Armen Panossian on Credit in a Time of Rising Rates
Sep 22, 2023
auto_awesome
Armen Panossian, head of performing credit at Oaktree Capital Management, discusses distressed debt investing, private credit markets for reasonable borrowers, changes in credit markets, interest rates and credit spreads, Oaktree's stability, AI in business, the Fed's transparency, and career advice for college graduates interested in finance in this entertaining podcast.
The dislocation in credit markets due to rising rates and excessive debt creates challenges for older transactions but presents opportunities for lending to large companies being bought out by private equity firms.
The market environment for private credit has shifted drastically, with demand for AAA-rated CLOs plummeting after quantitative tightening, leading to opportunities for direct lenders and widened pricing for first-lien debt.
The combination of high rates, defaults, and limited access to capital may lead to a recession, but Oaktree Capital Management, as a countercyclical manager, is well-positioned to benefit from market conditions and has a balanced and well-managed private credit book.
Deep dives
Key Point 1: The credit markets are experiencing dislocation due to rapid rate increases and cracks in the economy.
The sudden increase in rates and inflation, along with the risks arising from borrowers that took on excessive debt during easier times, has led to dislocation in the credit markets. Older vintage transactions with high levels of debt and floating rate liabilities are facing challenges, while opportunities are arising for lending to large companies being bought out by private equity firms. First-lien debt is being offered at higher yields, presenting attractive investment opportunities.
Key Point 2: The private credit market is seeing a sea change due to changes in CLO demand and increased direct lending.
The market environment for private credit has shifted drastically. The demand for AAA-rated collateralized loan obligations (CLOs) skyrocketed in 2021 due to reserve infusion by the Fed, but abruptly halted when quantitative tightening took place in 2022. As a result, direct lenders stepped in and provided capital to borrowers seeking certainty of execution. The pricing for first-lien debt has widened, and opportunities have emerged for private credit, such as lending to large businesses being acquired by private equity firms.
Key Point 3: Higher rates and potential recession pose risks to private credit, with increased defaults and tightening availability of capital.
The combination of high rates and other factors such as elevated defaults and tightening availability of capital may lead to a recession in the near future. Regardless of a recession, there will likely be an increase in defaults and limited access to capital, which would impact the private credit market. As a countercyclical manager, Oaktree Capital Management may benefit from these market conditions and has a balanced and well-managed private credit book.
Private Credit vs Equities: Favoring Credit in the Next Few Years
The podcast discusses how the relative value perspective and risk-adjusted returns of private credit make it an attractive investment option for investors. With a sudden increase in interest rates, the Fed has favored creditors over equity. Private credit lenders have taken advantage of the reduced competition from banks and increased spreads, making it a favorable pricing opportunity. The spread for private credit has widened in the last 18 months, indicating a technical imbalance between the demand and supply of private credit, rather than an increased risk of default. These factors suggest that private credit may outperform equities in the coming years.
The Role of Co-CEOs at Oaktree Capital Management
The podcast explores the leadership transition at Oaktree Capital Management, where the firm's founders, Howard Marks and Bruce Karsh, have appointed co-CEOs to oversee the strategic direction of the firm. While Todd Moltz manages the institutional non-investment side of the business, Armin Pinocean and Bob O'Leary lead the opportunistic and performing credit businesses, respectively. As co-CEOs, they continue to be actively involved in running funds and overseeing the investment process, ensuring close proximity to clients, and providing on-the-ground market insights. Oaktree's stability, cultural values, and mentorship from individuals like Bruce Karsh have been fundamental in shaping Armin Pinocean's career and maintaining his long-term commitment to the firm.
Bloomberg Radio host Barry Ritholtz speaks with Armen Panossian, managing director and head of performing credit at Oaktree Capital Management LP, which has $179 billion in assets under management. He oversees the firm’s liquid and private credit strategies, and also serves as a portfolio manager within Oaktree’s global private debt and global credit strategies. He previously worked for Pequot Capital Management, where he worked on distressed debt strategy. Panossian holds an MS degree in health services research from Stanford Medical School; a JD degree from Harvard Law School; and an MBA from Harvard Business School. He serves on the advisory board of the Stanford Institute for Economic Policy Research and is a member of the state bar of California.
