Oaktree: We’re Finding Value in Leveraged Loans

HONG KONG (Reuters) – Oaktree Capital Management has bought loans used by private equity firms to finance past deals and expects to invest in “a lot” more as aftershocks from the global financial crisis weigh on the industry for a long time.

Opportunities in the sector are likely to be plentiful because of the huge number of private equity firms that overpaid and borrowed too heavily for deals and are now being hammered by the slowing economy, said Oaktree Chairman Howard Marks.

“The greatest opportunities arise in the areas where there are the great excesses,” Marks said on the sidelines of the Asian Venture Capital Journal conference in Hong Kong on Friday.

“We’re in the distressed debt business. If everybody did everything wisely … then we wouldn’t have any opportunities.”

Los Angeles-based Oaktree, which had over $55 billion in assets under management as of September 30, has long specialised in investing in distressed securities as well as high-yield and convertible debt markets, private equity and real estate.

Marks, who co-founded Oaktree in 1995, said the firm had done particularly well early in the decade investing in debt of firms such as Nortel Networks Corp (NT.TO: Quote, Profile, Research, Stock Buzz) and Corning Inc (GLW.N: Quote, Profile, Research, Stock Buzz) in which yields moved from double to single digits as the economy improved.

The former high-yield bond fund manager, noted yields on weaker issuers had climbed again, but warned this did not signify the distressed debt market has hit bottom.

“We’re not quite there yet. We don’t claim to be at the bottom. But we do claim to be getting very strong value. The one event which certainly lies ahead is an increase in the rate of default among outstanding bonds,” he said.

GOOD COMPANIES, BAD BALANCE SHEETS

Marks said his investment firm was most interested in purchasing buyout loans tied to well-run businesses, rather than faltering firms requiring extensive restructuring. He said most of the investments would happening in North America or Europe.

“Our mantra is good company, bad balance sheet, so our opportunities come from the application of excessive leverage to good companies,” he said.

Marks added that Asia was not as fertile a market for these types of loans, though the firm is interested in the region. Last month it agreed to invest $3 billion in South Korea through a partnership with a state-run pension group.

“The private equity ‘miracle’ did not arrive in full force in Asia and there weren’t many companies that were bought out at high prices with high leverage. So right now we’re not expecting to have a heavy level of opportunity in Asian distressed debt.”

Marks said going forward, the private equity industry would more closely resemble what it was in the 1970s, with smaller deals, greater emphasis on buying cheaply and creating value by improving operations, and smaller contributions from leverage and financial engineering.

Less leverage and longer holding periods would mean “undoubtedly lower internal rates of return (IRR). If you hold something, it takes longer to realise and you do it with less leverage, clearly you’re going to have lower IRR.”

At the same time, he said with fewer buyers willing to step forward for companies, private equity firms will be able to drive better deals. He was also encouraged by the widespread pessimism among investors globally.

“The fact that nobody can think of a reason to invest is the best reason to invest,” he said.

By Jeffrey Hodgson
(Reporting by Jeffrey Hodgson; Editing By Keiron Henderson)