A cycle-aware approach to investing (JPMorgan Chase & Co.)

April 2013

KEYWORDS: debt, distressed debt, capital markets, Macro Trends, Macro, credit default swaps, CDS, Hedge Fund Research, Barclays, collateralized loan obligation, CLO

Authors:

James P. Shanahan, David J. Matherly, Thomas J. Skowron

Organizations:
  • JPMorgan Chase & Co.

Summary:

History shows the most attractive returns in distressed debt are generally earned during the period of spread tightening around peak levels of default.  Distressed opportunities can be found across the credit cycle – whether driven by macro developments, secular downturns or idiosyncratic credit events.  We believe investors can be rewarded by committing capital to distressed debt when fundamentals remain solid and defaults are relatively low – before the onset of the next default cycle.  In our view, the opportunity cost of committing capital too early in the distressed debt cycle is less than the cost of being late.  Spreads tend to tighten much faster in a recovery, thus providing a limited window for capturing peak returns.

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