There are always going to be successes and failures as a result of the pandemic, and major funds players are watching the market closely.

Much has been made of the business opportunities that might arise as a result of the impact of the COVID-19 pandemic around the globe. In times of crisis there will always be corporate successes and failures, and many expert commentators are considering distressed debt as an area of interest.

Indeed, distressed debt was a point of focus in a recent webinar hosted by Ocorian, with Todd Buchholz, renowned economist and former White House Director of Economic Policy, highlighting how hedge funds are looking at it as an opportunity.

For Buchholz, a key question is which companies will come out of the pandemic in one piece. He noted how the retail space has been hit particularly hard, pointing to how 40% of US retailers in shopping malls didn't pay rent in May. He also drew attention to numerous high-profile bankruptcies, such as J. Crew and Neiman Marcus.

"It's a fascinating time for distressed debt. I do believe there will be survivors. I do believe that the Fed is backstopping interest rates," he says. "We've seen high-yield outperform most recently and, if you believe the economy is going to survive and there is going to be a reopening, then I think the opportunities there are rather vast and promising."

Buchholz believes that demand for expertise in this area from the likes of Blackrock, Citadel, Blackstone and others is a clear indication of the potential that lies in distressed debt.

James Maitland, Ocorian's Regional Head of Americas and Global Capital Markets Service Line Leader, is very much in agreement about the opportunities and points out that there is a lot happening on the ground. "Funds, especially the distressed players, are eager to get going. We are seeing more and more shifting into that space. I think they see opportunities that are almost too good to miss."

Among the sectors that Maitland identifies as being particularly busy with the acquisition of distressed assets are airspace, shipping and related sectors. "There is clearly a lot more activity and workout going on in the form of restructuring, refinancing and non-performing assets, whether that be loans or other considerations."

For example, he thinks there is a lot more to come in commercial real estate with the full picture of non-payment of rent still emerging. "It's how you reconcile that with government stimulus and where the fundamentals end up, in terms of whether these players ultimately come back online or go to a full-scale bankruptcy."

Bond issuance buoyant

On a broader basis, Maitland points out that there has been a "remarkable" level of new bond issuance and that markets are buoyant. 

"The public sector is booming, whether you are looking at sovereign, federal or municipal debt or SSAs with a focus on social bonds," he says. "In the private sector, high-yield, even investment grade, is starting to kick in." 

In the structured space Maitland is witnessing "a progressive re-engagement and traction both across ABS and also CLOs and structured credit, which has a correlation with what we are seeing in the fund space as well. A number of the main players are pricing new transactions, while Western Asset Management who haven't done a CLO in about six years have just announced one" according to Creditflux.  

Huge liquidity flows from the Federal Reserve are expected to help maintain such buoyancy. Wrapping up his commentary, Todd Buchholz noted: "There wasn't a huge disagreement in the United States between Republicans and the Democrats on a trillion-dollar stimulus package. Another one will likely be passed in July. If re-opening continues at even a modest pace, that's forward momentum."

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