Default rates are poised to bounce back from historic lows and rise during the next 18 months, according to panelists. Some of them advised audience members in Sin City to take their chips off the table before what they see as an inevitable spike.
Ronald Beck, managing director at Oaktree Capital Management in Los Angeles, said oil prices, the Chinese banking crisis and continued rate rises indicate "some sort of crisis will happen; there will be a shock to the system." He added volatility in distressed assets has increased because there are more investors playing in the arena.
University of North Carolina Management Company, which has 85% of its $1.2 billion endowment invested in alternative investments, is lightening up in distressed investments and taking profits in anticipation of the next cycle, said Michael Hennessy, senior investment director. "Over the long term, investors don't have to get it precise, they just have to be there early," he commented. Mitchell Harwood, managing director at Evercore Partners, a private equity investor in New York, pointed to the recent surge in triple-C issuance as indicative of problems ahead.
Robert Hockett, principal at DDJ Capital Management in Wellesley, Mass., added the years of 2005 to 2007 have been set up for increasing default rates given the low quality of recent deals with triple-C issuance comprising 25% of the market. He noted around 20% of junk credits default within two to four years. "A lot of companies have refinanced their way out of their problems through banks, but they never solved their problems," he explained. Harwood also highlighted the growing number of fallen angels and large amount of issuance in Europe as factors "waiting to hit the fan."