Things are looking ugly in some corners of the debt market, and that is wonderful news for some investors.
Steve Schwarzman, CEO of mega-investor Blackstone, said that the distressed debt segment of the market – debt from companies nearing or in bankruptcy – is looking more and more attractive.
“On the flip side, a new distress cycle is clearly underway in the energy credit area and other needs for credit which create significant opportunities for our business,” said Schwarzman in the company’s quarterly earnings call Thursday.
This makes sense, as default rates for high yield debt are creeping up overall and skyrocketing for the energy sector. In turn, this is opening up opportunities for Blackstone’s debt arm GSO, according to Schwarzman.
“I believe GSO is going into a period that’s extremely positive for them where they will be able to expand their business, given the lack of liquidity, and changed governmental regulations that are going to affect that part of the market, creates a unique opportunity for GSO,” continued Schwarzman.
Essentially, as the companies find themselves in distress or with reduced access to finance, GSO can step in. With the default rate jumping and lending conditions deteriorating, GSO’s dealmaking will most likely rise.
Michael Chae, CFO of Blackstone, agreed with Schwarzman’s assessment. He was asked why Blackstone hadn’t put more money to work in the first quarter, given the turbulent market conditions. Chae explained that that while the number of deals GSO was able to get through in the first quarter was muted, there would soon be more on the way.
- Thomson Reuters
Here’s Chae’s overview (emphasis added):
I think, look, in the first six weeks of the quarter, it’s obviously historic sort of meltdown in the markets. And as a result, the number of deals in the market went away. And so, that portion of GSO’s business which is in part to support acquisition finance, the major part of it, the volumes obviously were lower. So, that is probably the simplest answer. And with the sort of revival of the markets in the past few weeks, deals are coming back.
And GSO had an investor conference yesterday, and we’re talking about how their pipeline has never been stronger actually. They’re really, really excited, chomping at the bit around the market opportunity Steve and I talked about. And the pipeline and the backlogs are picking up, and the pricing in terms available to them are quite attractive. So, I think you will surely see – almost surely see if this market stays put more or less, or the deal volumes picking up at GSO.
To quickly break that down, one of GSO’s main functions is to finance purchases of companies. Due to the serious downturn in markets during the first quarter, it was harder for buyers to finance these deals and thus fewer were completed.
Now, the markets are coming back just enough to help buyers finance their deals, creating opportunity for GSO and Blackstone.
This sort of performance is far removed from the rest of Wall Street, which is struggling across the board. Distressed debt, however, is making a killing for many hedge funds and clearly this is happening at places such as Blackstone as well.
So while companies, especially energy companies, are flailing in the current environment, Blackstone’s GSO is ready to step right in.