(Bloomberg) - Debt markets are facing a “reckoning” after years of complacency, according to Victor Khosla, the founder of credit investor Strategic Value Partners LLC.
Uncertainty surrounding the US’s relationship with the rest of the world, and the “remaking” of the economy won’t disappear after April 2, when US tariffs are set to go into effect, he said in an interview with Bloomberg Television on Monday.
Higher interest rates are working their way through to companies, which face significantly increased borrowing costs when their debts start to come due. Meanwhile, President Donald Trump’s escalating trade wars have raised concern over the health of the global economy. That’s all proving fertile ground for opportunistic investors.
Consumer sentiment and industrial growth are starting to drop and as a result Khosla’s firm will lean further into consumer, industry and manufacturing investments, the money-manager said. It’s also time to start ramping up its property exposure, he added. While there’s potential in Germany, the UK and Ireland have so far offered more compelling opportunities.
“There’s a moment in time when real estate gets interesting,” Khosla said. “It’s here.”
There have been more defaults than expected given the economy’s not in a recession, Khosla added. And while there haven’t been any “headline-grabbing” bankruptcies like Lehman Brothers, “what is happening underneath the surface is just frantic activity.”
Earlier this month, high-yield corporate credit spreads in US jumped to levels last seen in August — though still remain near historic lows. Gauges of credit risk are rising and it’s become harder for private capital firms to sell off their holdings.
Five Charts That Show Complacency Is Fracturing: Credit Weekly
Credit complacency isn’t over yet because spreads are still “incredibly” tight, Khosla said. But money managers can earn 8% from junk bonds — returns that would look good to equity investors today, he added.
“There is a reckoning and it’s here,” he said.
By Neil Callanan and Constantine Courcoulas
With assistance from Francine Lacqua
