"The Spark That Lights The Fire": Oaktree Spots A $1 Trillion Opportunity In The Coming Bond Crash

Back in November, still smarting from a year he would rather forget, Russell Clark and his Horseman Capital, i.e. the "world's most bearish hedge fund" unveiled what he would short next: according to Clark, the next major source of alpha would be shorting fallen angel bonds.

Citing a recent IMF Global Financial Report, Clark said that "US investment grade debt is very low quality, and could produce some large fallen angels [and] mutual funds are much larger in the high yield market than they used to be. [L]ow rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me."

One month later, in the aftermath of of Steinhoff fiasco, in which the ECB found itself long tens of millions of bonds in a company which went from investment grade to deep junk after it was revealed that it may have engaged in occasional fraud, crashing the bonds...

... Mario Draghi only made the bearish "fallen angel" case more explicit, by clarifying that going forward the ECB would likely liquidate bonds which were purchased as IG and subsequently downgraded to Junk (as we explained in detail in "The ECB Has Some Bad News For Junk Bond Buyers")

Fast forward to today when one of the icons of credit and distressed investing, Oaktree Capital, joined the bandwagon of fallen angel hunters, saying that the fund "expects to see a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds."

Speaking at the Bernstein Strategic Decisions Conference, Oaktree Capital's Chief Executive Jay Wintrob said that when the cycle turns it will be faster and larger than ever as "fallen angels" proliferate, and added ominously that "there will be a spark that lights that fire."

Picking up on last week's warnings by Moody's, in which the rating agency warned of a junk bond default avalanche as rates rise, Wintrob said that the supply of low-quality debt is significantly higher than prior periods, while the lack of covenant protections makes investing in shaky creditors riskier than ever.

According to the Oaktree CEO, those structural flaws of the bond market mean debt will fall into distress quickly once conditions flip, and "Oaktree is prepared with about $20 billion saved for future investing opportunities" he said according to Bloomberg.

Of course, Oaktree could be simply talking its book: the fund fund which ranks among the world’s biggest investors in distressed debt, has been rather bored in recent years in which record low rates have made distressed opportunities an endangered species, and as we noted last wee, credit-rating firms are forecasting even fewer opportunities in the months ahead, although the tide will turn once rates rise higher enough.

But not just yet: for now, the total kept by S&P Global Ratings of potential “fallen angels”, or those investment grade companies in danger of being downgraded to junk, stood at just 45 in April, with $119.3 billion of debt outstanding according to Bloomberg.

This is where Oaktree came in, with the rhetorical question posed by Wintrob to lenders, who "should be asking themselves if the market can continue to lend and extend maturities of debt at very low rates."

The abnormality in the lending market shows creditors should be “investing with an extra dose of caution,” he said. “We’re living in a low-return, high-risk world."

The potential opportunity for Oaktree is so pressing that the fund has now allocated about a quarter of its assets to troubled issuers.

Amid slim pickings in the U.S., the firm has looked to spread its distressed strategies into China, India and other emerging markets.

To be sure, Horseman and Oaktree are not alone preparing for a surge in troubled issuers. The amount of “dry powder” held by fund managers to invest in low-quality debt has grown to around $150 billion, Wintrob estimated. Quoted by Bloomberg, he said this number has shown steady growth as the duration of bonds has increased, which could make the coming price drops even more significant than during the turn of the last credit cycle in 2008.

Which of course would be great news for America's bankruptcy advisors: as a reminder, last weekend we quoted Moelis' co-head of restructuring Bill Derrough who said that "I do think we're all feeling like where we were back in 2007," adding that "there was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

All that is needed is the spark.


cheka evoila Fri, 06/01/2018 - 21:29 Permalink

mssg to oaktree - buy whatever goldman buys.  frbny will pay full face value to goldman - on bonds that are only worth a small fraction of face

for those not around in the last scam.  goldman bought 'toxic' bonds for dimes on the dollar.  frbny then bought them from goldman for full dollar.  hard to calculate how high the profit was when you include 60-1 leverage in the dimes they spent

In reply to by evoila

pcrs Fri, 06/01/2018 - 16:04 Permalink

Central banks will put a bid under the market forever. Nationalise the economy on their balance sheet. Crash will not happen. They rather let inflation rip and keep the market thinking they will one day raise rates and shrink the sheet.

shortonoil pcrs Sat, 06/02/2018 - 09:38 Permalink

The central banks can't do a thing to prevent the melt down of EM currencies. Over priced oil is blowing out their current account deficits, and their currencies are falling. The foreign bond holders are heading for the door. Demand growth has come out of the EM for the last couple of decades. Without it the over indebted developed economies unwind. The central banks are up shit creek; short one paddle.

In reply to by pcrs

Quantify Fri, 06/01/2018 - 16:09 Permalink

And the seventh angel poured out his vial into the air; and there came a great voice out of the temple of heaven, from the throne, saying, It is done.

booboo Dilluminati Fri, 06/01/2018 - 16:55 Permalink

So we are supposed to help find a woman protesting the cops, the same cop that would stomp your ass into a mud puddle if you were protesting. Yea right, not a chance and by the way Beck has lost his marbles and has only a fraction of support he used to have but that was before he was summoned to Israel and had a heart to heart with a butcher.

