected against inflation because contracts typically allow operating costs like fuel and labor to be passed through to end customers.
• Leveraged debt markets are as weak as they have been since early 2020, indicating a potential distressed cycle is on the horizon even if a full-fledged cycle has not yet begun.