Car rental agency

Vulture funds will have to learn to fly again

A griffon vulture spreads its wings carrying its spotting beacons as it prepares to fly near Sde Boker, southern Israel, October 29, 2019. REUTERS / Amir Cohen

Register now for FREE and unlimited access to


LONDON, December 28 (Reuters Breakingviews) – The vulture funds will have to be deployed. Business defaults are on the decline, despite the surprising endurance of the pandemic. Investors who specialize in buying distressed debt like Oaktree will need to look beyond the mainstay of government debt markets.

The past two decades have been a golden age for financial crises, but life is getting more difficult for funds that take over struggling companies by buying back their bonds or loans. Covid-19 has triggered big failures, like the car rental company Hertz (HTZ.O). But default rates, which reached nearly 14% in 2009, peaked at about half that level in 2021, according to data from Moody’s Investors Service.

This is part of a longer term trend. High levels of public debt mean that central banks must keep interest rates low, helping even fragile companies to raise funds. Unless there are severe shutdowns due to the new coronavirus variants, 2022 could be even more stress-free. The proportion of US loans traded below 80% of their face value, an indicator of likely default, was only 1.12% in November, according to an index tracked by Leveraged Commentary & Data.

Register now for FREE and unlimited access to


Yet the management of troubled debt funds is far from dead. The sector has raised some $ 40 billion in capital in the first 11 months of 2021, Preqin estimates. This is in addition to the $ 100 billion of so-called dry powder that was expected to be deployed earlier in 2021. Oaktree, founded a quarter of a century ago by Howard Marks, has just raised $ 16 billion for a fund of credit opportunities.

The Chinese real estate crash could be an opportunity. The country’s dollar-denominated high yield bonds returned nearly 25% in early December, according to an ICE Bank of America Asia index. And managers will also need to seek higher returns by lending in the $ 1,000 billion private credit market, where loans are not widely traded.

New markets bring new challenges. China’s debt valuation is tricky given the uncertainty over how offshore creditors will be treated. And private debt yields may decline as the money flows. Experienced managers can still thrive.

But struggling debt funds overall generated a 13% return in the 12 months following the emergence of Covid, according to Preqin, less than half the return after the 2008 crisis. With 2022 looking more slim, investors in vulture funds may have a hard time finding future choices.

To follow @ Unmack1 on Twitter


– The global default rate of companies with ratings below investment grade in October totaled only 2.3%, according to Moody’s, lower than the 3.3% recorded before the pandemic. The rating agency predicts the failure rate will be 2.2% by October 2022. The long-term average is just over 4%.

(This is a Breakingviews prediction for 2022. To see more of our predictions, click .)

Register now for FREE and unlimited access to


Editing by Rob Cox, Oliver Taslic and Amanda Gomez

Reuters Breakingviews is the world’s leading source for financial calendar information. As the Reuters brand for financial commentary, we dissect the big companies and economic stories from around the world every day. A global team of around 30 correspondents in New York, London, Hong Kong and other major cities provide real-time expert analysis.

Sign up for a free trial of our full service at and follow us on Twitter @Breakingviews and at All opinions expressed are those of the authors.