The uncertain geopolitical climate and the ensuing market volatility are offering a variety of entry points into credit markets, according to Bill Bohnsack, president and senior partner at Oak Hill Advisors, in a session made possible by T. Rowe Price at the Canadian Investment Review’s 2025 Global Investment Conference.
“The reason for that is, when you have fear and uncertainty, there tends to be decompression that takes place in the market, a dispersion of opportunities in terms of risk-return across markets. This creates inefficiencies that tends to expand idiosyncratic opportunities in credit across both primary and secondary markets.”
Since 2010, private credit’s share of the leveraged finance market has grown from two per cent to 17 per cent, he said, while highlighting some of the beneficial attributes for borrowers. These include: access to financing through market conditions, executive efficiency and simplicity, certainty of terms, minimal trading/volatility, increased flexibility, no rating agency requirements, confidentiality, direct partnership with lenders and streamlined lender coordination.
“These attributes are valued by borrowers and lead to financing opportunities for private lenders,” said Bohnsack. “For us as the lender, we have the ability to earn an attractive premium over what you can get in the syndicated markets and, quite frankly, other markets as well.”
However, not all credit is created equal, he said, noting managers matter a great deal and he expects that differences will become more pronounced. “We’re going to start to see dispersion between how different portfolios perform based on where managers are investing and what types of risk they are taking.”
As an example, he highlighted the divergence between small cap and large cap credit migration, which is understood by the fact that large companies typically have much higher margins — 1.2- to 1.6-times higher for companies with EBITDA of $75 million and above compared to $50 million and below. “If you look at public companies, you can see margins are much more resilient through time depending on company size.”
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For smaller companies, on the other hand, margins are coming down faster and harder, said Bohnsack, which is leading to more defaults. In addition, he highlighted that larger companies tend to have higher recoveries in the event of a default, which is another aspect underscoring the attractiveness of lending to larger businesses.
Ultimately, credit opportunities present themselves during periods of dislocation and uncertainty, particularly given a lot of investors tend to be ratings-driven, he added, noting selling becomes indiscriminate and people get concerned about credit.
“It can be a great opportunity to be a secondary market player in periods of stress when you have recession risk, when you have access to capital disappear, stressed situations, restructurings and other special situations creating great opportunities.”
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