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Speaker 1: Hello, Welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Mohit Mittel, chief

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Speaker 1: investment Officer for Core Strategies at PIMCO.

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Speaker 2: How are you, mo Hit, I'm good, Thanks for having me, James.

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Speaker 1: Thank you so much for joining us today. We're very

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Speaker 1: excited to get your credit market views. Also delighted to

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Speaker 1: have back on the show Steve Flynn with Bloomberg Intelligence. Hello, Steve,

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Speaker 1: Hi dreams And from Bloomberg News, rene Garcia Perez covering

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Speaker 1: credit markets from London. How are you at Rennie?

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Speaker 3: Hello, James, very well, Thank you great so.

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Speaker 1: Pimco, one of the biggest bond funds in the world,

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Speaker 1: had a very interesting report out this month, what they

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Speaker 1: call the cyclical Outlook. On page one. There's a word

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Speaker 1: that jumped out. I use it a lot on this show,

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Speaker 1: but it's not always one that guests want to get into. Complacency.

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Speaker 1: The full sentence is we maintain a cautious stance given

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Speaker 1: some complacency we see in corporate credit due to tight evaluations.

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Speaker 1: So can we talk about that. Mohit I mean a

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Speaker 1: lot of people have raised the idea of being cautious,

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Speaker 1: mostly because spreads are so tight, but also because we

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Speaker 1: have a lot of potentially destabilizing things happening out there,

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Speaker 1: from geopolitics and the US election to inflation and recession risk,

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Speaker 1: all of which could push spreads a lot wider. But

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Speaker 1: on the other hand, if you haven't leaned into risk,

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Speaker 1: you've underperformed. Fundamentally, there are dangers, but the technicals of

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Speaker 1: credit just seem too strong. So why the caution now

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Speaker 1: and how do you express that? Mohit in a credit portfolio?

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Speaker 2: Absolutely, James Tex again for having me, maybe.

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Speaker 4: For the listeners.

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Speaker 5: I'll just provide a little bit of a context around

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Speaker 5: what we do at PIMCO. At PIMCO, we manage about

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Speaker 5: one point nine trillion that spans broad global fixed income markets,

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Speaker 5: but it also incorporates alternatives real estate, asset based lending,

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Speaker 5: as less private corporate credit. Having that kind of diverse

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Speaker 5: portfolio helps us get a good perspective into investor flows,

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Speaker 5: but then also allows us to have an unbiased discussion

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Speaker 5: around relative value across different segments of the market. To

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Speaker 5: your question around credit, I think one thing before we

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Speaker 5: go into credit That stands out to us also is

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Speaker 5: that following the repricing that we saw or the generational

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Speaker 5: reset in rates that we saw in twenty twenty two,

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Speaker 5: that has created an immense value in high quality fixed income.

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Speaker 5: I'm talking about high quality fixed income across US, but

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Speaker 5: also outside of US in countries like UK, Australia, Canada,

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Speaker 5: and you can use that to construct a portfolio that

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Speaker 5: broadly yields give or take six percent that under most

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Speaker 5: states of the world will deliver sixi ish percent over

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Speaker 5: the next three years. But then in an environment where

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Speaker 5: the central banks have to cut rates more than expected,

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Speaker 5: can certainly deliver returns that are closer to double digits.

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Speaker 5: So in that backdrop, when we compare against credit oriented assets,

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Speaker 5: we see there is signs of complacency there, we see

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Speaker 5: more value in high quality fixed income. And then when

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Speaker 5: we put together or incorporate all the risks that we

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Speaker 5: see and we certainly could talk more about it, including geopolitics, politics,

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Speaker 5: but then also incorporate valuations, it stands out to us

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Speaker 5: that we can construct a much better quality portfolio that

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Speaker 5: does protect the investor from the downside risks and then

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Speaker 5: does not compromise on the return or the yield expectations.

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Speaker 6: So when you think about the potential for all in

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Speaker 6: total return, whether it's investment great or high yield, you know,

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Speaker 6: we're at a level where spreads are pretty tight. So

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Speaker 6: do you need underlying US treasuries to tighten for overall

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Speaker 6: return or were just looking at a Carrie tree going forward.

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Speaker 5: I think it's a combination of a lot of different things.

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Speaker 5: I think twenty twenty three is an interesting example. We

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Speaker 5: started twenty twenty three with ten year treasury at three

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Speaker 5: point nine percent, and that in twenty twenty three. At

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Speaker 5: the end of twenty twenty three, ten year treasury closed

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Speaker 5: at three point nine percent. Yet many of our core

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Speaker 5: strategies are you know, income oriented strategies, delivered returns that

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Speaker 5: were closer to six to seven and a half percent

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Speaker 5: as well. So it's a combination of basically little bit

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Speaker 5: around higher quality fixed income interst rate risk. But then

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Speaker 5: it also incorporates a lot of global relative value. So

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Speaker 5: I was referring to kind of opportunities outside of US

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Speaker 5: as well. Basically, what we're seeing, for example, is that

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Speaker 5: growth in countries like Australia UK slowing more meaningfully than

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Speaker 5: that in the US. So there's certainly more room for

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Speaker 5: central banks to cut there. We go into other higher

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Speaker 5: quality spread products like agency mortgages, which have lagged quite

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Speaker 5: substantially following the Silicon Valley bank situation in twenty twenty three,

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Speaker 5: so that has provided an opportunity continues to provide that

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Speaker 5: opportunity you know, structured products, higher quality structured products. And

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Speaker 5: then also within you know, corporate credit, even though valuations

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Speaker 5: are at the tighter end, you see good opportunities in

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Speaker 5: higher quality sectors like banks, like utilities, even some select

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Speaker 5: telecom So it's a combination of all these things which

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Speaker 5: incorporate basically a base level of yields, a lot of

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Speaker 5: very attractive you know we would call alpha opportunities to

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Speaker 5: add value that allows for investors to capture that higher

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Speaker 5: return in an environment where treasuries did not go down

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Speaker 5: and yield last year. This year is again the same

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Speaker 5: thing you see that you saw the ten year start

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Speaker 5: at three point nine percent. We are at about, you know,

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Speaker 5: give or take just around four percent four point zero

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Speaker 5: five percent. Yet that you're seeing returns to the tune

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Speaker 5: of north of five percent in high quality fixed income

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Speaker 5: and you still have a quarter to go.

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Speaker 1: You say you can get to double digit, So is

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Speaker 1: it ten percent? Is there it to twenty percent? I

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Speaker 1: mean these are kind of equity like returns in credit,

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Speaker 1: which we've heard some of our guests get quite excited about.

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Speaker 1: And how do you get to that without taking on

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Speaker 1: a ton of risk?

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Speaker 5: Yeah, so I think again, just to clarify, a men

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Speaker 5: double digit in higher quality fixed income, which does include

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Speaker 5: interest rate exposure or duration exposure. And I was referring

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Speaker 5: to a scenario where growth is slowing down, so it's

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Speaker 5: a bit of a DIVERSI fire to equity risk. So

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Speaker 5: certainly think of a scenario where equities are down fifteen

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Speaker 5: to twenty percent, and in that environment, central banks, likely

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Speaker 5: driven by growth concerns, likely because inflation is coming down,

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Speaker 5: can certainly cut rates much more than currently priced into

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Speaker 5: the markets.

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Speaker 4: We are at.

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Speaker 5: FED has brought down rates towards five percent, but certainly

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Speaker 5: there's a scenario central bank can bring rates to three

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Speaker 5: percent or even lower if there is any kind of

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Speaker 5: growth recession. And when you think about these higher quality

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Speaker 5: fixed income strategies, broadly speaking, they have an interest rate

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Speaker 5: duration of five to six, So you think about starting

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Speaker 5: yield that is near five and a half to six

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Speaker 5: percent add to it basically the exposure or the total

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Speaker 5: return that will come from yields going down. So for example,

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Speaker 5: each one hundred basis points of yield going down would

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Speaker 5: essentially mean a total return that is, you know, five

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Speaker 5: and a half to six percent.

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Speaker 4: Above the yield.

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Speaker 5: So that gets you to that double digit return. Again,

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Speaker 5: in a scenario where growth is slowing down, equities are

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Speaker 5: lower and hence acting as a very nice diversifier to

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Speaker 5: the equity risk or other credit oriented risks that investors

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Speaker 5: have in their portfolio.

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Speaker 1: But if the fat does start cutting at that pace,

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Speaker 1: you know, quite aggressively, does that not signify something very

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Speaker 1: bad in the fundamental to the economy that might lead

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Speaker 1: to more defaults? You know, it might push credit spreads

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Speaker 1: a lot wider, and therefore you lose You lose out

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Speaker 1: on that side.

