Expect credit spreads to widen out substantially from here, says SVP's Victor Khosla

Summary

• Victor Khosla defines opportunistic credit investing as broader than distressed debt, involving buying control of businesses, fixing them, and improving assets.
• Credit markets have been under pressure for years due to higher interest rates and default rates, even while equity markets were strong.
• Recent pressures include threats from AI to software, geopolitical events like the Iran war, and sector-specific issues such as lumber.
• His firm has been net sellers, monetizing assets, but is now ramping up investments as opportunities develop from accumulating stress.
• Software sector is high-risk, with marks potentially collapsing from 100 to zero due to technology changes, not normal cash flow declines.
• Compares software stress to historical telecom and oil crashes, characterizing it as a "hiss, not a pop" – a gradual decline.
• Avoids software investments due to contagion risk spreading from software to other sectors.
• Focuses on real economy businesses: manufacturing in a 12-month recession in US and Europe, troubled consumer brands, chemicals in a once-in-a-generation down cycle, and home building.
• Base case expects no recession but anticipates credit spreads widening substantially, driven by conflict between troubled real economy and technology-driven growth.
• Has dry powder of $7.5 billion from $22 billion AUM to deploy in identified opportunities.
• Contagion from software stress is creating investment opportunities in real economy sectors.