Farview Investments' Approach to Credit Opportunities
Credit investing is inherently cyclical, with opportunities evolving alongside economic conditions. Investors who understand these cycles and adopt a flexible approach—balancing allocations between private and public securities—are better positioned to capture value. At Farview Investments, we believe that in addition to maintaining flexibility, specialization is crucial. In credit investing, specialists with deep expertise across different credit segments are best equipped to navigate market shifts and identify the most attractive risk-adjusted opportunities.
Credit Investing and the Market Cycle
The credit market encompasses a wide range of strategies, each suited to different points in the economic cycle. Understanding these strategies and their appropriate timing is essential for optimizing returns and managing risk. During expansionary periods, stable cash-flow-generating strategies such as senior secured lending and private debt tend to perform well, offering consistent returns with lower volatility. These investments benefit from strong corporate earnings and abundant liquidity, allowing companies to secure financing at favourable terms while providing investors with predictable income streams.
As the cycle matures and interest rates rise, credit spreads widen, creating openings for opportunistic credit and subordinated lending. At this stage, investors can take advantage of higher yields and more attractive risk-adjusted returns as companies begin to experience greater capital constraints. Private debt funds may shift toward more structured deals, incorporating features such as equity kickers or covenant protections to enhance returns and mitigate downside risk.
When economic conditions deteriorate and defaults rise, stressed and distressed credit strategies become more compelling, allowing investors to capitalize on market dislocations and restructuring opportunities. Companies facing liquidity crises or unsustainable debt loads may seek alternative financing sources, presenting opportunities for distressed investors to acquire deeply discounted debt positions with potential for significant recovery. These situations require deep expertise in restructuring and active involvement in liability management exercises, enabling investors to negotiate favourable terms or facilitate turnaround plans.
Finally, as the economy recovers, post-reorganization equity and distressed-to-control investing can offer significant upside potential. Investors who participated in restructuring processes may benefit from equity appreciation as companies regain financial stability and operational strength. Additionally, acquiring controlling stakes in reorganized entities can provide long-term value creation opportunities, particularly in industries poised for cyclical recovery. By strategically navigating these different phases, investors can maximize returns while managing exposure to credit market risks.
Current Market Conditions are positive for Stressed Credit
Currently, the market environment presents particularly attractive conditions for stressed credit investing. With interest rates at elevated levels and liquidity tightening, many overleveraged companies face refinancing pressures and capital constraints. A key risk for credit, particularly loans (also the ones structured as CLOs) and some parts of the private credit space, is the burden placed on lower-quality loans that could struggle under prolonged high interest rates.
Most of these loans are floating rate, meaning investors may benefit from generous yields, but borrowers must be able to meet rising interest payments. While defaults have remained relatively muted, pockets of stress are emerging, creating opportunities for stressed credit strategies to act as the lender of last resort for companies in need.
Even if global interest rates are declining, many firms will still face challenges in servicing their debt in the coming years. While solid economic activity and healthy corporate balance sheets have allowed some firms to maintain strong margins, defaults have steadily risen as weaker f irms struggle. Mid-sized companies borrowing at high interest rates in credit markets are increasingly strained, with some resorting to payment-in-kind methods, effectively deferring interest payments and accumulating more debt.
Signs are mounting that high interest rates are placing significant pressure on private credit borrowers. A severe downturn has not yet tested many of the features designed to mitigate credit risks at the private credit industry’s current size and scope. The rapid growth of the private credit industry, increasing competition from banks on large deals, and pressure to deploy capital have contributed to a deterioration in underwriting standards and weakened covenants, compounding the impact of persistent high interest rates. These dynamics further reinforce the importance of a flexible and opportunistic approach to credit investing, as market dislocations continue to create compelling opportunities in the distressed space. Liability management exercises (LMEs) and discussions around long-term interest rates have remained two dominant themes in stressed credit investing. The volume of LMEs has surged in 2024, reaching $57 billion—an annual record and twice the 2023 level—surpassing the combined total of 2008 and 2009. When excluding these LMEs and considering only formal Chapter 11 restructurings, the leveraged finance space may appear relatively stable, with the trailing twelve-month default rate for high-yield bonds and leveraged loans at 1%, a 1.1 percentage point decline year-over-year and well below the long-term average of 3.4%. However, incorporating LMEs raises the combined default rate by 2.1 percentage points to 3.1%, with leveraged loans alone seeing defaults climb to 4.5% due to weaker creditor protections. This suggests that while the market has not yet entered a "true" distressed environment, credit stress is increasingly prevalent. This evolving landscape underscores the importance of flexibility and expertise in stressed credit investing, as new opportunities continue to materialize in response to shifting market dynamics.
Farview Approach to Credit Investing
As the economic cycle shifts away from an extended period of historically low interest rates, Farview Investments remains focused on the stressed and distressed credit space. With corporations facing tighter financing conditions and elevated borrowing costs, the market is creating abundant opportunities for credit restructuring specialists. Companies are increasingly seeking to deleverage, divest non-core assets, or undertake comprehensive balance sheet reorganizations, further reinforcing the need for a flexible and opportunistic investment approach.
To capitalize on these market dynamics, the strategy is structured to allocate capital across a select group of typically five to ten specialized investment managers. Each manager brings distinct expertise, ranging from traditional distressed debt strategies to more opportunistic and niche approaches. The core geographic focus are North America and Western Europe, where well-established legal frameworks facilitate efficient restructurings. Additionally, Farview may have selective exposure to emerging markets, leveraging the expertise of regional specialists who navigate the complexities of local credit environments.
Allocation to specialists is at the heart of Farview’s approach, and within the credit opportunities strategy, this is particularly crucial. Some allocations allow exploration of unique market niches where the majority of opportunities arise. There is also significant differentiation based on the target size of the deals: larger firms tend to focus on big deals, often collaborating to maximize returns and play a bigger role in the reorganization process, while smaller firms target niche opportunities with a different perspective, often less reliant on macroeconomic trends to generate returns. Investment philosophy also varies among managers, with some emphasizing an aggressive stance, while others prefer a cooperative approach with existing management, boards, or other stakeholders. Additionally, the approach to the complexity of the balance sheet plays a critical role—some managers excel in financial engineering, while others focus on cash flow dynamics to drive successful exit strategies. Furthermore, while sector expertise and established networks can be advantageous, they may also limit the opportunity set, necessitating a balanced approach between specialization and opportunism.
This diversified and actively managed approach enables Farview to navigate shifting market conditions, capture compelling opportunities across the entire credit cycle, and deliver risk adjusted returns for investors.
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