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Speaker 5: Absolutely, I think you would certainly lose out on the

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Speaker 5: credit spread side, which is why I think what we

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Speaker 5: are referring to is a more higher quality fixed income

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Speaker 5: strategies that have much lower credit exposure. So example that

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Speaker 5: I was providing, for example, you know, when we replace

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Speaker 5: our corporate credit risk with agency mortgage risk in an

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Speaker 5: environment where growth is slowing down, equities are declining, central

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Speaker 5: bank has to cut rate, credit quality is deteriorating. Certainly,

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Speaker 5: credit spreads can widen. But what would happen on the

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Speaker 5: other side of it is agency mortgages, which have lagged

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Speaker 5: because of high you know, hawkish central bank policies, because

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Speaker 5: of basically higher interest rate volatility, they can perform quite well.

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Speaker 5: So that would certainly allow for four fixed income to

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Speaker 5: do well in that scenario. You can look at kind

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Speaker 5: of what happened. For example, a very simple case would

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Speaker 5: be what happened in the first.

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Speaker 4: Three days of August this year. In the first three

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Speaker 4: days of August this year.

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Speaker 5: You saw equities decline almost five six percent as you

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Speaker 5: saw this Japan carry trade unwind happen through the through

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Speaker 5: the system. During that period, fixed income returned north of

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Speaker 5: five percent. Similarly, during the Silicon Valley bank situation, when

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Speaker 5: you had equities decline substantially, you saw fixed income post

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Speaker 5: nice positive returns. So certainly there's an environment where you know,

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Speaker 5: you see weakness in equities, credit spreads widen somewhat, But

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Speaker 5: having a portfolio that is broadly diversified across higher quality

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Speaker 5: fixed income with some interest rate duration can perform quite nicely.

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Speaker 2: Mohite.

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Speaker 3: You were mentioning structured credit earlier in the Cyclical Outlook,

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Speaker 3: You mentioned that you see acid based lending as more

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Speaker 3: attractive than private corporate credit. What acts in part sequelar

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Speaker 3: do you see attractive in that space? And also, this

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Speaker 3: is an area where Pinco has been lending for decades.

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Speaker 3: Why is it more attractive now than it was, say

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Speaker 3: ten years ago.

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Speaker 5: Yeah, So I think let's break down that question first

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Speaker 5: with respect to asset based lending, and then with respect.

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Speaker 4: To corporate credit.

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Speaker 5: First, let me just talk a little bit about private

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Speaker 5: corporate credit. I think you know, if you look at

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Speaker 5: it in the little bit of a longer historic context,

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Speaker 5: what you observe is quite interesting. And I'm going to

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Speaker 5: use high yield market as a reference point, and then

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Speaker 5: that kind of can be a good reference point to

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Speaker 5: other private corporate credit, which is somewhat more levered than

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Speaker 5: even the high yield market. So if you look at

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Speaker 5: the high yeal market, which started to take hold in

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Speaker 5: the early eighties, what you observe is that the starting

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Speaker 5: spreads were high back then. But then you also had

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Speaker 5: a continuous or a very periodic call it some form

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Speaker 5: of default or stress cycle, beat the nineteen eighty seven

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Speaker 5: equity market crash, sorry, nineteen ninety DRUGXEL situation, LTCM situation

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Speaker 5: in the late nineties, or even the telecom situation in

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Speaker 5: two thousand and two. So what that meant was that

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Speaker 5: for the first twenty years from nineteen eighty three to

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Speaker 5: call it twenty two thousand and two, the excess return

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Speaker 5: on high yield. When I say excess, I'm referring to

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Speaker 5: the return from spread excess of interest rate exposure subtracting

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Speaker 5: the defaults, the excess return was only about zero point

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Speaker 5: six percent. Then subsequently, in two thousand and two, you

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Speaker 5: started to see you know growth pickup, you know, spreads

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Speaker 5: to quite well for the five six years until two

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Speaker 5: thousand and eight happened, and then that took away a

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Speaker 5: meaningful portion of excess return, so much so that from

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Speaker 5: two thousand and two to two thousand and eight, the

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Speaker 5: excess return on high shield was negative one percent or

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Speaker 5: negative one and a quarter percent. Then, when two thousand

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Speaker 5: and nine started, we started with very attractive wider valuations,

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Speaker 5: but then it was also accompanied by very you know,

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Speaker 5: stimulative fiscal as well as monetary policies, and that continued,

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Speaker 5: and even in COVID we had some stress, but that

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Speaker 5: was quickly came back with a very strong fiscal policy

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Speaker 5: as well as a strong monetary policy including q's and

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Speaker 5: low interest rates. And that meant that from two thousand

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Speaker 5: and nine to two thousand and twenty four, the access

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Speaker 5: return on broadly speaking, levered credit was give or take

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Speaker 5: seven percent. And you know, when we look at it

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Speaker 5: in that twenty you know, call it over a thirty

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Speaker 5: five year history, the last ten plus years seem somewhat unique.

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Speaker 5: And that has been basically a combination of initial valuations,

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Speaker 5: combination of very very strong fiscal which has gone from

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Speaker 5: you know, call it thirty five percent debt to GDP

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Speaker 5: in two thousand and seven to about one hundred and

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Speaker 5: five percent debt to GDP and then very strong qus

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Speaker 5: now where we are now, and then we think about

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Speaker 5: over the next five years, we have valuations that are tighter,

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Speaker 5: and that applies to levered credit, that applies to private

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Speaker 5: corporate credit as well. And then you also have a

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Speaker 5: scenario where fiscal and monetary policy may not come to

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Speaker 5: the rescue as they have in the past because of

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Speaker 5: some form of constraint imposed by very high debt to

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Speaker 5: GDP and then already a large central bank balance sheet.

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Speaker 5: You contrast, and then you add to it has been

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Speaker 5: happening with respect to covenance, you know, with respect to

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Speaker 5: you know, sponsored activity, And then you contrast with asset

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Speaker 5: based lending, which to us includes lending to a lot

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Speaker 5: of areas tied to the consumer, which has the benefit

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Speaker 5: of owning a house or a property. It is tied

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Speaker 5: to areas like aviation finance, equipment rental, where you have

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Speaker 5: a little bit of a better asset coverage, but then

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Speaker 5: also a very strong documentation. When you look at, you know,

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Speaker 5: some of the documentation that is tied to this asset

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Speaker 5: based lending, you know, you have thick pages of documentation

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Speaker 5: which speaks to kind of the restrictions or at least

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Speaker 5: the policy changes over the last fifteen years, relative to

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Speaker 5: in the corporate credit where the documentation, documentation tends to

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Speaker 5: be very very light, covenance weakening. So that's the comparison

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Speaker 5: or the contrast that we draw between asset based lending

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Speaker 5: and corporate private corporate credit at this point point where

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Speaker 5: we think valuations are somewhat attractive, but then also the

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Speaker 5: fundamentals are significantly different. And hence over the next three

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Speaker 5: five years, we would see asset based lending play out

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Speaker 5: very differently relative to private corporate credit. Right.

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Speaker 3: In terms of private corporate credit, perhaps the one exception

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Speaker 3: is the capital solutions strategy, I think or where do

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Speaker 3: you see the opportunities in that particular pocket?

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Speaker 5: Yeah, so I think capital solution strategy is quite interesting, right.

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Speaker 5: What it is saying is that you know, when there

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Speaker 5: are challenges, when there are companies that run into any

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Speaker 5: kind of stress, and you're seeing that quite regularly, there's

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Speaker 5: an opportunity to provide a very senior secured capital at

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Speaker 5: terms that are much more accreative to the new lenders.

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Speaker 2: And that's what that.

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Speaker 4: Strategy is essentially based off of.

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Speaker 5: And why we think that is more attractive is when

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Speaker 5: we look at for example, I think Moody's publish this

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Speaker 5: study last week and there's an interesting study to read at.

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Speaker 5: What it shows is that the default rate in p

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Speaker 5: backed companies is starting to pick up and has gone

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Speaker 5: to about six to seven annalyzed rate for private equity

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Speaker 5: banked backed companies. Compare that to only about one and

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Speaker 5: a half to two percent default rate for broad high yield,

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Speaker 5: and compare that to about three and a half percent

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Speaker 5: default rate to broad broadly syndicated loan market. So certainly

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Speaker 5: there's an opportunity to benefit or at least to provide

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Speaker 5: a new capital for for that. The other area also is,

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Speaker 5: you know, when we kind of think about, you know,

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Speaker 5: financing for you know, basically navy line, so that can

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Speaker 5: also be another area where that capital solution strategy can

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Speaker 5: provide provide financing at very attractive terms to the new investors.

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Speaker 3: On that, just a very quick follow up, one of

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Speaker 3: the issues that private credit has seen in recent years

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Speaker 3: is that because the space has gotten crowded, the documentation

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Speaker 3: has also got worse, even even for them, not just

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Speaker 3: for public markets in the capital solution space. Do you

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Speaker 3: see potentially that issue down the line as well, or

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Speaker 3: we're far from it yet.

