Distressed-Debt Giant Oaktree Capital Sees Promising Opportunities in Credit

Distressed-debt powerhouse Oaktree Capital is eying significant prospects in the credit market over the next few years as a massive wave of debt comes due.

Armen Panossian, the incoming co-chief executive and head of performing credit, along with Bob O'Leary, portfolio manager for global opportunities, envision a lucrative $13 trillion market that is ripe for the taking.

The market encompasses high-yield bonds, BBB-rated bonds, leveraged loans, and private credit, which have all expanded significantly since the 2007-2008 global financial crisis, ballooning from their initial $3 trillion size.

In a client note on Wednesday, the co-CEOs highlighted commercial real estate as the most acute area of risk at present. They stated that the maturity wall is already upon us and will persist for several years.

According to the Mortgage Bankers Association, more than $1 trillion of commercial real estate loans are scheduled to mature in 2024 and 2025.

Although the benchmark 10-year Treasury yield (BX:TMUBMUSD10Y) retreated to around 4.1% on Wednesday from its peak of 5% in October, providing some relief, many borrowers are likely to face challenges with refinancing.

Related: Commercial Real Estate Identified as the Top Threat to the Financial System in 2024, Say U.S. Regulators

Distinctive Capital Needs in the Office Property Market

The Oaktree team acknowledges the pressing need for capital in the office property sector, particularly in properties with high vacancy rates and stagnant rental growth. Over the last three years, borrowing rates have significantly increased, placing further strain on the availability of capital. In fact, for certain types of office properties, securing capital has become increasingly challenging.

Adopting Strategies from the Financial Crisis

Given this challenging backdrop, Oaktree plans to revisit its playbook from the financial crisis. The firm intends to acquire portfolios of commercial real-estate loans from banks, a strategy that proved successful during the previous crisis. In addition, Oaktree aims to engage in "credit-risk transfer" deals that assist lenders in reducing their exposure, offering another avenue to navigate the capital constraints.

Attractive Opportunities in Private Credit and High-Yield Loans

Oaktree also identifies potential opportunities in private credit, as well as in the high-yield and leveraged loan markets. Despite the possibility of an increase in defaults, Oaktree estimates that a significant portion of the approximately 1,500 companies that have issued such debt will weather the storm. Consequently, Oaktree recognizes the potential value in these sectors.

Monitoring the Treasury Market

The vast Treasury market, estimated at around $26 trillion, is another area of interest for Oaktree. However, there are concerns regarding the trajectory of the 10-year Treasury yield. The U.S. budget deficit, coupled with a substantial supply of Treasuries presented to investors, raises uncertainties. Moreover, Oaktree notes how foreign buyers, who were historically dominant in this market, may have reached their limit.

Related: Factors Influencing the Rise of the 10-Year Treasury Yield

Stock Market Reacts to Strong Retail Sales Data

On Wednesday, U.S. stocks experienced a decline in response to robust retail sales data for December. Despite this, it is worth highlighting the strength of the U.S. economy, which has remained resilient. It is notable that the Federal Reserve has maintained its policy rate at a 22-year high since July, further emphasizing the strength of the economy.