Avenue’s Marc Lasry Sees Reckoning for Investment-Grade Company Bonds

(Bloomberg) -- U.S. investment-grade corporate bonds are likely to plunge as economic growth slows, with some dropping as much as 40 percent, distressed-debt investor Marc Lasry said Wednesday.

The Federal Reserve is likely to lift short-term rates about another percentage point, slowing economic growth in the process. Eventually, a massive sell-off will follow in the $5 trillion market for U.S. investment-grade corporate debt, said Lasry, chief executive officer of Avenue Capital Group, in an interview on Bloomberg TV.

“In any slowdown, you're going to have bonds drop pretty quickly,” Lasry said. “We'll be able to buy those bonds somewhere around 60 to 70 cents on the dollar,” which are currently trading around 100 cents, he said.

About half the investment-grade market is now rated BBB, the tier just above junk. In 1993, that proportion was closer to a quarter. The growth in the riskiest portion of the investment-grade market has Lasry and other fund managers bracing for a flood of downgrades once the economic cycle turns.

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“There's going to be issues,” Lasry said. “I love issues. More issues. Just give me issues.”

Among the names that Lasry is starting to look at is General Electric Co., once synonymous with the highest credit ratings. The company has faced cash-flow shortfalls and falling earnings as weak power markets have undercut its biggest business. Its bonds aren't cheap enough for Lasry to buy just yet, but might be in a year, he said.

--With assistance from Erik Schatzker.

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins, Mary Romano

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