Where There's Smoke, There May be Fire... & Opportunity?

Destra Capital

A Timely Market Update on Special Situations Credit Investing

Jake Schultz, CFA, Director, Investment Strategy at Destra Capital, recently sat down for a discussion with Adam Phillips, Portfolio Manager and Head of BlueBay Special Situations team (RBC Global Asset Management), to discuss recent geopolitical events and market headlines around credit distress, and to understand how Adam and his team are navigating dislocated credit markets today.

Jake Schultz:“Adam, thanks for speaking with us today. Your team has been foreshadowing mounting stress and distress in European credit markets for several years now due to higher interest rates, excess leverage, and an uptick in geopolitical events. How has your team tried to take advantage of these market headlines and dislocations?”

Adam Phillips: “Today, we have an intentionally higher allocation to distressed businesses in our portfolios. On average, we have usually held about one-third of exposure to these issuers, but the additional exposure seen today is a function of the rich opportunity set within the European mid-market.

As we entered 2026, the majority of the distressed positions held have completed their respective restructurings where the businesses have been de-risked, process risk has been eliminated, and we are optimistic that the businesses will turn around now that their respective balance sheets are appropriately right-sized.

One example is a German auto-parts business where we were instrumental in the restructuring which completed in November 2025. We are now in a position where we are waiting for the business to turn around. We believe the company could be a strategic target for an Asian car manufacturer given the market dominance the company has in Europe.”

Jake Schultz: “Are there any new themes or opportunities that your team is monitoring?”

Adam Phillips: “Whilst the strategy is largely idiosyncratic, oil tankers are an interesting area as the day rates have climbed post Venezuela and Iran. Potentially, this type of theme offers a hedge against geopolitical risk.”

Jake Schultz: “How does the RBC BlueBay platform help you and your team stay up to speed in the current market environment?”

Adam Phillips: “A key advantage of the BlueBay platform is issuers can move between desks, for example from investment grade to high yield and then fall into our space. An example is a French IT firm which has made this journey, and the advantage of the platform is we have a deep knowledge of the company built up over a long period. Cross-desk knowledge was a strong source of information in 2025 and is expected to continue in 2026.”

Jake Schultz: “A lot has happened in the first two months of 2026. What is the opportunity set for Special Situations Credit throughout the remainder of 2026?”

Adam Phillips: “We anticipate the opportunity set for European special situations will continue to improve meaningfully. A large volume of capital structures were refinanced during the low-rate environment of 2020–2021 and are now approaching maturity in a materially higher cost-of-capital regime. At the same time, lender flexibility is diminishing, earnings growth is slowing, and refinancing options are becoming more constrained. It’s also interesting that we see many of the opportunities in Germany and France – traditionally the strongest in Europe – and less in peripheral Europe. I would also add we do foresee some of the stresses in private credit creating pockets of interest in the future.”