Distressed debt cycle is already here - Strategic Value Partners
By Chiara Elisei
LONDON, April 4 (Reuters) - A distressed debt cycle, in which the number of companies with too high a debt load or refinancing problems rises, is here and likely to stay in place for some time, the founder of Strategic Value Partners (SVP) told Reuters.
Victor Khosla, also chief investment officer of the investment firm focused on opportunistic credit and private equity, said a steep rise in interest rates had fundamentally changed the economic and financial environment.
"For the first time in 30 years, you see a cycle where the central banks are not your friend and with higher rates for longer ... the distressed cycle is not just around the corner, it's already partly here," said the founder of SVP, which manages roughly $17 billion of assets.
A common indicator of corporate distress is the discounted price at which bonds trade.
Khosla noted that about 23% of junk-rated bonds globally are trading below 80 cents on the dollar, close to the 25%-30% rate seen in previous distressed cycles such as during the 2020 COVID crisis.
Recent turmoil stemming from the U.S. and European banking sectors has tightened financing conditions and raised recession risks. And although major central banks have sounded more cautious, further rate hikes remain likely given sticky inflation.
"The mindset we have, as we approach this cycle, is it's a couple of years down and a couple of years up. No one month down and one up like COVID," Khosla said, referring to increases in distressed debt opportunities.
He added that recent market turmoil had exposed fragilities in the banking sector, accelerating the distressed debt trend.
Corporate distress levels in Britain have accelerated to their highest since June 2020, an index compiled by law firm Weil Gotshal & Manges showed last month.
Tighter credit conditions imposed by banks mean companies with heavy debt piles and falling earnings will likely struggle to refinance their debt.
In particular, firms in the industrial sector, struggling to pass on higher costs from raw materials and labour, and interest-rate sensitive businesses such as real estate will be under pressure, Khosla said.
"In some ways, we've been on a little bit of a sugar high with what the central banks did in regard to monetary policy," Khosla added, referring to the easy-cash era. "Now, there's a period of indigestion as we return more to the norm." (Reporting by Chiara Elisei Editing by Dhara Ranasinghe and Mark Potter)
