Marathon Sees Cheap Assets Amid Dislocation in Credit

(Bloomberg) -- Distressed-investment specialist Marathon Asset Management is buying beaten-up debt amid the greatest dislocation in credit markets since 2008, according to Bruce Richards, co-founder and chief investment officer of the firm.

“When we get through this, the assets will be very cheap,” Richards said in an interview with Bloomberg Television Thursday. Marathon is eyeing debt at the top of company capital structures, as well as low-rated securities trading at steep discounts. “We’re buying quality that will recover irrespective of where spreads are,” Richards said.

Marathon Sees Cheap Assets Amid Dislocation in Credit

The firm, one of the more active buyers of debt in struggling companies or those already in bankruptcy, is preparing to put more money to work in the worst rout in credit since the financial crisis. The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion as the coronavirus pandemic wreaks havoc in multiple sectors.

Distressed debt describes the borrowings of companies perceived to be under significant financial pressure, and often suggests there’s considerable risk that debt holders won’t get paid everything they’re owed.

At the top of Marathon’s shopping list are bonds trading about 70 cents on the dollar with coupons between 5% to 7%, which had been trading at full value before the recent sell-off, according to Richards.

Marathon is avoiding the energy sector, which accounts for most of the distressed debt outstanding. U.S. energy companies are reeling from less travel demand due to Covid-19 and a price war between Saudi Arabia and Russia that sent the price of oil tumbling to less than $20 a barrel last week from above $50 a month ago.

The capital-intensive industry, which financed its shale production largely through debt, suddenly faces the prospect of deeper losses.

Marathon is also avoiding the travel and leisure sector, at least until the government steps in to help stabilize companies currently in shutdown or suffering from the disruption, Richards said. If the government gets involved with financing, it can be “highly accretive to creditors,” he said.

The New York-based hedge fund has around $19 billion in assets with investments spread across corporate bonds and loans, structured credit, real estate and emerging markets. Marathon was co-founded in 1998 by Louis Hanover and Richards, and employs more than 150 professionals in New York, London and Singapore.

The fund has thrived in times of economic stress, when prices on debt of troubled companies fall to deep discounts. Investors like Marathon with an eye on troubled assets have been raising new capital, waiting for a surge in distress after years of easy lending and low interest rates made potential targets scarce.

Read More: Marathon targets $2 billion for new distressed-debt fund

Apollo Global Management Inc., one of the largest and more active investors in the credit market, is tracking more than 250 potential opportunities to scoop up distressed assets. Oaktree Capital Management LLC, led by Howard Marks, is also planning a new distressed-debt fund.

Marathon is ready to jump into credits on the brink of bankruptcy, but at a later date, Richards said. The firm’s analysts and lawyers are doing work and waiting for the opportunity “to unfold” before they decide how to act and which securities to buy. “This will be less of an equity story, and much more about a credit story,” he said. But right now, “it’s too early to see how that plays out.”

©2020 Bloomberg L.P.

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