As a result of COVID-19 and related events, we are seeing a clear unfolding of opportunity across the global credit markets. In March, the volume of distressed loans reached an all-time high, eclipsing levels reached during the global financial crisis, with more than 50% of outstanding loans priced at distressed levels.1
Since then, large-cap liquid credit (such as BB loans) has rebounded substantially, while the more infrequently traded, inefficiently priced small-cap/middle market loan universe has yet to recover. We do not believe the full extent of the pandemic has been priced into the credit markets, particularly in small-cap/middle market credit, where we expect weak earnings in the second and third quarters to cause further fundamental pricing pressure. Additionally, we expect earnings misses to trigger ratings downgrades, which can create technical selling pressure for many of the structured vehicles that own the majority of the loan market. Put simply, we believe we have only seen the “tip of the iceberg” with respect to distressed opportunities.
Learn more about finding opportunities in small-cap/middle market distressed credit.
Source: S&P LCD, March 2008 to March 2020
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