Companies are about to get hit by a dangerous combination of too much debt and too little cash flow, according to Paul Goldschmid, a partner and co-portfolio manager at King Street Capital Management.
(Bloomberg) — Companies are about to get hit by a dangerous combination of too much debt and too little cash flow, according to Paul Goldschmid, a partner and co-portfolio manager at King Street Capital Management.
“There’s a huge math problem in credit right now,” he said while speaking Tuesday at The Brink Live, a distressed debt event hosted by Bloomberg.
King Street oversees more than $22 billion of assets under management.
Consider the more than $1 trillion leveraged loan market, Goldschmid said. Companies that boast B ratings currently tend to be levered about four to eight times, he added.
Meanwhile, risk-free rates have gone from zero to 500 basis points in a matter of months, creating a precarious situation for companies staring down maturities.
Goldschmid predicts that as part of the economic cycle, company earnings will start to decline even more in the coming months and that will create a predicament for those that are strapped by looming debt payments.
Commercial real estate is a sector that will suffer due to the “massive amount of floating rate debt,” he said.
Those hedges are starting to expire and capital markets remain “generally shut on the CMBS side.”
“We’re generally not long much in commercial real estate right now,” he said, although his firm has some short positions.
The sector is hurtling toward maturities, with $500 billion coming due in the next two years, he said.
That debt load creates a quandary for distressed investors who are tasked with figuring out whether there’s the potential for lucrative returns.
“Real estate is one of those things right now where things are starting to crack,” he said.
“And you keep on asking yourself, ‘is this the time to provide capital?’”
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