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Speaker 5: I think we're further away from that again, you know,

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Speaker 5: it's all it's all about to us, it's all about,

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Speaker 5: you know, how much capital is chasing a certain opportunity.

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Speaker 5: What you're seeing in private corporate credit, a lot of

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Speaker 5: assets have been raised, a lot of funds are essentially

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Speaker 5: chasing that, and I think, like you know, the simplest

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Speaker 5: way to think about is that previously you know, you

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Speaker 5: would have a very tight knit group of lenders and

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Speaker 5: that would allow for you know, documentation to be a

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Speaker 5: little bit stronger. What has happened is you've seen a

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Speaker 5: more newer entrance into pe that has led to weakness

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Speaker 5: in relationship between the sponsors or the sponsor led weakness

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Speaker 5: and the sponsor led relationships versus in a capital solutions strategy,

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Speaker 5: you can certainly kind of, at least at this point,

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Speaker 5: dictate or even kind of state terms that are more

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Speaker 5: advantageous to you.

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Speaker 6: Well, how do you think about relative value between the

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Speaker 6: public and private corporate credit markets? Is it mainly driven

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Speaker 6: by the documentation, the stronger covenants that you're talking about,

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Speaker 6: or to what extent is liquidity potentially a driver and

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Speaker 6: relative value between the two classes.

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Speaker 5: Yeah, I think that's an interesting question, and we kind

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Speaker 5: of tend to think about it in pretty detailed manner

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Speaker 5: when we look about when we look at the two

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Speaker 5: we see four sources of differences, and that's important to

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Speaker 5: understand what those are. I think those four sources are

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Speaker 5: tied to first one liquidity, and I'll go into.

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Speaker 2: The details of each of these.

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Speaker 5: So the first is liquidity differences, which you alluded to

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Speaker 5: The second is associated with opportunity cost. The third is

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Speaker 5: associated with basically the opportunity to add value in active

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Speaker 5: fixed income or what we call the alpha opportunities in

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Speaker 5: active fixed income or active public fixed income, which is

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Speaker 5: a little bit less prevalent in private credit. And then

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Speaker 5: the fourth is the credit quality differences. So let's go

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Speaker 5: into each of these one by one. So liquidity. I

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Speaker 5: think the liquidity differences are huge. There is a lot

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Speaker 5: of talk more recently that I've heard where it says

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Speaker 5: that the liquidity in public fixed income is quite weak,

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Speaker 5: and I think nothing could be far from truth on

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Speaker 5: that front. When you look at public investment grade, Steve,

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Speaker 5: you cover credit, you would have good sense of that

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Speaker 5: as well. When we look at the liquidity in public

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Speaker 5: investment grade, what you observe is a daily trading to

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Speaker 5: the tune of about thirty five billion, monthly trading to

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Speaker 5: the tune of about eight hundred billion, and that number

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Speaker 5: has gone from two hundred billion monthly trading ten years

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Speaker 5: ago to.

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Speaker 4: Eight hundred billion monthly trading.

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Speaker 5: That has happened because of growth in technologies which has

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Speaker 5: enabled trading. It has happened because of growth in ETFs

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Speaker 5: as well. As portfolio trading. On the other side of

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Speaker 5: it is, you know, liquidity considerations in private corporate credit,

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Speaker 5: which are again in a sparse quite quite quite low.

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Speaker 5: So certainly there needs to be that difference in compensation

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Speaker 5: between public and private because of liquidity. The second source

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Speaker 5: of difference, as I mentioned, is the opportunity cost, and

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Speaker 5: I think that is a little bit less understood. What

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Speaker 5: that is is essentially, you know, if you acquire something,

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Speaker 5: even though you may not think you need liquidity, but

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Speaker 5: if the asset that you acquire does well, and you

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Speaker 5: have the ability to deploy into an asset that has

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Speaker 5: done poorly, then there is a meaningful opportunity cost in

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Speaker 5: going away from that asset. So take, for exa example,

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Speaker 5: public fixed income. If you acquire today, as I mentioned,

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Speaker 5: six percent starting yield in a scenario where equities go

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Speaker 5: down fifteen twenty percent, chances are as we discussed earlier,

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Speaker 5: fixed income would have returned double digit.

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Speaker 4: It's a liquid asset.

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Speaker 2: You could easily deploy away.

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Speaker 5: From this asset at that time into equity or other

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Speaker 5: risk oriented strategies that would have underperformed. Whereas when you

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Speaker 5: have locked up that capital, even if you may not

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Speaker 5: see the mark to market decline.

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Speaker 4: The ability to redeploy is low.

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Speaker 5: And hence the opportunity cost of going from fix from

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Speaker 5: public fixed income into private has gone up as yields

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Speaker 5: have moved higher in the last two three years. Third

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Speaker 5: thing I touched about is the alpha. Again, there's a

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Speaker 5: lot of talk about lack of alphae public fixed income.

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Speaker 5: I think again that is not born by data, that

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Speaker 5: is not born by facts. If you look at the

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Speaker 5: morning Star study, so morning Star had published the data.

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Speaker 5: What they showed is that over the ten year period,

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Speaker 5: on average, about sixty to seventy percent of fixed income

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Speaker 5: strategies outperform their passive benchmarks. The number for equities is

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Speaker 5: less than twenty five percent. So certainly there is the

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Speaker 5: opportunity for alpha. At PIMCO, again, you have had a

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Speaker 5: long history of managing public fixed income and you can

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Speaker 5: see strategies outperform their passive benchmarks by one hundred, one

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00:21:20,560 --> 00:21:22,760
Speaker 5: hundred and fifty to two hundred basis points over a

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Speaker 5: longer period of time. So that's the third source of difference.

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Speaker 5: And then the fourth is the credit quality. I think

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Speaker 5: that's also important to understand. Just because something is rated

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Speaker 5: the same between public and private doesn't mean that the

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Speaker 5: credit quality is different. Take, for example, a triple B

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Speaker 5: investment grade company. A triple B investment grade company is

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Speaker 5: something that has a loan to value of about forty percent,

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Speaker 5: and it's the top forty percent of the capital structure

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Speaker 5: of a large kind of company, a large multinational US corporation.

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Speaker 5: A average investment grade in private can tend to include

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Speaker 5: some corporates, but it will also include mezzanine tranches or

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Speaker 5: call it triple B tranches of clos, which will have

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Speaker 5: a very very.

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Speaker 4: Different risk profile.

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Speaker 5: They would broadly be fifty to fifty five percent tranch

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Speaker 5: of a diversified pool of loans. The thinness of that

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Speaker 5: tranch would mean that while in most states of the

397
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Speaker 5: world you would do fine owning that triple B tranch,

398
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Speaker 5: in a stress scenario, your losses could be very very

399
00:22:29,080 --> 00:22:32,879
Speaker 5: different in a triple B CLO relative to a triple

400
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Speaker 5: B investment grade. So the credit quality differences need to

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00:22:35,920 --> 00:22:39,760
Speaker 5: be incorporated as well. So net, when we combine essentially

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Speaker 5: the compensation for liquidity, the opportunity cost, the alpha that

403
00:22:46,359 --> 00:22:49,760
Speaker 5: can be obtained in active extincome, and the credit quality differences,

404
00:22:50,080 --> 00:22:53,440
Speaker 5: we think there needs to be a compensation well north

405
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Speaker 5: of two hundred basis points in going from public credit

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Speaker 5: into private credit, and we don't see that in the

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Speaker 5: current market.

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Speaker 4: This was there, you know, three years ago.

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Speaker 5: Certainly it was there back then, but more recently, with

410
00:23:06,720 --> 00:23:10,600
Speaker 5: the compression, you're not seeing that opportunity, you're not seeing

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Speaker 5: that valuation. So certainly that's one of the reasons why

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Speaker 5: our strong preference for high quality public fixed income relative

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Speaker 5: to private code.

414
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Speaker 6: Now do you see that spread even getting tighter going forward,

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Speaker 6: giving all the demand and all the newsflow in private credit.

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Speaker 2: I think it's certainly possible.

417
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Speaker 5: I think it's possible, hard to know exactly how it

418
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Speaker 5: will play out. I think the other side of it

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Speaker 5: also is that what you're starting to see is some

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Speaker 5: of the stresses build up in the private space as well.

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Speaker 5: You know, when you look at, for example, the interest

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Speaker 5: coverage ratio for some of the you know, the private companies.

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Speaker 4: So what you.

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Speaker 5: Observe is that the fixed charge coverage ratio, which is

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Speaker 5: essentially saying the total amount of earnings less you know,

426
00:24:00,480 --> 00:24:03,720
Speaker 5: less capex, less taxes. What you observe is that forty

427
00:24:03,760 --> 00:24:07,320
Speaker 5: percent of the companies now have that fixed charge coverage

428
00:24:07,400 --> 00:24:10,800
Speaker 5: ratio of less than one, meaning they're not producing enough

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00:24:10,840 --> 00:24:14,040
Speaker 5: cash flow to cover the interest expense. So you know,

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Speaker 5: in that environment, maybe there is you know, some caution

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Speaker 5: into deploying the assets at these valuations and that prevents

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Speaker 5: further tightening. But if the deployment continues, certainly it's possible

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Speaker 5: that that spread continues to narrow.

