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Bram de Haas
Bram de Haas
Articles (335)  | Author's Website |

Howard Marks Buys Distressed Energy Bonds

Guru is raising money for a new fund to invest in the energy space

December 10, 2015 | About:

Oaktree Capital’s Howard Marks (Trades, Portfolio) spoke at a Goldman Sachs Group Inc.’s (NYSE:GSJ) U.S. financial services conference in New York and indicated he is interested in the distressed debt market.

Specifically high-yield bonds of energy companies have slumped and can be had for 60 cents on the dollar, according to the distressed debt specialist. The selloff is caused because of hedges wearing off and companies losing credit lines. The famous distressed investor compares the current environment to the post-Lehman crisis.

The opportunities Fund VII, which Oaktree set up after Lehman’s bankruptcy, was successful. Now Oaktree is again raising capital to deploy into the distressed market.

How to participate in this opportunity? There are several options:

  1. Buy Oaktree Capital stock. The downside is that your exposure to this particular strategy is extremely diluted. Oaktree Capital stock may be over or undervalued itself which adds another layer of complexity. The upside is you are the beneficiary of fees others are paying.
  2. Buy into the new fund Oaktree Capital is raising, if you can. It’s called Oaktree Opportunities Fund X. The downside is you will end up paying fees. The upside is you have specialists working for you.
  3. Buy some high-yielding (energy) bonds yourself. The downside is that it requires work to do your due diligence but the upside is you aren’t paying any fees.

A great place to start looking for high-yielding distressed bonds is in high-yield indexes. However, it is not as simple as just buying a high-yield index. Often these don’t include much in the way of distressed debt. That’s because there isn’t enough liquidity in these bonds. If you want to find the distressed bonds, you have to sort high-yield bond ETFs by position size and look at the smallest positions. These tend to be the most distressed and illiquid issues. Horizon Kinetics' Murray Stahl (Trades, Portfolio) recently went through this exercise and came up with the following table:

high yield.jpg

If these issues are a little too distressed for your taste, you can simply move up in the weightings and find more liquid and most likely somewhat less endangered issues:

stahl2.jpg

If Howard Marks is right, there should be plenty of alpha rich opportunities to be found among these for the hands-on investor.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website


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