Oaktree 1Q16 Earnings Call Notes

Jay Steven Wintrob – Chief Executive Officer & Director

Bruce Karsh – Co-Chairman and Chief Investment Officer

We think we are a big step closer to the next distressed debt opportunity

“While it proved to be a fleeting bargain buying opportunity, the credit markets’ panic attack from January through mid-February reminds us that market psychology is fragile, liquidity can suddenly become scarce, and capital markets can quickly shut. Moreover, we believe that signals that an upswing in defaults has finally started, and that we are a big step closer to the next expanded distressed debt opportunity.”

At the end of January 19% of the high yield index was trading at a 1000 bps spread over treasuries

“As you may know, the percentage of the high-yield bond that’s trading at yield spreads greater than 1,000 basis points over treasuries has historically been a reliable leading indicator of default rates. That is when there’s a greater supply of securities, more defaults are expected to occur. By the end of January, the percentage of the high-yield index trading at such high spreads had increased to 19%. Since mid-February, prices have snapped back and yield spreads have narrowed considerably. Nonetheless, a number of stressed securities are still trading at spreads over 1,000 basis points and not just in energy and commodity-related industries.”

Didn’t get everything that we wanted in Q1 but did a good job of putting money to work

“The window closed relatively quickly, and we didn’t get all that we had wanted when we were in the market looking for opportunities. But we felt that we did a reasonable job of putting money to work in Q1.”

Probably not going to deploy quite as much capital in Q2 and beyond

“And with respect to the rest of the year, it’s really going to be a function of what the environment is. We still think we’re going to continue to deploy, although what we were doing in Q1 is probably not as much of what we’re going to do in Q2 and beyond. We see some other opportunities outside of public U.S. corporate debt that looks interesting to us. And, of course, the energy sector is still interesting.”

There isn’t a lot of liquidity

“One of the hallmarks of the capital markets today is that there just isn’t a lot of liquidity. And when the sellers emerge, prices drop, in many cases, well below fundamental value.”

There wasn’t much supply so we didn’t get everything we wanted and then buyers came in and prices shot up again because of lack of liquidity. Prices went to levels we thought overvalued

“In some cases, we were stymied, because there wasn’t as much supply as we would have liked of the companies that we found attractive, but we bought all we could. Then, when the recovery came, again, some of these securities traded up 20 points or 30 points, again because of the lack of liquidity. So, when the buyer showed up, there wasn’t as much supply as I’d mentioned, and they drove prices up a lot. And we took the opportunity to sell. So, it was an unusual period where, for a short window, we were able to really enjoy the bargain we saw. And then very quickly, we saw prices go up to levels that we thought fundamentally overvalued some of these companies and thus we sold.”