Key Points:
- Distressed debt investing opportunities can arise in various sectors during different economic cycles.
- The current environment, with higher interest rates, has created a growing opportunity set for credit market investors.
- Sectors such as utilities, REITs, healthcare, and telecommunications may offer attractive distressed debt investment options.
- Investors should focus on risk/reward ratios and prioritize capital preservation in distressed debt investing.
- Exploring smaller and middle-end companies in the distressed debt market can lead to better risk/reward outcomes.
Each cycle in distressed debt investing is unique. In the past, companies faced liquidity crises during the global financial crisis and the bursting of the tech bubble. In the current cycle, with higher interest rates, many companies are struggling to refinance their debt, creating opportunities for distressed debt investors.
Central banks’ actions during periods of high volatility have increased the dislocation in bond prices, particularly for stressed companies. This has created a favorable opportunity set for credit market investors.
In distressed debt investing, it is important to remain sector agnostic and take advantage of opportunities in various industries. While traditionally defensive sectors like utilities and REITs are often funded by debt issuance, other sectors like healthcare and telecommunications may also offer attractive distressed debt investment options.
During recessionary periods, industries like healthcare and telecommunications tend to remain resilient due to the nature of their products and services. However, rising labor costs may impact margins in these sectors.
Exploring smaller and middle-end companies in the distressed debt market could provide a better risk/reward scenario and opportunities with less competition. Larger distressed credit funds typically cannot invest in companies of this size, giving smaller and more nimble investors an advantage.
Distressed debt investors should prioritize capital preservation and focus on risk/reward ratios when considering investments. Even in a worst-case scenario, those holding higher tiers in the capital structure may still realize value.
