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Plunging Oil Prices could Ignite a Debt, Job and Derivatives Crisis

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Howard Marks believes the plunge in oil prices may usher in a new era for investing in distressed debt.

For more than three years, the billionaire investor and Oaktree Capital Group LLC (OAK) co-founder urged his deal makers to be cautious, warning of loose credit standards and high prices for distressed assets. That may change as the price of oil plummets, Marks said in a letter to clients yesterday.

“With the arrival of some disarray and heightened risk aversion, events tell us it’s appropriate to drop some of our caution and substitute a degree of aggressiveness,” Marks, 68, wrote. “We knew great buying opportunities wouldn’t arrive until a negative ‘igniter’ caused the tide to go out, exposing the debt’s weaknesses. The current oil crisis is an example of something with the potential to grow into that role.”

Since 2011, as the Federal Reserve kept U.S. interest rates near zero, Marks argued that a chase for higher yields led investors to lend to less creditworthy companies and that bargains were becoming more difficult to come by. In preparation of a slowdown in economic growth and a new wave of distressed-debt opportunities, Los Angeles-based Oaktree earlier this year started to raise money, targeting $3 billion for a fund and $7 billion for a reserve pool.

The plunge in oil has started to create opportunities to invest, according to Marks. High-yield bonds of energy companies have declined 17 percent from June 19, when oil prices peaked this year, through yesterday, as Brent tumbled 48 percent. A sustained slump in crude oil may trigger a significant increase in defaults of energy companies, Deutsche Bank AG analysts Oleg Melentyev and Daniel Sorid said in a Dec. 8 report.


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