Conditions Appear Favorable for Distressed Credit Investing
Although the U.S. economy is in relatively good shape, we think there are headwinds in the outlook. Since central banks started hiking rates, the cost of capital for companies has risen sharply. This is happening at a time when inflation is still putting pressure on margins. have hindered companies’ abilities to access capital as traditional lenders pulled back on lending, and high yield issuance hasn’t recovered from highs seen a few years ago. Low interest rate pandemic era bonds and loans are maturing and companies are being forced to refinance at much higher rates or face the prospect of default. As a result, we expect investments in distressed credit to grow, and potentially show strong returns, as a result. Let’s take a closer look.
Distressed credit is the debt of companies that are experiencing stress, on the brink of default, or are already entangled in it. Volatility and uncertainty are key attributes of these markets, which often leads to a mispricing of assets. For an investor well-versed in managing the risks inherent in distressed debt, these mispriced assets can translate to higher returns relative to traditional performing credit. A meticulous and strategic approach can unearth the potential for high returns.
Stress has become particularly evident in Europe as rising interest rates, spurred by inflation and central banks, have taken their toll on the economy and availability of financing. Like in the U.S., high yield debt issuance has plummeted in Europe. As a result, some European companies are facing a coming due with no traditional ability to refinance. Distressed credit investors can move quickly to provide solutions to refinance or restructure debt in a way that is beneficial for the company, while investors could receive higher rates and more favorable structures.
In our 10-year Capital Market Assumptions outlook, we expect developed market equities to return 6.3% annually and global high yield to return 7.2% annually. Distressed debt funds have achieved significantly higher returns historically, and the returns have become particularly attractive at a time of stress when public market returns are depressed. As we haven’t seen conditions like this for distressed credit in more than a decade, it is hard to predict how the market will unfold. We think skilled credit managers with a thoughtful and disciplined approach to portfolio construction will likely have the most success.
Monetary tightening reduces the money supply in the economy, which may slow down the economy and reduce inflation.
Potentially Higher Return for Distressed Debt
As we haven’t seen conditions like this for distressed credit in more than a decade, it is hard to predict how the market will unfold. We think skilled credit managers with a thoughtful and disciplined approach to portfolio construction will likely have the most success.
Interested in learning more about our expertise and how we can help?
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTI or its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTI or its affiliates’ efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTI or its affiliates. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult an NTI representative.
Forward-looking statements and assumptions are NTI or its affiliates’ current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of NTI or its affiliates.
This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing, and other services rendered to various proprietary and third-party investment products and firms that may be the subject of or become associated with the services described herein.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Not FDIC insured | May lose value | No bank guarantee