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Speaker 1: And where are we now? I mean, I recall you

435
00:24:32,000 --> 00:24:34,600
Speaker 1: wrote in I think it was summer at some point

436
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Speaker 1: around one hundred basis points and fair value, as you say,

437
00:24:38,040 --> 00:24:40,000
Speaker 1: is two hundred a week. Are we still around one hundred?

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Speaker 5: So I think so what that hundred was? So what

439
00:24:43,359 --> 00:24:46,399
Speaker 5: we what I mentioned was about minimum hundred basis points

440
00:24:46,440 --> 00:24:49,480
Speaker 5: needed in investment grades, two hundred basis points needed in

441
00:24:49,920 --> 00:24:53,760
Speaker 5: more levered credit segments of the market. What we are seeing,

442
00:24:53,800 --> 00:24:57,280
Speaker 5: for example, in the levered credit that number is about one.

443
00:24:57,240 --> 00:24:59,160
Speaker 2: Hundred and ninety basis points on average.

444
00:24:59,440 --> 00:25:01,480
Speaker 5: And then in a investment grade, when you look at

445
00:25:01,480 --> 00:25:05,320
Speaker 5: public versus private corporate, for corporate, what you observe is

446
00:25:06,119 --> 00:25:09,800
Speaker 5: about fifty basis points spread, so certainly tighter than what

447
00:25:09,840 --> 00:25:13,240
Speaker 5: we would think as minimal or compensation that is needed

448
00:25:13,720 --> 00:25:17,480
Speaker 5: for investors to go from public corporate to private credit.

449
00:25:17,920 --> 00:25:21,720
Speaker 1: So you underweight private markets. Would you say versus I mean,

450
00:25:21,760 --> 00:25:24,119
Speaker 1: it's hard to benchmark because it's such a you know,

451
00:25:24,240 --> 00:25:26,960
Speaker 1: a paque area. But would you say that you are

452
00:25:27,040 --> 00:25:28,720
Speaker 1: underweight the private markets.

453
00:25:29,400 --> 00:25:31,040
Speaker 5: I think what we would say is that there are

454
00:25:31,040 --> 00:25:34,760
Speaker 5: opportunities in private market. Those opportunities are less on the

455
00:25:34,800 --> 00:25:39,159
Speaker 5: corporate credit space, in private corporate credit or private direct lending.

456
00:25:39,280 --> 00:25:42,000
Speaker 5: There are more in the asset based lending. So certainly

457
00:25:42,440 --> 00:25:45,919
Speaker 5: we have kind of, you know, built more of our

458
00:25:45,960 --> 00:25:49,000
Speaker 5: strategies to take advantage of the opportunities in the asset

459
00:25:49,040 --> 00:25:52,800
Speaker 5: based space relative to the private corporate space, but certainly

460
00:25:52,840 --> 00:25:55,280
Speaker 5: on a one off basis. Again, I think the key

461
00:25:55,320 --> 00:25:59,600
Speaker 5: here is flexibility. So what we try to do is

462
00:25:59,760 --> 00:26:02,919
Speaker 5: we try to be agnostic of the vehicle type and

463
00:26:03,000 --> 00:26:07,160
Speaker 5: provide a dual tracking financing solution two issuers, such that

464
00:26:07,320 --> 00:26:09,719
Speaker 5: you know, if the end outcome is a private solution

465
00:26:10,400 --> 00:26:12,719
Speaker 5: and the terms are creative to us, terms are what

466
00:26:12,800 --> 00:26:15,440
Speaker 5: we think are valuable, we can take advantage of the

467
00:26:15,440 --> 00:26:18,760
Speaker 5: private solution. But if the terms are not that attractive

468
00:26:18,880 --> 00:26:21,320
Speaker 5: in the private space, then then we can stay out

469
00:26:21,320 --> 00:26:23,080
Speaker 5: of it. But then we provide the issue or an

470
00:26:23,080 --> 00:26:27,040
Speaker 5: opportunity to look at the public solution as well, So

471
00:26:27,119 --> 00:26:29,440
Speaker 5: you know, we try to be agnostic of the vehicle

472
00:26:29,480 --> 00:26:32,600
Speaker 5: type and look at the ultimate valuations when making a determination.

473
00:26:34,080 --> 00:26:37,480
Speaker 3: Well, here another space that we've seen growth in in

474
00:26:37,520 --> 00:26:42,239
Speaker 3: the private credit space recently is NAP lending and to

475
00:26:42,280 --> 00:26:45,480
Speaker 3: some extent also back leverage. What are pink cos views

476
00:26:45,200 --> 00:26:49,000
Speaker 3: on that space, Like does the firm that space attractive

477
00:26:49,040 --> 00:26:52,560
Speaker 3: at all? And what risks do you see in that

478
00:26:52,720 --> 00:26:53,800
Speaker 3: type of lending?

479
00:26:54,640 --> 00:26:57,000
Speaker 5: Yeah, I mean I think there can be good opportunities

480
00:26:57,040 --> 00:27:00,639
Speaker 5: there as well, particularly you know, when a good amount

481
00:27:00,640 --> 00:27:03,639
Speaker 5: of capital has been drawn, when there are very strong commitments,

482
00:27:03,640 --> 00:27:07,239
Speaker 5: and then when the level of leverage is lower, So

483
00:27:07,280 --> 00:27:11,160
Speaker 5: it can be good opportunities to provide NAV lending solutions.

484
00:27:11,600 --> 00:27:14,960
Speaker 5: Uh in those situations, I think to your question on

485
00:27:16,359 --> 00:27:18,560
Speaker 5: you know, what are the concerns again, it just speaks

486
00:27:18,600 --> 00:27:21,800
Speaker 5: to the level of leverage. It speaks to buy that

487
00:27:21,920 --> 00:27:24,679
Speaker 5: is being done. You know what sometimes is happening is

488
00:27:24,680 --> 00:27:28,120
Speaker 5: that the p funds doing uh you know, NAV loans

489
00:27:28,200 --> 00:27:32,040
Speaker 5: to fund dividends because you're not able to uh do

490
00:27:32,600 --> 00:27:35,199
Speaker 5: equity raise you know, as you would do in a

491
00:27:35,240 --> 00:27:38,439
Speaker 5: normal market, certainly a little bit different this time around.

492
00:27:38,600 --> 00:27:41,000
Speaker 5: So if you're not able to exit either through an

493
00:27:41,040 --> 00:27:43,560
Speaker 5: I p O or through a strategic mn A, and

494
00:27:43,640 --> 00:27:48,880
Speaker 5: you're doing, you know, borrowing nav loans to fund that dividend.

495
00:27:49,040 --> 00:27:51,720
Speaker 5: You just have to be a little bit careful at

496
00:27:51,760 --> 00:27:54,920
Speaker 5: that time, but certainly worth looking at on a case

497
00:27:54,920 --> 00:27:55,840
Speaker 5: by case basis.

498
00:27:56,920 --> 00:28:00,720
Speaker 1: I just wanted to circle back on asset based because

499
00:28:00,720 --> 00:28:03,960
Speaker 1: that seems to be an area of on the one hand,

500
00:28:04,080 --> 00:28:06,640
Speaker 1: huge excitement and a lot of people on this show

501
00:28:06,680 --> 00:28:09,520
Speaker 1: talk about the massive opportunity. We've had guests talk about

502
00:28:09,560 --> 00:28:14,239
Speaker 1: thirty forty trillion dollars in potential market there. But what

503
00:28:14,240 --> 00:28:15,840
Speaker 1: does it mean to you, because it seems to means

504
00:28:15,840 --> 00:28:17,399
Speaker 1: a lot of different things that different people.

505
00:28:18,320 --> 00:28:20,359
Speaker 5: Yeah, so I think what it means to us is

506
00:28:20,400 --> 00:28:22,920
Speaker 5: it's certainly a good opportunity. And then we have had

507
00:28:22,960 --> 00:28:26,080
Speaker 5: a very very long history in being involved in this market,

508
00:28:26,960 --> 00:28:29,280
Speaker 5: you know, going back to like you know, early eighties

509
00:28:29,359 --> 00:28:32,399
Speaker 5: nineties through through the usage of you know, many of

510
00:28:32,400 --> 00:28:35,320
Speaker 5: our structured product strategies. So certainly we've been very involved

511
00:28:35,320 --> 00:28:38,920
Speaker 5: in it, and you can get are well equipped to

512
00:28:39,000 --> 00:28:40,520
Speaker 5: kind of take advantage of the.

513
00:28:42,200 --> 00:28:43,320
Speaker 4: It creates.