In reply to by Dilluminati

GRDguy Fri, 06/01/2018 - 16:41 Permalink

Straight out of scenes in the movie "Margin Call."

"So, what you're telling me is that the music is about to stop and we're going to be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism." And "If you're the first out of the door, that's not called panicking."

rockstone Fri, 06/01/2018 - 17:08 Permalink

But not just yet: for now, the total kept by S&P Global Ratings of potential “fallen angels”, or those investment grade companies in danger of being downgraded to junk, stood at just 45 in April, with $119.3 billion of debt outstanding according to Bloomberg.

Right. Only 45. Got it.

exartizo Fri, 06/01/2018 - 17:43 Permalink

The "spark" as I've chronicled here many times is:


...brought on essentially by too many people and not enough resources (water and oil).

War fixes over-population and reverts all (currently fucked up) economic principles to their normal functions again.

It's coming.

Expendable Container lew1024 Sat, 06/02/2018 - 11:40 Permalink

There is a War Against the ethnic-European race so we are being given false information ie Black South Africans say 'Whites stole our Land'. Caught out lying! Here Black South African Communist leader, Julius Malema, admits the true history but he was addressing today's South African foreign Blacks and we weren't supposed to hear this. Hear it here from his own mouth. This is good!:


Malema ADMITS ALL Blacks are foreigners to South Africa from the Malawi lakes region in central Africa, that the non-Black KOI-KOI and SAN Bushmen (and Whites actually) were there when they arrived. Its historical fact that the BANTU (including ZULUS) genocided the Koi-Koi and Bushmen as they moved in.

Trump and all White world leaders - "SILENCE means CONSENT"!

Yesterday White Rhodesians (gone), today White South Africans (going), tomorrow the rest of the White West.....

first they came for the....and I did nothing....then they came for the ....and still I kept silent....and then they came for ME and there was no one left to speak out for me"

In reply to by lew1024

Expendable Container exartizo Sat, 06/02/2018 - 11:52 Permalink

Be aware that the world's ethnic-European population is collapsing, never mind 'overpopulation'.

In 1910 Whites were 36% of the world's population.

Today Whites are under 9% of the world's population and still falling.

Now all White nations - and ONLY White nations - are being flooded with young (mainly Muslim) non-White males.

There is a War Against the White Race. WWI and WWII to set ethnic-European brother against brother by telling outrageous TAVISTOCK INSTITUTE propaganda lies about the German peoples to instigate an 'enemy', whilst these Zionists reaped the financial rewards and gained Palestine.

Wake up folks! Benjamin Freedman's 1961 Warning to America: https://www.youtube.com/watch?v=hAgYBcc4bX4

In reply to by exartizo

Son of Captain Nemo Fri, 06/01/2018 - 18:12 Permalink

This will be fun when it "crashes"... And believe me!...

YOU WILL KNOW IT when it happens!!!

Meanwhile somewhere in rural PA... Explosions (https://www.zerohedge.com/news/2018-05-23/mysterious-booms-across-penns…) (https://www.zerohedge.com/news/2018-05-30/mystery-booms-heard-across-pe…) for new underground condominiums "without a view" are being built at a price you even Oaktree can't afford!!!

As the old saying goes whether you're below or above "ground"... YOU CAN'T TAKE IT WITH YOU!

Won't be long now folks...

Let it Go Fri, 06/01/2018 - 18:12 Permalink

In a panic or crisis one of the first things  to go is liquidity.

We should not forget that a "liquidity trap" differs from the standard liquidity problem. In many ways, it is just the opposite. This causes a great deal of confusion in that it can be difficult to comprehend why too much liquidity is an issue.

This is why it is important to look a little closer at these two terms and what they represent. The article below looks at the ramification from each as they play out and how they affect the economy.

 http://Liquidity Trap Differs From Standard Liquidity Problem.html

francis scott … Fri, 06/01/2018 - 21:09 Permalink

I'm not sure what "fallen angel bonds" are.  But I do

remember Satan's best line from Milton's epic poem.

Let me update it and remind you if you forgot it.


"Better to reign on Wall Street, than serve in Heaven"



Insofar as "All that is needed is the spark' is concerned, I don't

doubt the Wall Street Angels are capable of producing a wee,

but unexpected critical mass somewhere on the planet to drive

stocks down, and make the largest profit ever recorded in the

history of greed when all their shorts become radioactive and

fall to nothing.


But the manipulating Wall Street Angels will echo the words of

the English Ambassador in the last scene of Hamlet:


"The ears are senseless that should give us hearing,
To tell him his commandment is fulfill'd,
That Rosencrantz and Guildenstern are dead:



(and our trillions?)





IvannaHumpalot Sat, 06/02/2018 - 08:26 Permalink

i tried the TBTs a few years ago but the options house i bought them through couldn't be trusted and played silly buggers with my account trading on it without my knowledge. you have to have a trustworthy broker/vehicle to buy the things with in the first place


then you face uncertainty as to whether the instrument will reflect the movement in the underlying treasuries