# Bigger Than the GFC: The Once in a Lifetime Cycle in Distressed Debt

### Introduction

The 2008 Global Financial Crisis (GFC) is the touchstone for investors in our lifetime. Selloffs, crises, even the consequences of financial contagion: all are measured by comparison to what happened in 2008. This makes us no different to previous generations. If we were to quiz the ghost of Benjamin Graham, we imagine that his point of reference would be the largest financial crisis of his career, the Great Crash of 1929.

For distressed debt investors especially, 2008 remains the benchmark. It was the largest distress cycle and offered some of the most rewarding distressed investing opportunities1 in modern history. As distressed debt levels once again approach those of the GFC, we could now be on the precipice of an even bigger, though surely different, distressed cycle. Fuelled by the latter stages of a forty-year bond bull market and turbocharged by Covid-induced borrowing, the global debt burden as a percent of GDP is now larger than ever before2 and appears vulnerable to a shift in the interest rate regime, at the same time it faces other, idiosyncratic stressors. The result has been a significant spike in distressed debt, led by emerging markets (EM) and EM sovereigns in particular (Figure 1). EM distressed has grown relative to developed markets (DM) distressed consistently and now represents 80% of the stock of distressed debt, from closer to 10% following the GFC, and the trend has accelerated since 2019 (Figure 2).

In our view, we may be on the cusp of a distressed debt super cycle – but unlike in 2008, the crisis is likely to originate from EM, not DM.

With more and larger EM sovereigns starting to default or restructure, distress in EM sovereigns has continued to expand. We now also view the contagion is beginning to envelop otherwise creditworthy EM corporates, and could spread beyond EM to infect DM, with European credit being particularly vulnerable. In our view, we may be on the cusp of a distressed debt super cycle – but unlike in 2008, the crisis is likely to originate from EM, not DM. Investors should be prepared: for those with flexible capital, a discerning research agenda and broad geographic scope, this could be the career-defining cycle.