(Bloomberg) -- A dramatic increase in defaults during the next year due to the coronavirus will create a big opportunity for distressed debt investors, according to the world’s biggest publicly listed hedge fund firm.
Money managers at Man Group Plc are intrigued by what they say could be the largest global distressed credit cycle in a generation. It all happened in just a month as the public health crisis rippled through economies all over the world, prompting a sell-off in sovereign and corporate bonds. That means even some stronger countries and companies could get caught up in the process, according to Patrick Kenney and Santiago Pardo, money managers at the firm’s GLG unit.
“Default rates could be set to spike on a very large and potentially vulnerable global debt stack,” they wrote in a report on Wednesday. That “may create an enormous opportunity set for distressed debt funds, particularly those focused on opportunities outside the U.S.”
The investors are striking a more upbeat tone after another Man GLG fund got rewarded for its bearish bets on riskier assets. The firm’s emerging markets debt total return fund, managed by Guillermo Osses, has returned 9.6% this year, beating more than 200 peers with at least $1 billion, according to data compiled by Bloomberg. The fund ranks in the 97th percentile over the past three years.
While uncertainty and fear now pervade markets, Man GLG points to some encouraging signs. For one, data from nations with higher testing of Covid-19 suggest mortality rates are fairly small once propagation rates are controlled. Plus, the prospect of vaccines, treatments, herd immunity and adaptation mean global business should return to normal over time, Kenney and Pardo wrote.
A $349 Billion Bucket of Distressed Debt Is Biggest in Trump Era
In emerging markets, the pile of high-yield corporate and sovereign Eurobonds has surpassed $1.4 trillion, more than triple its total in 2009. For much of that period, default rates remained historically low and only a small group of weaker companies and countries got the distressed label.
That changed almost overnight, and there are now even fewer investors dedicated to distressed debt. Kenney and Pardo said they expect a flurry of new funds that will seek to capitalize on this mismatch.
“The opportunity set for international distressed credit could yield particularly attractive investments due to higher-quality borrowers needing to restructure,” they wrote.
(Adds in fourth paragraph full name of Man GLG fund managed by Osses)
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