Macro

Beach Point Targets $17B in Distressed Credit Amid Rate Hikes

$17 Billion Beach Point Capital eyes opportunities in distressed credit, amid real estate lending shifts and global investment pivots.

By Mackenzie Crow

5/15, 00:45 EDT
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Key Takeaway

  • Beach Point Capital Management, managing $17 billion, targets distressed credit opportunities amid rising interest rates affecting risky borrowers.
  • The firm notes a bifurcation in credit markets, with half of high yield and loans trading at stressed levels, indicating volatility and opportunity.
  • Despite overall stable credit fundamentals, some sectors show strain from higher rates and inflation impacting consumer spending.

Credit Market Bifurcation

Beach Point Capital Management, managing about $17 billion, is closely monitoring the credit markets for opportunities arising from the bifurcation caused by rising interest rates impacting risky borrowers. Portfolio manager Sinjin Bowron highlighted in a Bloomberg Television interview the existence of stressed and distressed levels within high yield and loan markets, despite half of the high yield trading at spreads below 200 basis points and half of the loan market trading at prices greater than par. This scenario, according to Bowron, not only introduces credit volatility but also opens up potential opportunities as these situations develop. The firm is tactically positioning itself to capitalize on distressed debts, especially as interest rate cuts are being priced out further.

Real Estate Debt Attraction

Amidst a backdrop of banks retreating from commercial property lending, major investment firms such as PGIM, LaSalle, Nuveen, Brookfield, and others are planning to increase their credit exposure to real estate. These firms are targeting sectors like logistics, data centers, multi-family rentals, and high-end office markets, betting on an end to the sharp drops in real estate prices. Despite the global commercial property industry facing its most significant slump since the 2007-9 financial crisis, these alternative lenders are optimistic about generating attractive returns from current valuations. This shift is partly attributed to stricter capital regulations for banks and recent U.S. regional bank failures, opening the market further for non-traditional lenders.

Global Investment Shifts

Investors are also eyeing opportunities in China and the Gulf, with firms like Brookfield Asset Management and Qatar’s sovereign wealth fund bullish on China's consumer industries despite global skepticism. Brookfield's CEO, Bruce Flatt, and QIA's CEO, Mansoor Al Mahmoud, both see China's large population and expanding middle class as attractive for generating higher returns. Meanwhile, Goldman Sachs Group Inc. is planning to expand in the Gulf, predicting that Middle Eastern companies could grow their share of the MSCI Emerging Markets Index from 7% to as much as 10%. This reflects a growing interest in the Gulf's public markets and its efforts to diversify its economy.

Street Views

  • Sinjin Bowron, Beach Point Capital Management (Neutral on credit markets):

    "With half of high yield trading at spreads below 200 basis points, half of the loan market trading at prices greater than par, you still have that lower decile within both of these asset classes that is trading at stressed and distressed levels... That leads to just credit volatility, but also potential opportunity as those situations develop."