Armen Panossian on Credit in a Time of Rising Rates

Episode Summary

Executive Summary: Armin Panossian, incoming co-CEO of Oaktree, explains how distressed and private credit investing works, why Oaktree thrived in the GFC and 2022 selloff, and why today’s high-rate environment favors credit over equities. He argues that floating-rate legacy deals are under pressure, while new private credit offers attractive risk-adjusted returns, especially for large sponsor-backed borrowers.

Main Topics: Distressed credit as a career and investment philosophy (Priority: 5/5): Panossian describes how he gravitated toward distressed debt because it was the most intellectually interesting part of the market, emphasizing restructuring, control, and bottom-up analysis over optimism. Oaktree’s role during the Global Financial Crisis (Priority: 5/5): He recounts how Oaktree bought massive amounts of debt in 2008–2010 when markets were frozen, often as one of the only bidders, and why that required conviction and discipline. Private credit opportunities in the current rate environment (Priority: 5/5): Panossian argues that higher rates and market dislocation have created attractive lending opportunities, especially for large private equity-backed companies with stronger equity cushions. Why legacy floating-rate debt is under stress (Priority: 4/5): He explains that many sponsor-backed borrowers chose floating-rate debt for flexibility and failed to hedge adequately, leaving them vulnerable as rates reset sharply higher. CLOs, bank retrenchment, and the rise of direct lending (Priority: 4/5): The discussion traces how 2021’s CLO boom and 2022’s rate shock caused banks to pull back, creating room for direct lenders like Oaktree to step in. Macro-aware, but fundamentally bottom-up (Priority: 4/5): Panossian says Oaktree does not make macro forecasts, but it does incorporate rates, liquidity, and economic stress into underwriting decisions and portfolio construction. Leadership transition and Oaktree culture (Priority: 3/5): He outlines the co-CEO transition at Oaktree and credits the firm’s stability, risk discipline, and mentorship from Howard Marks and Bruce Karsh for his long tenure.

Key Arguments: Distressed investors are paid to buy when others are forced sellers; the strategy works best when conviction and analysis are strongest during panic. Oaktree’s GFC success came from being early, patient, and willing to deploy capital when spreads and prices were deeply dislocated. Today’s market is attractive for credit because rates are high, spreads are wider, and many borrowers are underwritten to stress cases, improving risk-adjusted returns. Legacy floating-rate liabilities are a major vulnerability because many borrowers preferred floating debt for refinancing flexibility and did not hedge enough. About one-third of floating-rate debt has been hedged, leaving hundreds of billions exposed to higher SOFR-linked coupons. Banks’ retreat from syndicated lending after 2022 losses has expanded the market for direct lenders, who can offer certainty of execution. Oaktree is less levered and more diversified than many peers, which should help it navigate a recession better and exploit dislocations. The current environment likely favors credit over equities because higher rates claim more of the corporate cash-flow pie for lenders and less for shareholders.

Data Points: Oaktree client assets: About $179 billion - Barry Ritholtz describes Oaktree’s scale at the start of the interview. Art Sandberg / Pequot net annual returns: 17.8% annual net returns - Ritholtz cites Sandberg’s long-term track record as background on Panossian’s early career environment. Pequot first-year drawdown: 25%–26% - Ritholtz notes Sandberg’s early drawdown during the 1987 crash. Original distressed fund target: $3 billion - Howard Marks initially targeted this size for the 2007 distressed fund. Capital ultimately raised: $14 billion - Ritholtz notes the fund raised far more than the original target. A fund size: About $3.5 billion - Panossian distinguishes the smaller A fund used first. B fund size: Over $10 billion - Panossian explains the larger committed fund available if opportunities emerged. Daily debt purchases in crisis: Hundreds of millions of dollars per day - Panossian describes Oaktree’s buying during 2008–2010 after Lehman’s collapse. Time period of busiest investing: 2008, 2009, 2010 - He says these were the busiest years of his career. Floating-rate debt hedged: About one-third - Panossian estimates the portion of floating-rate debt that has been hedged to fixed in some fashion. LIBOR to SOFR move: 25 basis points to over 5% - He illustrates how borrowing costs reset dramatically higher for floating-rate borrowers. Typical private credit pricing: SOFR plus 6% to 6.5% - Panossian gives current pricing for typical first-lien loans. Current first-lien yield: About 11% to 13% - He describes rates on private loans to large private equity-backed companies. Equity checks in sponsor deals: Greater than 50% of enterprise value - He says private equity sponsors are contributing unusually large equity cushions. Leverage in sponsor deals: 4.5x to 6x debt/EBITDA - Panossian discusses current underwriting levels in LBO/private credit deals. Spread widening: About 150 basis points wider - He compares current spreads with the easier-money period, noting a large widening in 18 months. Prior spread range: 475 to 550 over SOFR - Historical pricing in easier markets. Current spread range: 625 to 650 over SOFR - Equivalent risk is now priced wider in the current market. CLO issuance in 2021: About $175 billion - Panossian cites record issuance driven by bank demand for AAA CLO paper. Fed tightening speed: 500 basis points in 18 months - He notes the rapid increase in rates that hit credit markets in 2022. High-yield bond performance by June 30, 2022: Down 16% - He cites the magnitude of the selloff in credit markets. Senior loans performance by June 30, 2022: Down 7% - He compares losses across credit sectors. Institutional default-risk stress: Weakest 20% to 30% of private credit portfolios - He expects elevated defaults in older vintage deals if recession arrives.

Pivotal Quotes: "We are paid to catch falling knives." — Howard Marks (quoted by Armin Panossian): Describing Oaktree’s role during the 2008–2009 market collapse and why disciplined buying is central to distressed investing. "It’s a very exciting time to be in the credit markets." — Armin Panossian: His framing of the post-2022 environment as dislocated and favorable for lenders. "If I only had a dollar to bet on a recession or not a recession, it would be for a recession next year." — Armin Panossian: His view that high rates and capital tightening make a recession more likely than not.

Implications: Listeners should see credit as one of the most attractive areas in markets today, especially for disciplined lenders. For Oaktree, higher-for-longer rates may create both stress in legacy deals and unusually rich opportunities in new private credit.