514
00:28:44,440 --> 00:28:47,520
Speaker 5: From an opportunity point of view, you know, certainly consumer

515
00:28:47,600 --> 00:28:51,480
Speaker 5: oriented opportunities I touched upon a little bit earlier. You know,

516
00:28:51,560 --> 00:28:55,640
Speaker 5: consumer generally in a healthy space place right now. Also

517
00:28:55,760 --> 00:28:58,000
Speaker 5: you have an asset which is the loan, which is

518
00:28:58,040 --> 00:29:04,200
Speaker 5: the home that is backing the investment. So certainly that

519
00:29:04,240 --> 00:29:08,080
Speaker 5: their banks are also retreating from that space. So that

520
00:29:08,120 --> 00:29:11,840
Speaker 5: certainly creates an opportunity for private entrance to provide asset

521
00:29:11,840 --> 00:29:16,000
Speaker 5: based solutions there. And we go beyond the consumer into

522
00:29:16,040 --> 00:29:19,640
Speaker 5: the corporate space. You know, aviation finance is interesting for us,

523
00:29:20,280 --> 00:29:24,280
Speaker 5: certainly seeing an opportunity there. This is again an area

524
00:29:24,440 --> 00:29:27,680
Speaker 5: where we have been involved over twenty five thirty years

525
00:29:27,960 --> 00:29:31,280
Speaker 5: through our public strategies. You know, we've been big investors

526
00:29:31,320 --> 00:29:35,400
Speaker 5: in aircraft backed wtcs as they're called in the public

527
00:29:35,480 --> 00:29:40,240
Speaker 5: market enhanced Equipment trust certificates for the last thirty plus years.

528
00:29:40,840 --> 00:29:43,760
Speaker 5: And our strategy is broadly speaking, you know, even though

529
00:29:43,880 --> 00:29:47,840
Speaker 5: many of the airlines have defaulted over the last twenty

530
00:29:47,840 --> 00:29:53,040
Speaker 5: five thirty years, the aircraft backed bonds have delivered, particularly

531
00:29:53,080 --> 00:29:57,000
Speaker 5: the senior tranches, have delivered near power for all investors,

532
00:29:57,320 --> 00:30:01,600
Speaker 5: again based upon careful underwriting and careful collateral analysis. So

533
00:30:01,640 --> 00:30:04,960
Speaker 5: certainly we're bringing that expertise into the mix when we

534
00:30:05,000 --> 00:30:10,000
Speaker 5: look at the aircraft space as well other equipment rental

535
00:30:10,160 --> 00:30:14,160
Speaker 5: very similar framework are similar to aircraft. And then also

536
00:30:14,400 --> 00:30:16,840
Speaker 5: you add to it the data opportunity in the data

537
00:30:16,880 --> 00:30:21,440
Speaker 5: center space, again a big growth opportunity. You have seen

538
00:30:21,560 --> 00:30:25,360
Speaker 5: investments to the tune of about four hundred five hundred

539
00:30:25,360 --> 00:30:30,080
Speaker 5: billion being announced across the globe, across US, Europe to

540
00:30:30,200 --> 00:30:34,080
Speaker 5: meet the growing AI related data center needs. So certainly

541
00:30:34,120 --> 00:30:39,320
Speaker 5: an opportunity to partner and create value for our investors.

542
00:30:40,040 --> 00:30:42,160
Speaker 5: So these are some of the examples around asset based

543
00:30:42,200 --> 00:30:44,680
Speaker 5: finance that we've been involved in.

544
00:30:44,680 --> 00:30:51,000
Speaker 3: In that space, we've also seen private funds buying portfolios

545
00:30:51,040 --> 00:30:54,600
Speaker 3: of mortgages. I have a bit of a crystal ball question,

546
00:30:54,840 --> 00:30:59,640
Speaker 3: but do you think private credit funds may eventually be

547
00:30:59,680 --> 00:31:02,840
Speaker 3: the one underwriting the mortgages themselves?

548
00:31:02,920 --> 00:31:06,520
Speaker 2: Directly possible?

549
00:31:06,600 --> 00:31:08,240
Speaker 5: I mean again, I don't want to be the one

550
00:31:08,240 --> 00:31:12,160
Speaker 5: who would discount that possibility. I think certainly would require

551
00:31:12,320 --> 00:31:17,000
Speaker 5: a partnership with an underwriter uh and do that. But

552
00:31:17,280 --> 00:31:21,120
Speaker 5: certainly for us, having access to the data, uh, you know,

553
00:31:21,160 --> 00:31:24,360
Speaker 5: having access to that consumer data allows us to kind

554
00:31:24,360 --> 00:31:28,160
Speaker 5: of carefully select a pool. When a large bank is

555
00:31:28,200 --> 00:31:31,480
Speaker 5: looking to sell a large pool of mortgages, we can

556
00:31:31,480 --> 00:31:34,560
Speaker 5: select that pool, uh, you know, work with with with

557
00:31:34,720 --> 00:31:38,640
Speaker 5: with the bank and construct uh, you know, portfolio that

558
00:31:38,640 --> 00:31:39,960
Speaker 5: that we want to have exposure in.

559
00:31:40,600 --> 00:31:40,680
Speaker 4: Uh.

560
00:31:40,720 --> 00:31:43,360
Speaker 5: You know, we've also been involved in securitizations. You know,

561
00:31:43,400 --> 00:31:47,640
Speaker 5: we've done hundred plus securitizations. And after acquiring that pool,

562
00:31:47,640 --> 00:31:51,240
Speaker 5: we can certainly do a securitization and keep the exposure

563
00:31:51,320 --> 00:31:54,360
Speaker 5: that we won't based upon the mandate and then exit

564
00:31:54,480 --> 00:31:57,520
Speaker 5: or at least sell the exposure that that doesn't fit

565
00:31:57,560 --> 00:32:00,480
Speaker 5: the mandate. So it's a combination of you know, identifying

566
00:32:00,520 --> 00:32:03,600
Speaker 5: the right collateral, having the data to be able to

567
00:32:03,640 --> 00:32:07,600
Speaker 5: do that, and then securitizing it to meet the investor needs.

568
00:32:07,800 --> 00:32:08,880
Speaker 4: Certainly is the focus.

569
00:32:09,000 --> 00:32:12,720
Speaker 5: But to your question, maybe over the next few years

570
00:32:12,880 --> 00:32:13,960
Speaker 5: possible on underwriting.

571
00:32:15,080 --> 00:32:17,840
Speaker 1: We talk about sextism here. You've talked a little bit

572
00:32:17,840 --> 00:32:22,000
Speaker 1: about financials, you know, people like banks generally, utilities you've

573
00:32:22,000 --> 00:32:24,560
Speaker 1: mentioned to me as well, but telecoms was one that

574
00:32:24,640 --> 00:32:26,880
Speaker 1: stood out. I mean, it seems to have been a

575
00:32:26,880 --> 00:32:30,280
Speaker 1: story of a lot of distress being kind of pulled

576
00:32:30,280 --> 00:32:32,480
Speaker 1: out of trouble because.

577
00:32:32,200 --> 00:32:33,280
Speaker 6: Of M and A.

578
00:32:34,280 --> 00:32:38,280
Speaker 1: I'm delighted we have a telecoms supremo here. Steve Flynn

579
00:32:38,440 --> 00:32:40,520
Speaker 1: from Bloomberg Intelligence, so I wanted to get his view

580
00:32:40,560 --> 00:32:43,400
Speaker 1: as well. But what is the telecoms opportunity. There's obviously

581
00:32:43,400 --> 00:32:45,440
Speaker 1: some massive capital structures there, but there's also a lot

582
00:32:45,480 --> 00:32:48,120
Speaker 1: of trouble. How do you trade that?

583
00:32:49,080 --> 00:32:49,760
Speaker 4: Yeah?

584
00:32:49,800 --> 00:32:53,440
Speaker 5: Absolutely, I think our welcome Steve's thoughts as well. What

585
00:32:53,480 --> 00:32:56,560
Speaker 5: I was thinking about is the contrasting the investment great

586
00:32:56,600 --> 00:32:59,520
Speaker 5: telecom market versus the high deal telecom market. So I

587
00:32:59,560 --> 00:33:04,120
Speaker 5: think in the investment grade telecom market, very large telecom companies.

588
00:33:03,960 --> 00:33:06,320
Speaker 4: They did a fair bit of capex, they did.

