SVP’s Khosla Sees Recovery Rates Dip in Distressed-Debt Brawls

Victor Khosla, chief investment officer and founder of Strategic Value Partners, said a “good size opportunity” still exists for distressed-debt investors, despite a recent pullback in the pool of troubled issuers to assist.

“In the end, the music is going to stop,” Khosla said in an interview on Bloomberg Television Tuesday. Loose credit documents and easy lending have allowed investors “a lot of room to maneuver,” creating a situation where creditors try to edge each other out.

SVP is picking from a shrinking set of opportunities for distressed debt as a rally induced by the Federal Reserve, and companies filing for bankruptcy that exited the index, has left just $168 billion of bonds from troubled companies outstanding. In the depths of the pandemic in March, that figure had ballooned to nearly $1 trillion, according to Bloomberg data.

With less debt to go around and creditors brawling for scraps, recovery rates in restructuring and default scenarios will decrease, Khosla said, echoing comments from distressed-debt titan Marc Lasry earlier in the day.

SVP’s Khosla Sees Recovery Rates Dip in Distressed-Debt Brawls

SVP, which manages around $10 billion, is “good with creative destruction” in the U.S., but less active in Europe, Khosla said. The “cleanup” in Europe will be bigger and last longer than that in the U.S., he said.

Greenwich Connecticut-based SVP avoided the first flood of restructuring opportunities caused by the pandemic, Khosla said in an interview in August. It’s now looking for ways to put money to work, investing in disrupted industries with tangible assets that provide stability. Khosla also likes “old economy businesses” with hard assets rather than those undergoing change.

His firm prefers investments in airplanes over airlines. Oil and gas and retail remain “hard to invest in,” given the ongoing secular shifts and declines, he said.

©2020 Bloomberg L.P.

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