Credit Giants Weigh In On Distressed-Debt Market

Wall Street’s credit giants face slim pickings in their search for cheap bonds and loans to buy, but they’re still finding opportunities in European real-estate and the commodities-related sectors like oil-and-gas.

That’s according to  senior executives at credit-investing giants Oaktree Capital Group LLC and Blackstone Group LP, who shared thoughts on distressed investing on earnings calls in recent weeks. Wednesday, Apollo Global Management LLC was the latest to weigh in. Here are common themes from the calls:

1. Distress remains hard to find. With interest rates near zero and the U.S. economic climate benign, the default rate among U.S. corporate high-yield debt issuers sits at just 2% the year through June, according to Moody’s Investors Service. As such, “the supply of corporate distressed debt opportunities has been muted,” Oaktree co-chairman Bruce Karsh said Tuesday.

2. Distressed bets have burned investors lately. Meanwhile, some popular trades haven’t played out as investors had hoped. Oil company debt meant to help explorers and producers ride out a price slump has largely traded down after issuance. Popular wagers tied to litigation involving Washington Mutual Inc. and Nortel Networks Corp. have stung investors.

In “energy, metals and mining, some of the consumer retail, there has been a lot of pain in performance out there, along with names like Puerto Rico—which we’re not involved with—or liquidation trades like WaMu or Nortel,” said Jim Zelter, Apollo’s global head of credit.

Poor distressed-debt performance in Oaktree’s closed-end funds offset gains elsewhere, one Oaktree executive said. Mr. Karsh said “our distressed debt returns over the past 12 months have been below historical norms.” He added though, many of the firm’s most profitable investments have struggled out of the gate.

 3. Energy among pockets of opportunity. Around the credit landscape, “the dominant themes include distressed real estate in Europe, European credit, energy and opportunities created by the pullback of financial institutions globally,” Blackstone Chief Executive Stephen Schwarzman said earlier this month.

Oaktree’s looking to make relatively safe loans to “financially distressed companies” that are secured by valuable assets or have high priority in the order for repayment in bankruptcy, Mr. Karsh said. It also may purchase “existing energy and commodity-related securities at deep discounts.”

Apollo co-founder Joshua Harris says “we see it getting worse before it gets better” in the oil patch. “We’ve sat back and waited. We feel like the market is coming towards us.”