The era of refinancing fixes and liability-management transactions that helped highly leveraged companies avoid default may be nearing its end, creating a potentially fertile environment for distressed investors, according to a report by Bloomberg citing Oaktree Capital Management MD Brook Hinchman.
Speaking on a recent Oaktree podcast, Hinchman said higher interest rates and looming debt maturities are exposing weaknesses among companies that relied on aggressive financing structures to navigate the post-pandemic tightening cycle.
More than $200bn of high-yield bonds and leveraged loans are currently trading at distressed levels — below 90 cents on the dollar and with yields above 15% — with a significant portion linked to buyout transactions completed during the peak deal years of 2021 and 2022, Hinchman noted.
For several years, borrowers have been able to defer pressure through payment-in-kind (PIK) financings and liability-management exercises, extending debt maturities and preserving liquidity. However, Hinchman argued that those tools are becoming less effective as companies approach hard maturity dates.
His comments add to a growing chorus of warnings from credit-market participants about a potential default cycle as large volumes of debt come due over the next several years. Investors have increasingly highlighted concerns that many issuers, particularly those backed by private equity sponsors, may struggle to refinance in a higher-rate environment.
Software companies remain a particular area of focus. The sector attracted significant leverage during the low-rate era and now faces additional uncertainty from the rapid adoption of artificial intelligence, which is reshaping competitive dynamics and growth expectations across the industry.
Hinchman also pointed to pockets of vulnerability within private credit, where direct lenders financed heavily leveraged transactions during the pandemic boom. While he stressed that the broader direct-lending market remains fundamentally sound, he suggested that certain portfolios are overly concentrated in enterprise software and exposed to weaker-vintage deals originated at peak valuations.
For distressed debt managers, the combination of elevated financing costs, approaching maturities and refinancing challenges could mark a turning point after several years in which defaults were largely postponed rather than resolved.
