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GSO Capital Partners swung to a first-quarter gain on its distressed-debt investments as securities linked to troubled companies recovered from their swoon at the end of last year.

The credit arm of Blackstone Group LP posted a 3.1 percent net composite return on distressed assets for the quarter. That compares with a 0.6 percent drop in the same quarter a year earlier and negative 5.9 percent in the fourth quarter, according to Blackstone’s earnings presentation. The figure, which measures profit after taxes, fees and carried interest, amounts to a 0.3 percent gain for the trailing 12 months.

Investors in distressed debt struggled to post meaningful gains last year because low interest rates and frothy credit markets have helped troubled issuers find new backers to bail them out. By contrast, GSO’s net composite returns from performing credit were 3.2 percent for the quarter ended March 31 and 7.3 percent over the last 12 months.

An 11 percent rally in distressed-debt indexes this year hasn’t made the job any easier for the GSO unit. There aren’t a lot of troubled assets to choose among, and prices are relatively full, Blackstone President Jonathan Gray said on a conference call to discuss the results.

“It’s not an environment where you back up the truck and buy everything like it was seven or eight years ago,” Gray said. “We get this capital for a long period of time. So if there’s not a lot to do, we can sort of leave the bat on our shoulder.”

Blackstone Bounces Back GSO's net return on distressed strategies reversed loss to 3.1% gain in 1Q19 Source: Company filings

The entire credit unit managed about $132.3 billion at quarter end, making it the third-largest business unit at Blackstone. The supply of unused capital available to invest in credits of all types stood at $24.2 billion, little changed from the fourth quarter.

GSO’s composite gross return for distressed assets before fees and deductions was 3.7 percent for the quarter, reversing the 0.3 percent loss in last year’s first quarter and a negative 7.3 percent in 2018’s fourth quarter. The firm declined to elaborate on the results beyond the release and conference call.

Co-founded by Bennett Goodman, GSO is watched closely by investors because it’s one of the largest public and most active distressed-debt investors. Returns in the field can vary widely from one quarter to the next, with results depending in part on when troubled issuers decide to take corrective actions, when deals are completed and on court rulings.

The credit unit has undergone a series of changes in the past couple of years, winding down its hedge fund in favor of longer-term investments and naming Dwight Scott as president. Goodman stayed on as the only one of the three-co-founders after Tripp Smith and Doug Ostrover departed. Last month, the credit business hired Bob Carroll as a managing director and head of distressed trading.

GSO’s parent Blackstone also announced plans to convert to a corporation from a publicly traded partnership, as its assets crossed half a trillion to $512 billion for the first time. The switch makes it possible for the firm to be included in indices, which could potentially boost stock valuations and win more mutual fund and ETF investors. The conversion is expected to be effective July 1.

— With assistance by Heather Perlberg