Debt default risks are on the rise — but there may be investing opportunities

Debt default risks are on the rise — but there may be investing opportunities

SINGAPORE — Debt default risks have grown since the pandemic — but there are nonetheless opportunities for traders, stated William Bohnsack, president of funding agency Oak Hill Advisors.

Some of the sectors which have the next threat of default embody retail, eating places, airways, and sure sectors inside vitality, he instructed CNBC as certainly one of the attendees of the Singapore Summit, which is being held just about this yr.

“We see that they’re struggling more so than in other parts of the economy. Yields are at very low levels, and default rates are increasing, so that creates challenges even within debt — where investors can find good opportunities,” he stated.

“This is not an easy time for any kind of fixed income investor,” Bohnsack concluded.

Still, he stated, there are opportunities in high-yield bonds — additionally known as “junk bonds.” They are company debt with low credit score rankings that provide excessive returns for traders keen to take the threat of lending to a enterprise with a poor monetary document. Junk bonds are seen as a high-risk, high-reward funding.

Oak Hill Advisors is an alternate funding agency that focuses on distressed credit score associated investments, amongst others. It has about $42 billion of belongings beneath administration in areas together with North America and Europe.

Rock and a tough place?

Investors are caught between two “potentially unappetizing” situations, Bohnsack stated.

He cited the S&P 500 index, the place shares had been buying and selling decrease at one second, then swinging to all-time highs the subsequent. On the different hand, Treasurys are at very low ranges, with world central banks pushing rates of interest decrease.

High-yielding credit score “sits in the middle,” and have the potential for engaging whole returns – offered downsides are protected, he stated.

Streets are empty and companies have been shuttered in Jersey City on April 27, 2020 in Jersey City, New Jersey.

Arturo Holmes | Getty Images

The default outlook for Asia’s high-yield bonds is extra favorable than different areas, in keeping with Goldman Sachs Asset Management. In an August report, the funding financial institution forecast that the default price for Asia’s high-yield bonds may be at 4%, in comparison with 8% in the U.S.

Annual 10-year returns for Asia high-yield bonds are at 6.6%, versus U.S. high-yield debt at 5.8%, in keeping with the report.

The iShares High Yield Corporate Bond Index, a preferred exchange-traded fund (ETF) that measures investor curiosity in the junk bond market, plunged in March. But it has quickly shot up since then to commerce round 26.5% increased since these lows.

“Credit in this environment is seeing a lot of interest from investors … we see opportunity today,” Bohnsack stated.

Distressed debt

In specific, there have been opportunities in distressed debt.

Earlier this yr, he stated, there had been opportunities “to buy good companies at distressed prices.”

“Certainly through the March and April time period, we saw pronounced selloff in the secondary market of good companies … with just a bit too much debt,” he stated. “We saw significant selloff in high-yield and leveraged loans.” He stated his firm stepped ahead to speculate about $2 billion to $three billion {dollars} throughout that interval.

That market has now traded again up in the previous couple of months, he stated.

Bohnsack added: “We’re seeing, I’ll say, an even bigger trend … of larger companies, particularly in the United States, companies in the billions (of) dollar of enterprise value, market leading companies … coming to our market for financing because they may not want to use the syndicated markets, they may not find that the banks are there for them.”

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