Credit markets are headed for 'slow motion car crash,' hedge fund billionaire says

• Credit markets will soon look like a "slow-motion car crash," King Street Capital's Brian Higgins said.
• The billionaire investor's hedge fund made billions in the aftermath of the 2008 debt crisis.

Credit markets look like a "slow motion car crash," according to hedge fund billionaire Brian Higgins.

Higgins is the co-founder of King Street Capital, which made billions in the wake of the 2008 debt crisis. The firm is now looking to raise a $3 billion fund targeting opportunities in credit markets, a source told Bloomberg on Wednesday.

Higgins, meanwhile, told Bloomberg that he saw new opportunities in debt markets as tighter credit conditions pressure many firms.

"This market is a slow-motion car crash," Higgins said, describing opportunities in the market as a "walk, don't run" situation.

The firm is especially looking to increase exposure to commercial real estate, a source told Bloomberg, especially as the sector sees defaults and delinquency rates rise amid tighter lending standards, lower property valuations, and higher interest rates.

The firm's flagship portfolio posted a gain of 4.5% through May, and lost just 3.8% in 2022 as markets broadly swooned, a source said. It has outpaced other hedge funds in the market, with Bloomberg's credit hedge fund index gaining just 2.2% this year and losing 5% in 2022.

Experts have warned of trouble in debt markets after banking failures earlier this year caused other regional banks to pull back on lending. That's further tightened financial conditions, raising the risk of corporate debt defaults.

A credit crunch along with a full-blown recession could result in $1 trillion of corporate defaults, Bank of America estimated. Commercial real estate prices meanwhile could suffer a 40% crash, according to Morgan Stanley, thanks to $1.5 trillion of commercial real estate debt that's set to mature by 2025 and will have to be refinanced in worse market conditions.