(Bloomberg) — Pacific Investment Management Co. is using its deep pockets to snap up bargains among assets that have been hurt by the cost of living crisis, surging inflation and rising interest rates.
The Newport Beach, California-based fund manager has spent more than $2 billion in recent months to buy leveraged debt backing consumer companies that banks had struggled to offload. The purchases are part of a broader strategy at the firm to capitalize on depressed prices, according to people familiar with the matter, who asked not to be named because details are private.
With $1.8 trillion of assets under management, Pimco is well placed to make such bold moves, but it’s an approach that’s fraught with risk as the global economy teeters on the edge of recession. The firm will likely have to stomach several quarters of poor performance before the investments have any potential to come good, making it vulnerable to outflows, and could incur big losses if the bets sour.
“For this to pay off over the long term, two things have to be true: first, you need to be correct about the investment thesis; and second, you need to have a good handle on liquidity,” said Mara Dobrescu, an analyst at Morningstar Inc in Paris. “Historically, Pimco has been able to do both with a fair degree of success.”
A spokesperson for Pimco declined to comment on the firm’s credit strategy.
Pimco CEO Manny Roman has been waiting for these kind of opportunities since 2018, when he said in an interview with Bloomberg News that the firm was preparing for a recession within the next five years. The asset manager is well known for taking outsized — and ultimately successful — bets on mortgage-backed securities during the global financial crisis.
At the end of May, Pimco bought 600 million euros ($608 million) of loans and 545 million euros of bonds backing the unsuccessful sale of British grocery chain Wm Morrison Supermarkets Plc. The deal was underwritten by banks last August, when market conditions were more favorable, but flopped earlier this year on concerns the retailer would struggle amid rising inflation and an economic downturn. Pimco bought some of the bonds at 85% of face value and they are now trading around 82 cents, according to Bloomberg data and people familiar.
Last month, Pimco snapped up 1 billion euros of loans backing Apollo Global Management Inc.’s acquisition of Worldline SA’s payment terminals unit, also at a steep discount. The asset manager bought the loan in the range of 85 cents on the euro and added it to its largest fund, the $124 billion Income Fund, according to some of the people.
The firm’s size means it can usually buy a large chunk of each loan, which gives it better terms, and potentially a say in how the restructuring of the underlying company is carried out, according to Dobrescu. It also has a team of more than 60 credit analysts able to drill into company financials and spot underpriced assets, she said.
Clients withdrew 28.7 billion euros from the bond giant in the three months through June, the biggest quarterly outflow since the onset of the pandemic in early 2020.
The buying spree has provided something of a lifeline for banks, though. The Morrisons and Apollo deals were underwritten before the recent jump in interest rates and lenders including Goldman Sachs faced having to keep the risky debt on their balance sheets.
Read More: Global Banks Suffer Almost $2 Billion Hit on Buyout Financing
Pimco could also get stuck with that debt if the price doesn’t recover, but it can spread the risk out over multiple funds, according to Noel Hebert, director in credit research at Bloomberg Intelligence.
“You buy at a price that fits your view of the credit,” Hebert said. “Pimco, given its size, needs to be able to put a lot of money to work, so these purchases are a good opportunity for them.”
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