Betting on a recession, US distressed debt funds seek new capital

NEW YORK, July 27 (Reuters) – Several struggling U.S. asset managers are in fundraising talks with investors to bolster their firepower, anticipating a recession will create more opportunities to recover and profit from the debt of companies in difficulty, according to several sources.

Investment firms such as Oaktree Capital Management, GoldenTree Asset Management, Monarch Alternative Capital and Avenue Capital Group, have in recent weeks begun marketing their plans to institutional investors such as pension funds and endowments, according to eight investors familiar with the subject.

“There are a lot of people who are anticipating that we are heading into a recession and think we should be opportunistic and deal with this and try to raise capital now so that we have it in place if and when things really go. , really bad.” said one.

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Distressed debt investors buy the debt of distressed companies at discounted prices, expecting to profit if the company recovers or, if it files for bankruptcy protection, that they can take the company control.

The fundraising efforts of the funds had not previously been reported. Some investors, however, doubt that there are enough suitable targets. They doubt a recession will significantly increase corporate defaults to an all-time high, especially after large companies fared much better than expected during the COVID-19 pandemic-related shutdowns.

Currently, around $78 billion committed to distressed investments globally is unallocated, according to data provider Preqin.

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Distressed funds returned 15.6% last year, compared to 10.2% for the broader hedge fund market, and in 2020 were in line with the sector, with gains of 11 .8%, according to HFR data.

To attract investors, some asset managers are offering “call for capital” structures in which investors put their money back and only start paying management fees when a target is identified, two of the sources said, all of whom wished to remain anonymous as the discussions are private. .

“Distressed funds seek assets in everything from debt to crypto and real estate,” said Paul Foley, partner and president of the investment management practice at law firm Akerman.

Monarch, Avenue and GoldenTree, which specialize in distressed debt and manage about $9.6 billion, $11.6 billion and $47 billion, respectively, declined to comment.

Oaktree, which manages $164 billion in assets, also declined to comment. His latest fundraising efforts come less than a year after raising a $16 billion opportunistic loan fund.

RISK OF DEFAULT

Default rates on US junk bonds are at historic lows of around 1%, but in the event of a recession next year, that percentage could climb to 5% by the end of 2023 and peak at 10 .3% in 2024, according to Deutsche Bank analysts. . S&P Global Ratings’ US “distress ratio” – a measure of risk in the bond market that tends to anticipate movements in US default rates – rose from 4.3% in June to 9.2% in July, its highest level since October 2020.

“Corporate default rates have historically been lagging indicators, they almost always exceed 6% in a recession, but that usually happens long after the recession has started,” said Tom Joyce, financial markets strategist at MUFG. At New York.

With mixed economic data, economists are split on whether the United States is on the brink of recession, although the uncertain outlook is leading to tighter funding conditions.

High-yield bond issuance in the first half of this year was down 75% and investment-grade bond issuance by more than 13%, according to Dealogic.

With corporate borrowing costs rising, BlackRock has raised money for a fund that would provide financing to borrowers who cannot access traditional debt markets, two sources said. BlackRock Inc (BLK.N), the world’s largest asset manager, declined to comment.

“A lot of people are looking to raise distressed capital,” one of the sources said. The conversations continued over the past quarter amid growing recession fears, but “have picked up speed a lot over the past couple of months,” the source said.

SKEPTICISM

Still, some investors remain skeptical. They point out that while credit spreads, the premium investors demand for holding corporate debt rather than less risky government bonds, have widened, they are a far cry from previous downturns. Read more

Fundraising activity for distressed debt has been sluggish this year, with just two funds raising $1.3 billion through July, compared to $40 billion for all of last year and 45 billion for 2020, according to Preqin.

“While some debt levels may increase, corporate balance sheets are very strong, as well as bank capital ratios,” said the chief investment officer of an asset investment firm.

The founder of a fund-of-funds company said he would only invest money in troubled funds when delinquency rates start to rise.

“The default cycles tend to be 18 to 36 months, so I’m not too worried about missing the first six months of that cycle,” he said.

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Reporting by Carolina Mandl and Davide Barbuscia in New York Editing by Michelle Price and Matthew Lewis

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