The Roundup: Top Takeaways from Oaktree’s Quarterly Letters – September 2024 Edition

Summary

• The Federal Reserve reduced interest rates in September for the first time in over four years.
• The corporate credit market is bifurcating, with most companies able to refinance debt comfortably while a meaningful percentage may struggle.
• Outstanding leveraged loan, high yield bond, BBB-rated bond, and private credit debt has roughly quadrupled since 2007 to over $13 trillion.
• Issuance of covenant-lite loans has exceeded $1.5 trillion since 2020, facilitating a record volume of liability management exercises (LMEs).
• LMEs allow borrowers to restructure debt outside of court to avoid Chapter 11 bankruptcy, often to the detriment of existing lenders.
• Nearly 35% of defaults and LMEs in 2024 involved companies that had previously defaulted or executed an LME.
• Mezzanine financing volumes dropped during the ultra-low interest rate era following the Global Financial Crisis but are now crucial for middle-market to large cap private equity-owned companies.
• Leverage in leveraged buyouts averaged 6x EBITDA between 2019-22, causing interest coverage ratios to decline as interest costs nearly doubled.
• Roughly $1.9 trillion of below-investment grade debt is set to mature between 2024 and 2028, driving demand for junior capital solutions.
• The U.S. median age has risen from 30 to 39 over the past four decades, with the population aged 65 and over projected to increase by nearly 50% by 2050.
• Annual U.S. healthcare expenditures are expected to hit nearly $7.8 trillion by 2032 due to the aging population.
• Average occupancy rates at medical outpatient buildings (MOBs) currently sit at 93%, while new construction remains well below pre-pandemic levels.
• Japan introduced a stock exchange reform program in early 2023 to enhance corporate valuations, with adopting businesses outperforming the MSCI Japan Index.
• Korea introduced a "Value Up" program to improve capital management, with banks, autos, and insurance sectors outperforming the MSCI Korea Index by over 15% in 2024.
• Several large Chinese companies, including state-owned enterprises, have proactively improved shareholder returns in 2024, such as the Industrial & Commercial Bank of China paying its first interim dividend.