Alternative Perspectives: COVID-19 Expands Opportunity Set in Credit


There is a rush of new distressed funds coming to market. COVID-19 gave rise to broad-based and somewhat indiscriminate selling across asset classes and sectors. And while there has been meaningful recovery in some asset classes since the lows of March, volatility and uncertainty may persist, leading to increased dispersion and inefficiencies across markets. In other words, we may not be out of the woods just yet, and particularly so as it relates to the credit markets. Consequently, we believe a highly flexible hedged investment approach might be helpful.

At the depths of the selloff in March, leveraged loans traded down 20%, and high yield (HY) traded down over 22%. Even sectors less impacted by COVID-19, such as cable, utilities and technology, all traded off meaningfully. Meanwhile, there was a rush to perceived safe-haven assets such as US Treasuries and the dollar.

As jobless claims have hit all-time highs and helped to create a massive revenue shock for companies, many are vulnerable as nearly 15% of HY issuers lack the liquidity to meet half of their debt service payments over the next 12 months.

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  • Managing Director Head of Credit, Event, Relative Value Franklin K2 Advisors
  • Senior Managing Director Co-Head of Investment Research & Management Franklin K2 Advisors
  • Senior Managing Director Co-Head of Investment Research & Management Franklin K2 Advisors


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The identification of attractive investment opportunities is difficult and involves a significant degree of uncertainty. Returns generated from Alternative Investments may not adequately compensate investors for the business and financial risks assumed. An investment in Alternative Investments is subject to those market risks common to entities investing in all types of securities, including market volatility. Also, certain trading techniques employed by Alternative Investments, such as leverage and hedging, may increase the adverse impact to which an investment portfolio may be subject.

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