AI summary and analysis
Marks answers the market's most frequently asked credit spread question: The key is not whether the spread is narrow, but whether current earnings are sufficient to cover future credit losses.
Key points
- He included the long-term default rate and loss rate of high-yield bonds into the calculation, reminding investors not to just look at the absolute yield or spread level.
- After interest rates return to higher levels from near zero, credit assets regain discussable absolute returns, but this does not mean there is no risk.
- Marks argued that credit versus equity offered a more attractive risk reward at the time because cash flows were more contractual and less uncertain.
- He remains a reminder of the need for underwriting discipline in both private credit and high-yield debt, especially assets that have not yet gone through a full distress cycle.
- This memo is important material in understanding why Oaktree prefers credit opportunities.