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Debt default risks are on the rise — but there may be investing opportunities

SINGAPORE — Debt default risks have grown since the pandemic — but there are still opportunities for investors, said William Bohnsack, president of investment firm Oak Hill Advisors.

Some of the sectors that have a higher risk of default include retail, restaurants, airlines, and certain sectors within energy, he told CNBC as one of the attendees of the Singapore Summit, which is being held virtually this year.

“We see that they’re struggling more so than in other parts of the economy. Yields are at very low levels, and default rates are increasing, so that creates challenges even within debt — where investors can find good opportunities,” he said.

“This is not an easy time for any kind of fixed income investor,” Bohnsack concluded.

Still, he said, there are opportunities in high-yield bonds — also referred to as “junk bonds.” They are corporate debt with low credit ratings that offer high returns for investors willing to take the risk of lending to a business with a poor financial record. Junk bonds are seen as a high-risk, high-reward investment.

Oak Hill Advisors is an alternative investment firm that focuses on distressed credit related investments, among others. It has about $42 billion of assets under management in regions including North America and Europe.

Rock and a hard place?

Investors are caught between two “potentially unappetizing” scenarios, Bohnsack said.

He cited the S&P 500 index, where stocks were trading lower at one moment, then swinging to all-time highs the next. On the other hand, Treasurys are at very low levels, with global central banks pushing interest rates lower.

High-yielding credit “sits in the middle,” and have the potential for attractive total returns – provided downsides are protected, he said.

Streets are empty and businesses have been shuttered in Jersey City on April 27, 2020 in Jersey City, New Jersey.

Arturo Holmes | Getty Images

The default outlook for Asia’s high-yield bonds is more favorable than other regions, according to Goldman Sachs Asset Management. In an August report, the investment bank forecast that the default rate for Asia’s high-yield bonds could be at 4%, compared to 8% in the U.S.

Annual 10-year returns for Asia high-yield bonds are at 6.6%, versus U.S. high-yield debt at 5.8%, according to the report.

The iShares High Yield Corporate Bond Index, a popular exchange-traded fund (ETF) that measures investor interest in the junk bond market, plunged in March. But it has rapidly shot up since then to trade around 26.5% higher since those lows.

“Credit in this environment is seeing a lot of interest from investors … we see opportunity today,” Bohnsack said.

Distressed debt

In particular, there have been opportunities in distressed debt.

Earlier this year, he said, there were opportunities “to buy good companies at distressed prices.”

“Certainly through the March and April time period, we saw pronounced selloff in the secondary market of good companies … with just a bit too much debt,” he said. “We saw significant selloff in high-yield and leveraged loans.” He said his company stepped forward to invest about $2 billion to $3 billion dollars during that period.

That market has now traded back up in the past couple of months, he said.

Bohnsack added: “We’re seeing, I’ll say, an even bigger trend … of larger companies, particularly in the United States, companies in the billions (of) dollar of enterprise value, market leading companies … coming to our market for financing because they may not want to use the syndicated markets, they may not find that the banks are there for them.”

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