589
00:33:06,400 --> 00:33:09,720
Speaker 5: Mn a previous years and as a result, their debt

590
00:33:09,720 --> 00:33:13,080
Speaker 5: profile went a little bit higher. So for US over

591
00:33:13,120 --> 00:33:16,400
Speaker 5: the last two three years, it has been an interesting opportunity,

592
00:33:17,040 --> 00:33:19,720
Speaker 5: as our view, helping that those companies would focus on

593
00:33:19,800 --> 00:33:23,400
Speaker 5: delevering their balance sheet use the cash flows to steadily

594
00:33:23,440 --> 00:33:26,920
Speaker 5: reduce their debt profile. And that's what we have seen happen,

595
00:33:27,280 --> 00:33:30,040
Speaker 5: and as a result, many of the larger telecom spreads

596
00:33:30,480 --> 00:33:34,880
Speaker 5: have tightened and has been performing quite well. You know,

597
00:33:34,960 --> 00:33:38,760
Speaker 5: contrast that with the basically call it the telecom space

598
00:33:38,800 --> 00:33:40,520
Speaker 5: in the high heal space, in the high heal market,

599
00:33:40,560 --> 00:33:45,240
Speaker 5: which includes cable media, where you've seen increased competition where

600
00:33:45,280 --> 00:33:50,480
Speaker 5: you have seen erosion of broadcast TV towards more streaming services.

601
00:33:50,840 --> 00:33:53,880
Speaker 5: Subscriber declines is another thing that you are seeing there

602
00:33:54,320 --> 00:33:58,760
Speaker 5: much higher debt levels as well as regulatory pressures, and

603
00:33:58,800 --> 00:34:02,080
Speaker 5: that has certainly been challenge for some of those companies.

604
00:34:02,560 --> 00:34:06,440
Speaker 5: Now you've also seen, you know, some of the AI

605
00:34:06,920 --> 00:34:11,239
Speaker 5: related kind of activities act as a positive as you

606
00:34:11,320 --> 00:34:15,040
Speaker 5: saw you know, the value of cable assets for Frontier

607
00:34:15,160 --> 00:34:18,680
Speaker 5: improve and you know verizond the transaction or similarly, like

608
00:34:18,719 --> 00:34:21,600
Speaker 5: you know another example Microsoft versus Luman. So you're seeing

609
00:34:21,760 --> 00:34:23,440
Speaker 5: kind of a little bit of a bifurcation in the

610
00:34:23,480 --> 00:34:26,920
Speaker 5: high yield space. But what I refer to as an

611
00:34:26,960 --> 00:34:29,800
Speaker 5: opportunity I was referring to more in the investment grade space,

612
00:34:29,840 --> 00:34:31,760
Speaker 5: particularly the large telecom companies.

613
00:34:32,480 --> 00:34:35,479
Speaker 6: Yeah, I'd agree with your thoughts. More heat I see

614
00:34:35,719 --> 00:34:38,799
Speaker 6: the big telcos and investment grade are doing well at

615
00:34:38,920 --> 00:34:40,759
Speaker 6: and T has de levered, has a little bit more

616
00:34:40,760 --> 00:34:42,960
Speaker 6: deleveraging to go to hit it's leverage target. But moving

617
00:34:43,000 --> 00:34:46,520
Speaker 6: in the right direction, Verizon is de leveraging. We'll get

618
00:34:46,520 --> 00:34:48,279
Speaker 6: a little bit of a bump up and leverage from

619
00:34:48,280 --> 00:34:53,320
Speaker 6: the Frontier transaction, but still has a lower leverage target

620
00:34:53,880 --> 00:34:56,680
Speaker 6: and T Mobile US is at its leverage target, has

621
00:34:56,719 --> 00:34:59,640
Speaker 6: a lot of M and A and investments upcoming, but

622
00:35:00,360 --> 00:35:02,520
Speaker 6: produces a ton of free cash flow, so they're in

623
00:35:02,520 --> 00:35:05,799
Speaker 6: a good position. So you know, the big telcos, even Comcast.

624
00:35:06,200 --> 00:35:08,279
Speaker 6: Comcast has exposure of media which has been a little

625
00:35:08,280 --> 00:35:12,320
Speaker 6: bit rough, but Comcast has a very modest leverage target

626
00:35:12,400 --> 00:35:14,640
Speaker 6: and it's that its leverage target and is doing well.

627
00:35:14,680 --> 00:35:17,400
Speaker 6: So the big telcos are doing well. Moving over to

628
00:35:17,480 --> 00:35:21,560
Speaker 6: high yield, it's still by far the widest trading sector.

629
00:35:21,920 --> 00:35:24,239
Speaker 6: In high yield, you still have the risks of the

630
00:35:24,280 --> 00:35:27,880
Speaker 6: migration of media from PayTV to streaming. You still have

631
00:35:27,920 --> 00:35:31,160
Speaker 6: intense competition for broadband, so there's still a lot of

632
00:35:31,200 --> 00:35:33,200
Speaker 6: concerns out there, but as you pointed out, there's a

633
00:35:33,280 --> 00:35:36,920
Speaker 6: number of positive catalysts that have happened. You've had the

634
00:35:36,960 --> 00:35:41,960
Speaker 6: acquisition of Frontier by Verizon, You've had T Mobile by

635
00:35:42,719 --> 00:35:46,640
Speaker 6: US Cellular, You've had a Luman announce some very large

636
00:35:47,360 --> 00:35:50,120
Speaker 6: AI driven capacity deals that have brought in a lot

637
00:35:50,160 --> 00:35:53,200
Speaker 6: of upfront liquidity, and that was a structure that was

638
00:35:53,200 --> 00:35:54,920
Speaker 6: pretty beaten ups and that was positive there. And then

639
00:35:54,960 --> 00:35:57,560
Speaker 6: finally we have a big one that just came up

640
00:35:57,600 --> 00:36:02,560
Speaker 6: with EchoStar with its DBS version with direct TV and

641
00:36:02,600 --> 00:36:06,080
Speaker 6: some financing there. Now, this probably goes to your solutions

642
00:36:06,120 --> 00:36:08,400
Speaker 6: group and they're you know, asking bondholders to take a

643
00:36:08,400 --> 00:36:12,080
Speaker 6: massive haircut to participate in this transaction and to move

644
00:36:12,080 --> 00:36:14,879
Speaker 6: to a bigger credits. You're wondering when when PIMCO thinks

645
00:36:14,920 --> 00:36:18,040
Speaker 6: about opportunities like that, you have a distressed company, you

646
00:36:18,160 --> 00:36:19,680
Speaker 6: have to take a haircut, but you'll end up in

647
00:36:19,680 --> 00:36:20,280
Speaker 6: a better place.

648
00:36:20,280 --> 00:36:21,200
Speaker 4: How do you think about that?

649
00:36:21,920 --> 00:36:23,520
Speaker 5: Yeah, so I think again, I'm not going to go

650
00:36:23,560 --> 00:36:27,200
Speaker 5: into the specifics of any individual transaction, but you know,

651
00:36:27,239 --> 00:36:29,839
Speaker 5: for us, it's what is the most accreative for our

652
00:36:30,239 --> 00:36:33,759
Speaker 5: investors over the long term, for you know, for the

653
00:36:33,840 --> 00:36:37,120
Speaker 5: assets or the bonds that we that we own, requires

654
00:36:37,120 --> 00:36:40,319
Speaker 5: a very careful analysis for not just thinking about in

655
00:36:40,320 --> 00:36:42,640
Speaker 5: the very near term, but also longer term. And then

656
00:36:42,640 --> 00:36:44,960
Speaker 5: we are fortunate to have a large team of what

657
00:36:45,040 --> 00:36:50,000
Speaker 5: we call special situations analysts bankruptcy experts, so all of

658
00:36:50,040 --> 00:36:54,040
Speaker 5: these individuals will partner with our analyst team and kind

659
00:36:54,040 --> 00:36:56,200
Speaker 5: of think about what is the most you know, the

660
00:36:56,280 --> 00:36:59,640
Speaker 5: most attractive way to add value to our investors over

661
00:36:59,680 --> 00:37:01,520
Speaker 5: the law.

662
00:37:01,560 --> 00:37:03,200
Speaker 1: On that though, there is a lot more credits around

663
00:37:03,200 --> 00:37:06,040
Speaker 1: credited violence. And you know, one of our guests recently

664
00:37:06,040 --> 00:37:09,640
Speaker 1: described that as just simply capitalism at work. So we've

665
00:37:09,640 --> 00:37:11,640
Speaker 1: got to probably assume that there will be a lot

666
00:37:11,680 --> 00:37:13,839
Speaker 1: more of it. How do you position for that, How

667
00:37:13,840 --> 00:37:15,839
Speaker 1: do you factor that into your valuations?

