Easy money conditions lead to excessive debt balances with weakened legal protections, potentially resulting in increased defaults.
Aggressive lending practices during easy money periods compromise safety, setting the stage for financial challenges.
Deep dives
Capital Structure Risks Due to Easy Borrowing Conditions
Easy money conditions have led to the creation of upside-down capital structures with excessive debt balances and weakened legal protections. Loans made in optimistic times with low borrowing costs may result in increased defaults and losses when economic conditions shift.
Impact of Easy Money on Risky Lending Practices
In periods of easy money, there is a tendency for people to engage in aggressive lending practices, offering lower returns and compromising safety. This behavior results in higher leverage and weakened covenants, setting the stage for potential financial challenges when market conditions tighten.
Market Risks Stemming from Asset-Liability Mismatch
The episode highlights the risks associated with asset-liability mismatches, such as short-term liabilities versus long-term fixed rate assets. Instances like the Silicon Valley Bank's liquidity crisis underscore the importance of aligning assets and liabilities to avoid solvency issues.
Anticipating Distressed Opportunities in Direct Lending Market
As banks curtail lending amid market instability, direct lending presents opportunities for well-balanced credit platforms to fill the funding gap. Distressed assets and elevated defaults in broadly syndicated loans signal a evolving landscape in private credit markets.
In the first episode of Oaktree’s new podcast, Armen Panossian (Head of Performing Credit) and Howard Marks (Co-Chairman) discuss key takeaways from the 1Q2023 Performing Credit Quarterly, including the potential ramifications of the recent banking turmoil, opportunities in private credit and a possible rise in distress. As part of the discussion, they explore Howard’s memo Lessons from Silicon Valley Bank.
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