SVP's Victor Khosla Sees 'Lots of Pressure' in Credit Market

Khosla sees credit stress broadening: oil shock, software defaults (15-20%), Europe recession, and real estate contagion. Defaults at 6% annually (Moody's) sustained through 2025, akin to COVID but prolonged. He's deploying $1.5B into distressed assets, betting on operational turnarounds. Key takeaway: avoid software, small caps, and oil; watch for yield easing as cycle matures.

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SVP's Victor Khosla Sees 'Lots of Pressure' in Credit Market

dxy

Europe (30% of high yield) is struggling, Western Germany in recession; relative weakness in Europe may support USD strength.

ndx

Software is facing 15-20% defaults; when software goes bad, it goes off a cliff.

rut

Broad contagion across homebuilding, chemicals, consumer brands, and real estate suggests small-cap Russell 2000 companies will be under severe pressure.

wti

An oil shock is reverberating through the credit market, compounding defaults.

1 calls

-25

frequent wrong calls with noticeable losses

yields

High interest rates are pressuring credit, but Khosla is investing heavily, implying yields may ease as the cycle progresses and defaults rise.

Asks about the health of the credit space given high interest rates and pressure.

Ramon
Victor Khosla

High interest rates are amping up pressure; an oil shock is reverberating with unclear depth; software is 20% of high yield and facing existential concerns.

Defaults are picking up over the last 4-5 months.
Questions whether software concerns are appropriate and if there are opportunities in beaten-down software names.

Ramon
Victor Khosla

Software concerns are real; defaults of 15-20% are expected, similar to telecom bust (2001) or oil & gas (2014). When software goes bad, it goes off a cliff.

We've studied busted software companies for two years; it takes 9-12 months to identify survivors.
Asks whether the environment calls for offensive or defensive stance on software defaults.

Ramon
Victor Khosla

Default rates in 2024 and 2025 will be 6% per year (Moody's), comparable to COVID's 9% spike but sustained. Oil shock and software distress compound the cycle.

We are investing $1.5 billion in the last six weeks, signaling opportunities amid caution.
Asks about focus areas for special situations fund.

Ramon
Victor Khosla

Contagion is broad: homebuilding, building products, chemicals (20-year down cycle), consumer brands, Europe (30% of high yield, Western Germany in recession), real estate (slow-moving tsunami).

These are not pockets but large chunks of industry; we buy for operational turnaround, not just rebound.
Asks about ripple effects from software pain to credit and BDC redemptions.

Ramon
Victor Khosla

Open-ended fund redemptions are not one-and-done; partial redemptions trigger more. The cycle will take 12-18 months to work through.

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