668
00:37:16,800 --> 00:37:18,799
Speaker 5: I think it again comes back to what we were

669
00:37:18,840 --> 00:37:21,640
Speaker 5: mentioning earlier, right on a relative basis, this is one

670
00:37:21,640 --> 00:37:26,280
Speaker 5: of another areas. All it is highlighting is that essentially

671
00:37:26,320 --> 00:37:29,840
Speaker 5: the credit fundamentals are deteriorating in more leveled portions of

672
00:37:29,880 --> 00:37:33,120
Speaker 5: the credit markets, which is why investors or the creditors

673
00:37:33,120 --> 00:37:35,640
Speaker 5: have to think about what you call credit or credit violence,

674
00:37:35,920 --> 00:37:39,840
Speaker 5: which is why you're seeing a lot more lemes or

675
00:37:39,840 --> 00:37:43,680
Speaker 5: which is basically a sophisticated way of saying bondholders or

676
00:37:44,120 --> 00:37:47,000
Speaker 5: debt hoolders take some form of a write down, which

677
00:37:47,040 --> 00:37:50,040
Speaker 5: is why you're seeing a lot more of the pick activity,

678
00:37:50,160 --> 00:37:54,359
Speaker 5: synthetic pick activity. So you know, from our perspective, what

679
00:37:54,400 --> 00:37:57,400
Speaker 5: it speaks to is that this is an area where

680
00:37:57,560 --> 00:38:01,439
Speaker 5: you have seen a little more, little more excesses you've seen,

681
00:38:01,680 --> 00:38:05,200
Speaker 5: you're seeing more complacency. So you have to be very thoughtful,

682
00:38:05,360 --> 00:38:07,400
Speaker 5: You have to be very careful. You have to do

683
00:38:07,440 --> 00:38:11,439
Speaker 5: a lot of credit work in it, and in many situations,

684
00:38:11,480 --> 00:38:16,320
Speaker 5: even though the starting spread is wider, starting yields are higher,

685
00:38:16,640 --> 00:38:20,799
Speaker 5: it may not be as attractive an investor as an

686
00:38:20,840 --> 00:38:24,960
Speaker 5: attractive and investment as might seem based upon the starting

687
00:38:25,040 --> 00:38:28,759
Speaker 5: level of spreads. You know, I gave an example whereby

688
00:38:29,160 --> 00:38:30,520
Speaker 5: like you know, when you look at if you just

689
00:38:30,600 --> 00:38:33,920
Speaker 5: go from you know, I call it bank a high

690
00:38:34,000 --> 00:38:37,440
Speaker 5: yeeal market to bank loan market broadly syndicated loan market.

691
00:38:37,719 --> 00:38:39,600
Speaker 5: You can get a little bit of a spread pickup,

692
00:38:39,880 --> 00:38:42,080
Speaker 5: but when you look at the aggregate quality of the

693
00:38:42,080 --> 00:38:46,760
Speaker 5: two markets, they are deviating quite substantially. Ten years ago,

694
00:38:47,000 --> 00:38:48,680
Speaker 5: you know, when you looked at the high heal market,

695
00:38:49,320 --> 00:38:51,399
Speaker 5: about forty to forty five percent of the high deal

696
00:38:51,440 --> 00:38:54,560
Speaker 5: market was double B. Now or over fifty five percent

697
00:38:54,560 --> 00:38:57,720
Speaker 5: of the broad high yield market is double B. Compare

698
00:38:57,760 --> 00:39:02,080
Speaker 5: that to the bank loan market, whereby only twenty percent

699
00:39:02,120 --> 00:39:05,000
Speaker 5: of the market is double B, and you know eighty

700
00:39:05,040 --> 00:39:07,719
Speaker 5: percent has moved single B or lower. And then you

701
00:39:07,840 --> 00:39:12,840
Speaker 5: make the extension into more call it private corporate credit

702
00:39:12,920 --> 00:39:15,840
Speaker 5: or direct lending, which in many ways is even more

703
00:39:16,239 --> 00:39:19,320
Speaker 5: lower in quality. So certainly what it speaks to is

704
00:39:19,360 --> 00:39:23,200
Speaker 5: another reason to be careful in analysis and another reason

705
00:39:23,520 --> 00:39:27,640
Speaker 5: to favor more higher quality, favor more you know, call

706
00:39:27,640 --> 00:39:30,560
Speaker 5: it higher quality global fixed income relative to some of

707
00:39:30,600 --> 00:39:35,560
Speaker 5: these more deeper down in quality credit oriented opportunities.

708
00:39:36,200 --> 00:39:38,800
Speaker 1: Are there any sectors in particular industries that you avoid

709
00:39:38,880 --> 00:39:40,160
Speaker 1: because that's where the trouble is.

710
00:39:40,960 --> 00:39:43,960
Speaker 5: Yeah, So I think when we go into the more

711
00:39:44,080 --> 00:39:47,120
Speaker 5: levered areas of the market, the sectors that we are

712
00:39:47,360 --> 00:39:49,560
Speaker 5: a little bit careful on. You know, we touched upon

713
00:39:49,640 --> 00:39:52,240
Speaker 5: cable certainly. You know, while there has been some recent

714
00:39:52,280 --> 00:39:56,160
Speaker 5: positive developments, it's been a sector where we have been underweight.

715
00:39:56,480 --> 00:40:00,759
Speaker 5: Another one is retail, particularly the brick and motor. What

716
00:40:00,760 --> 00:40:03,560
Speaker 5: you are seeing is, you know, more e commerce continued

717
00:40:03,600 --> 00:40:06,839
Speaker 5: more e commerce competition, which has been going on over

718
00:40:06,840 --> 00:40:10,720
Speaker 5: a secular period, but then on a more cyclical basis,

719
00:40:10,800 --> 00:40:14,720
Speaker 5: you are seeing a changing consumer behavior as well as

720
00:40:14,960 --> 00:40:18,239
Speaker 5: you know, risks of tariff overhang. And when you look

721
00:40:18,280 --> 00:40:21,360
Speaker 5: at the earnings in some of those retailers, what you

722
00:40:21,400 --> 00:40:23,680
Speaker 5: see is, uh, you know a little bit of a

723
00:40:23,680 --> 00:40:26,800
Speaker 5: weakness at the lower end consumer. You are seeing same

724
00:40:26,920 --> 00:40:30,360
Speaker 5: source sales decline and then earnings decline more than the

725
00:40:30,360 --> 00:40:34,720
Speaker 5: same souls sales decline, meaning that the margins are getting

726
00:40:34,760 --> 00:40:37,680
Speaker 5: compressed as well, meaning that many of these retailers are

727
00:40:37,719 --> 00:40:41,040
Speaker 5: not able to pass those costs to the end consumer.

728
00:40:42,239 --> 00:40:42,440
Speaker 4: You know.

729
00:40:42,520 --> 00:40:45,600
Speaker 5: Out Another sector that is needs some some more caution

730
00:40:45,840 --> 00:40:49,400
Speaker 5: is around auto sector. In the more levered portions of

731
00:40:49,440 --> 00:40:53,319
Speaker 5: the credit markets, you have you supply side disruptions to

732
00:40:53,400 --> 00:40:56,520
Speaker 5: deal with. You have to think about the secular shift

733
00:40:56,600 --> 00:41:00,560
Speaker 5: to more electric vehicles, many new entrants on the space,

734
00:41:00,760 --> 00:41:05,120
Speaker 5: and then incorporate changing consumer preferences also on that front.

735
00:41:05,160 --> 00:41:08,080
Speaker 5: So certainly somewhat cautious in that sector as well.

736
00:41:08,480 --> 00:41:09,319
Speaker 4: The sectors that.

737
00:41:09,239 --> 00:41:11,479
Speaker 5: We like when we look at a little bit more

738
00:41:11,600 --> 00:41:15,440
Speaker 5: leveled credit, I think technology looks interesting, a little bit

739
00:41:15,440 --> 00:41:19,839
Speaker 5: more growth potential there, more innovation, digital transformation helping their

740
00:41:20,320 --> 00:41:24,080
Speaker 5: you know, healthcare is another sector that looks quite interesting,

741
00:41:24,640 --> 00:41:28,520
Speaker 5: given kind of increased healthcare spending given the aging population.

742
00:41:29,840 --> 00:41:31,239
Speaker 4: And then also you know, within the.

743
00:41:31,200 --> 00:41:35,920
Speaker 5: Consumer space, consumer staples, you know, given you know, steady

744
00:41:35,960 --> 00:41:38,759
Speaker 5: demand for essential goods even in a more kind of

745
00:41:38,800 --> 00:41:42,399
Speaker 5: economic downturns or call it less cyclical approach. One other

746
00:41:42,480 --> 00:41:47,480
Speaker 5: area that we've been constructive on is tied towards natural gas.

747
00:41:48,160 --> 00:41:52,759
Speaker 5: You know, distribution, liquefication, export. I think what you see

748
00:41:52,920 --> 00:41:56,640
Speaker 5: is that the utilities demand for natural gas has gone

749
00:41:56,719 --> 00:41:59,640
Speaker 5: up quite dramatically over the last you know, call it

750
00:41:59,680 --> 00:42:04,200
Speaker 5: ten almost like a fifty percent increase, whereas the distribution

751
00:42:04,400 --> 00:42:07,800
Speaker 5: and the storage capacity has increased maybe twenty five percent,

752
00:42:07,840 --> 00:42:11,560
Speaker 5: for distribution, storage growing fifteen percent. So certainly there are

753
00:42:11,560 --> 00:42:17,040
Speaker 5: opportunities in the distribution through pipelines as well as liquefication

754
00:42:17,160 --> 00:42:19,000
Speaker 5: and export facilities.

