Victor Khosla Sees 'Fat' Tail Risk in Credit Markets

• High-yield credit markets are 'wobbly' with 6% default rates, and spreads at 300 basis points are considered mispriced.
• AI is expected to disrupt segments of the software business, with UBS strategists projecting a worst-case 15% AI-triggered default rate surge in direct lending to software companies.
• Khosla's firm sees a growing pipeline of investment opportunities in hybrid capital, junior capital, and real assets, including industrial manufacturing, power plants, and real estate.

Victor Khosla, CIO of Strategic Value Partners, warns of a 'fat tail risk' in credit markets, particularly from potential AI disruption in software and mispriced high-yield spreads. He notes elevated default rates and sees significant opportunities for distressed debt and real asset investments amidst these market dislocations.