During his recent interview with Bloomberg, Howard Marks explains that leveraged companies will face difficulties renewing their debt and will incur higher costs, creating better investment opportunities. Six years ago, banks offered generous loans at low interest rates, but now the terms are much stricter.
This shift particularly impacts private equity and real estate, which have relied heavily on debt to boost returns. The increasing debt service costs will negatively affect returns, especially in retail and office real estate sectors.
While this presents challenges, it also offers opportunities for investors, as the market disruption creates potential bargains.
Here’s an excerpt from the interview:
But right now, and I think going into the future, leveraged companies will not be able to renew their leverage as easily, and the cost of doing so will be higher. So that gives us better opportunities than we’ve been seeing.
Just to put it in brief for your listeners: Six years ago, you had an idea. You went into the bank, you described it, and they said, “Fine, we’ll give you $900 million at 5%.” Now it’s time to renew your debt. You go in, you describe it again, and they say, “Good, we’ll give you $500 million at 9%.”
Well, clearly, now it will be in highly levered situations.
You name two of them: private equity and real estate. The leverage, the use of debt to amplify your returns, has been the lifeblood of these two asset classes, and they’ve done extremely well as a result. It was very, very salutary for them. But that’s where the pain will come in the future.
You can’t increase a company’s debt service cost markedly without affecting its returns. And in certain sectors of the real estate world, mainly retail and office, there are fundamental questions. So, you put that together, we think you’ll see some disruption.
Which will give us and people like us opportunity. This has been a really tough period for lenders, which is what we are, and a really tough period for bargain hunters.
You can find the entire interview here:
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