DoubleLine Capital LP is reining in its corporate-debt buying, fearing that an already frothy market is growing more perilous as richly valued companies prepare for record borrowing to fund the artificial intelligence boom and acquisitions.
“This year is going to be the risk-building year,” said Robert Cohen, director of global developed credit at DoubleLine. “You have more risk, less spread. It’s the worst scenario.”
The risk premiums investors demand for holding high-grade corporate debt over low-risk government bonds are hovering near their lowest in about three decades, while warnings of complacency in credit markets are growing louder across Wall Street. But the “real froth” is set to hit this year as all kinds of companies releverage and lending standards weaken, leading to a deterioration of credit metrics, Cohen said in an interview.
“We’re in a credit expansion phase,” he said. “This is where credit risks build.”
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His warning comes at a time when much of the euphoria in the stock market is being driven by a few AI-linked companies, like Oracle Corp. Lofty valuations are particularly concerning for Cohen as he views a potential revaluation in the equity market as the most significant near-term risk for credit. It wouldn’t take much of a change in the narrative to spur a market correction, which in turn could cause credit spreads to widen, he added.
The $96 billion asset manager is focused on credit selection instead of trading short-term volatility and is cutting back on its company bond holdings overall, from high-yield to investment grade. DoubleLine has also been moving up in quality across the board, pulling back from lower tiers of junk-rated debts and putting a higher-than-usual weighting into Treasuries and agency mortgages. Amid the ongoing tariff tensions, Cohen is avoiding borrowers with substantial tariff risk and he’s particularly concerned about the retail space given the uncertainties about the resilience of middle- and lower-income Americans.
It’s a reversal from the post-pandemic years, when companies prioritized being improving their balance sheets. Firms focused on refinancing and paying down debt, resulting in lower net supply, strong demand and more upgrades than downgrades. However, dealmaking across sectors picked up last year and now the environment looks favorable for companies to pile on even more debt, added Cohen.
There’s around $63 billion of high-grade bonds that are teetering on the brink of junk. Investors have been particularly worried about Oracle, which has become the barometer for AI risk in credit. Cohen is concerned about the database giant’s lack of transparency around its future profitability prospects, cash burn and different borrowing arrangements.
An Oracle representative declined to comment.
Investors don’t know if Oracle is going to get a return on capital in excess of the cost of capital, he said. Meanwhile, the company is burning cash and the market and credit rating providers are “taking on faith that this capital is being deployed in a productive way,” he added.
“That’s a lot of uncertainty for me,” said Cohen. “Maybe I’m an old-fashioned credit curmudgeon. I want to see the economic activity so I don’t like that setup.”
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