Oaktree's Distressed Gains Slip Amid Hunt for Scarce Targets

(Bloomberg) -- Oaktree Capital Group LLC posted a smaller gain from distressed assets as the firm waits for the market to sour and produce newly troubled issuers.

Gross returns for Oaktree’s distressed-debt funds were 3 percent for the third quarter ended Sept. 30, the company told investors during an earnings conference call on Thursday. That’s down from 6 percent in the second quarter and 5 percent in the same period a year ago. Gross return refers to gains before the deduction of fees, expenses and carried interest. 

As a surplus of money chases fewer deals, Oaktree continues “bargain hunting” in non-U.S. credit markets including Asia and Europe, Chief Executive Officer Jay Wintrob said on a conference call to discuss the results. “The hardest thing is finding good investment opportunities” as markets continue into the later stages of the credit cycle, Wintrob said.

Wintrob’s comments mirror those of distressed-debt rivals scrounging for places to put their money to work. One of Oaktree’s largest peers, Blackstone Group LP’s GSO Capital Partners, posted a meager 0.6 percent composite gross return from distressed strategies for the third quarter, bringing the year-to-date gain to 4 percent.

Oaktree continues to closely monitor stress levels in the credit markets, as default rates in both the high-yield and senior loan markets sit well below their historic averages, Wintrob told investors. “We don’t see the debt markets signaling a big downturn,” he said.

Aging Cycle

The increased supply of distressed debt is likely to come as the cycle ages, Wintrob said. New credit will be characterized by lower-quality issuance, as covenants deteriorate and leverage remains high in the low-interest-rate environment, he said, laying the groundwork for more defaults.

Oaktree is one of the largest distressed-debt investors in the world and has about a fifth of its assets committed to troubled issuers. Amid slim pickings in a late-cycle environment, the firm continues to focus on private deals in Europe and Asia, as well as dislocated industries in the U.S. such as retail, Wintrob said on the call.

Oaktree’s distressed-debt team is larger abroad and growing, with only around half of the Los Angeles-based firm’s capital in its Opportunities Fund Xb invested inside the U.S., according to Wintrob. Assets under management in Oaktree’s distressed funds slid to $23.2 billion from $23.3 billion in the second quarter and $25.3 billion in 2017’s third quarter, according to the company’s website.

Total assets under management rose to $123.5 billion as of Sept. 30 from $121.6 billion at the end of the second quarter and $122.6 billion as of the same period last year.

To contact the reporter on this story: Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Dawn McCarty

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