755
00:42:18,680 --> 00:42:20,800
Speaker 4: For that runt. For the natural gas runt.

756
00:42:21,560 --> 00:42:24,799
Speaker 1: As you've said, start, you know, valuations are high, there's

757
00:42:24,800 --> 00:42:26,880
Speaker 1: a lot of competition for assets. If you had to

758
00:42:26,880 --> 00:42:29,960
Speaker 1: put your finger on the single best credit opportunity for

759
00:42:30,200 --> 00:42:31,799
Speaker 1: let's say the next twelve months, what would it be.

760
00:42:32,320 --> 00:42:34,160
Speaker 5: So I think of when I think about opportunities for

761
00:42:34,200 --> 00:42:36,520
Speaker 5: the twelve months, I generally try to think of it

762
00:42:36,680 --> 00:42:38,520
Speaker 5: in a multiple scenario context.

763
00:42:39,640 --> 00:42:41,160
Speaker 4: I think it's you know.

764
00:42:41,239 --> 00:42:44,360
Speaker 5: Our approach is that, you know, it's very hard to

765
00:42:44,400 --> 00:42:46,720
Speaker 5: have a very high degree of conviction on a single

766
00:42:46,760 --> 00:42:50,160
Speaker 5: economic scenario, so you have to think about multiple scenarios.

767
00:42:50,200 --> 00:42:50,960
Speaker 4: At this point.

768
00:42:51,120 --> 00:42:54,040
Speaker 5: When I think about different scenarios possible, certainly I would

769
00:42:54,080 --> 00:42:58,320
Speaker 5: assign a higher probability to some form of a softish

770
00:42:58,400 --> 00:43:02,600
Speaker 5: landing scenario whereby growth, you know, again it doesn't slow

771
00:43:02,600 --> 00:43:05,399
Speaker 5: down too much, central bank cuts rates a little bit,

772
00:43:05,600 --> 00:43:09,240
Speaker 5: but then also assigned probabilities to a little bit weaker

773
00:43:09,440 --> 00:43:13,759
Speaker 5: growth scenario whereby growth comes down faster many of the

774
00:43:13,840 --> 00:43:17,799
Speaker 5: credit sectors get challenged, and then also assign some probability

775
00:43:18,040 --> 00:43:21,440
Speaker 5: to a scenario where you have a growth stay steady

776
00:43:21,480 --> 00:43:25,120
Speaker 5: and inflation or the second derivative of inflation starts to

777
00:43:25,160 --> 00:43:28,080
Speaker 5: go higher, meaning inflation goes from two and a half

778
00:43:28,280 --> 00:43:30,360
Speaker 5: goes from towards two percent to maybe two and a

779
00:43:30,400 --> 00:43:32,920
Speaker 5: half to two seventy five two point seventy five percent.

780
00:43:33,120 --> 00:43:35,200
Speaker 5: So these are different scenarios we would think about. So

781
00:43:35,239 --> 00:43:39,080
Speaker 5: the best opportunity would be something that does well across

782
00:43:39,080 --> 00:43:42,239
Speaker 5: a range of scenarios instead of focusing only on a

783
00:43:42,280 --> 00:43:46,560
Speaker 5: single scenario. You know, to us at this moment, you know,

784
00:43:46,960 --> 00:43:50,040
Speaker 5: higher quality fixed income agency mortgages. Again, it's a spread

785
00:43:50,080 --> 00:43:53,160
Speaker 5: product would do well across those range of scenarios, So

786
00:43:53,160 --> 00:43:58,000
Speaker 5: certainly we are constructive on that. You know, incorporating banks

787
00:43:58,200 --> 00:44:01,040
Speaker 5: is another area. They do quite well across a range

788
00:44:01,040 --> 00:44:05,359
Speaker 5: of scenarios, so we quite constructive. Utilities another area which

789
00:44:05,400 --> 00:44:08,399
Speaker 5: will do well across a range of scenarios, and then

790
00:44:08,440 --> 00:44:10,640
Speaker 5: as we go down in quality, we just have to

791
00:44:10,680 --> 00:44:14,200
Speaker 5: be mindful of some of the performance in a downside scenario.

792
00:44:14,440 --> 00:44:17,040
Speaker 5: So certainly there are opportunities that we would use in

793
00:44:17,040 --> 00:44:21,840
Speaker 5: a diversified portfolio across those sectors, but not necessarily be

794
00:44:21,920 --> 00:44:26,320
Speaker 5: wedded to one opportunity because of the multiple scenarios possible.

795
00:44:27,080 --> 00:44:33,040
Speaker 5: And very briefly, single biggest risk, single biggest risk I

796
00:44:33,040 --> 00:44:36,440
Speaker 5: think I would put couple one is just the growth

797
00:44:36,480 --> 00:44:40,160
Speaker 5: coming below expectations. We talked about a lot of complacency

798
00:44:40,239 --> 00:44:43,160
Speaker 5: out there. A lot of it is built upon the

799
00:44:43,239 --> 00:44:47,160
Speaker 5: idea that central banks will be able to steadily cut

800
00:44:47,239 --> 00:44:50,200
Speaker 5: rates and hence many of the challenges that some of

801
00:44:50,239 --> 00:44:53,240
Speaker 5: the lower quality companies are facing with respect to cost

802
00:44:53,280 --> 00:44:56,239
Speaker 5: of funding will go away. If my view is that

803
00:44:56,280 --> 00:44:58,880
Speaker 5: the central bank is going to cut rates, then I

804
00:44:58,880 --> 00:45:01,680
Speaker 5: would rather invest in an opportunity that will do well

805
00:45:01,680 --> 00:45:03,480
Speaker 5: when the central bank cuts rates, which is the high

806
00:45:03,560 --> 00:45:07,080
Speaker 5: quality fixed income. So certainly, you know that would be

807
00:45:07,560 --> 00:45:08,920
Speaker 5: the risk that I would focus on.

808
00:45:09,160 --> 00:45:10,000
Speaker 4: And then the second.

809
00:45:09,840 --> 00:45:13,920
Speaker 5: Scenario is, you know, we we were generally thinking about

810
00:45:14,520 --> 00:45:17,280
Speaker 5: just the possibility that inflation doesn't get back to central

811
00:45:17,280 --> 00:45:20,160
Speaker 5: bank target. So in that scenario, what would happen is

812
00:45:20,600 --> 00:45:22,560
Speaker 5: a central bank will not be able to cut rates.

813
00:45:22,680 --> 00:45:26,040
Speaker 5: Growth still is low, so many of the lower quality

814
00:45:26,040 --> 00:45:29,520
Speaker 5: segments of credit markets will get challenged from being able

815
00:45:29,560 --> 00:45:34,040
Speaker 5: to because of they'll have a continued higher interest expense costs.

816
00:45:34,280 --> 00:45:36,919
Speaker 5: But then also the top line would not necessarily grow

817
00:45:37,440 --> 00:45:40,879
Speaker 5: in that areo, so having some inflation protection is also

818
00:45:40,920 --> 00:45:42,319
Speaker 5: important in portfolios in that.

819
00:45:42,239 --> 00:45:46,200
Speaker 1: Sense, great stuff, mo Hit metel Cio Core Strategies at Pimco.

820
00:45:46,239 --> 00:45:47,239
Speaker 1: Has been a pleasure having you on.

821
00:45:47,160 --> 00:45:49,080
Speaker 2: The credit edge. Thank you so much for having me,

822
00:45:49,480 --> 00:45:50,080
Speaker 2: and of course.

823
00:45:49,960 --> 00:45:52,279
Speaker 1: So very grateful to Steve Flyin from Bloomberg Intelligence, thanks

824
00:45:52,280 --> 00:45:54,239
Speaker 1: for joining us today, Thank you for having me, And

825
00:45:54,320 --> 00:45:57,360
Speaker 1: to Irena Garthia Perez Mary, thanks thank you for having me.

826
00:45:57,680 --> 00:46:00,520
Speaker 1: Well ierni's coverage on the terminal and that bloom dot

827
00:46:00,680 --> 00:46:04,200
Speaker 1: com for more credit market analysis and insight. Read all

828
00:46:04,200 --> 00:46:06,960
Speaker 1: of Steve Flynn's great work on the Bloomberg Terminal. Bloomberg

829
00:46:07,000 --> 00:46:09,480
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830
00:46:09,480 --> 00:46:13,080
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831
00:46:13,160 --> 00:46:15,719
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832
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833
00:46:20,120 --> 00:46:22,160
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834
00:46:22,160 --> 00:46:24,839
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837
00:46:31,520 --> 00:46:35,279
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838
00:46:35,280 --> 00:46:37,520
Speaker 1: been a pleasure having you join us again next week

839
00:46:37,640 --> 00:46:38,600
Speaker 1: on the Credit Edge.