Palace/Workshop

Credit Investing as Negative Art

investingcreditriskunderwritinghoward-marks

Credit Investing as Negative Art

Credit investing is mostly the art of avoiding losers rather than finding uncapped winners.

Core Idea

In equities, a few huge winners can dominate returns. In credit, upside is usually capped by the contract: interest payments plus principal repayment. The downside, however, can be large if the borrower defaults or the debt is impaired.

That makes credit a "negative art":

  • Avoid default-prone borrowers.
  • Demand enough spread for the risk.
  • Structure covenants and protections where possible.
  • Watch liquidity and refinancing risk.
  • Treat good times as dangerous because underwriting standards usually weaken.

Marks' Version

Howard Marks repeatedly says Oaktree's job is to avoid losers. In 2023-2025, this becomes especially important because higher rates made credit yields attractive again and private credit became fashionable. Higher promised yield is only useful if the borrower can pay.

The 2025 First Brands and Tricolor episodes show the same lesson in event form: frauds and weak credits are often seeded during good times, then revealed when scrutiny returns.

Connections

  • credit-cycle - Lending standards loosen in good times and tighten after losses.
  • liquidity-risk - Credit positions can become hard to exit when the market loses confidence.
  • second-order-thinking - Good credit research assembles a mosaic of weak signals before the market fully reacts.
  • sea-change-in-rates - Higher rates can make credit attractive, but also expose weak borrowers.

Sources