China and India’s Bad Debts Spell Opportunities, Oaktree Says

The Asia Pacific region is rapidly becoming more important for Oaktree Capital Group LLC in terms of both fundraising and investment opportunities.

The accelerated growth of debt in the region such as in China and India means more distressed situations are to come, according to Jay Wintrob, chief executive officer at the Los Angeles-based alternative asset manager, which has about $100 billion under management.

Across the world, high asset prices and looser covenants on high-yield bonds are among concerns for Wintrob, who said in an interview this week in Hong Kong that investors should lower their expectations on returns in the current low-rate environment. They should also reduce risk-taking to protect themselves from the downside, he said.

The following are excerpts of a Q&A with Wintrob:

1. How do you look at Asia for Oaktree?

Asia is a fast growing economic region. The amount of money being managed for a fee is growing the fastest in Asia Pacific than anywhere else in the world. In Asia we are still meeting with clients that have never allocated to alternative investments before – pensions, insurance companies in particular. On the investment side, I think opportunities will grow in Asia Pacific.

We have invested in three or four NPL pools in China. I do think the opportunity in China will grow and we are well positioned with a lot of dry powder. We are also spending a lot of time building a relationship with the local partners.

We are quite enthusiastic about India. There is a lot of debt. It’s not so much real estate related in India as it is in China. There is a new bankruptcy law that was adopted last year in India and we are watching that very closely. As we see the legal systems develop, and we see more outcomes consistent with the law, we feel more comfortable investing in that circumstance. There is a growing pool of non-performing and sub-performing loans there. We are working with local partners in India. We would be expecting in the coming years there will be opportunities.

2. Where is the next wave of defaults going to come from?

I don’t think right now this is a particularly robust time for defaulted situations and distressed securities globally. It’s hard to say there is one sector or industry where you can say “oh that’s really cheap. Just buy everything and it will work out.”

3. Do you have a time frame for the next crisis?

Not a specific time frame. We believe we are somewhere in the later stages of the current credit cycle. What you are seeing is that the covenant protections are tilted so much toward the borrowers, so the quality of the paper that is available is going down.

4. High yield bonds in the U.S. still good to buy?

Spread over Treasuries for the high-yield bonds is still at reasonable levels. They are lower than average, but reasonable. Defaults are relatively low. Defaults would have to spike an awful lot for people to not get their full return on capital. So that’s a pretty good risk reward.

5. What is the biggest risk for all your funds?

I worry about relatively high prices across most markets. I have worries about the unwinding of the monetary stimulus. These are fairly unusual circumstances. Most of us in the business have never operated in an environment of negative interest rates. There are a lot of potential negatives. It’s not going be the same old cycle unfolding in the same old way.
Source: Bloomberg

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