WEBVTT - Federated Sees Private Debt Red Flags; AT1 Boom 0:00:18.320 --> 0:00:21.040 Hello, and welcome to the Credit Edge, a weekly markets podcast. 0:00:21.239 --> 0:00:23.880 My name is James Crumby. I'm a senior editor at Bloomberg. 0:00:24.520 --> 0:00:27.440 This week, we're very pleased to welcome Fraser Lundy, head 0:00:27.480 --> 0:00:30.480 of fixed income at Federated Hermes, based in London. How 0:00:30.480 --> 0:00:33.080 are you, Fraser, Yeah, very well, thanks thanks for having me. 0:00:33.400 --> 0:00:34.960 Thank you so much for joining us today. I'm very 0:00:35.000 --> 0:00:37.160 keen to get your thoughts on the markets. We're also 0:00:37.200 --> 0:00:40.120 delighted to welcome back Lisa Lee, who covers credit markets 0:00:40.120 --> 0:00:42.080 from London. Great to see you again, Lisa. 0:00:42.479 --> 0:00:44.400 Great to see you too, thanks for having me. 0:00:45.240 --> 0:00:46.960 Also a bit later on the show, we're going to 0:00:47.000 --> 0:00:49.520 be talking to FRIEDA Silver, who covers the eighty one 0:00:49.600 --> 0:00:52.640 bond market for Bloomberg Intelligence based in Hong Kong. So 0:00:52.720 --> 0:00:56.920 do stay with us. But first, Fraser Lundy Federated Hermes. 0:00:57.160 --> 0:00:59.560 Great to have you on Credit Edge. Let's start with 0:00:59.600 --> 0:01:03.000 an easy one. Do you think that the US Federal 0:01:03.040 --> 0:01:07.080 Reserve has finished hiking? And how fast and deep do 0:01:07.120 --> 0:01:09.600 you expect them to start easning. I know it's a 0:01:09.640 --> 0:01:12.760 big one, but that's what everyone is talking about right now. 0:01:12.959 --> 0:01:15.200 Everyone has a view and I wanted to start with that. 0:01:16.080 --> 0:01:18.000 Yeah, I could see you smiling when you were asking 0:01:18.000 --> 0:01:21.440 that question there, So yeah, an easy one. Indeed, I 0:01:21.520 --> 0:01:25.080 think it's perhaps been slightly easier to answer that question 0:01:25.240 --> 0:01:27.160 than it would have been forty eight hours ago because 0:01:27.200 --> 0:01:30.360 of the data that we've been getting in most notably 0:01:30.400 --> 0:01:33.720 the CPI print, And you know, I think it is 0:01:33.760 --> 0:01:36.559 starting to mount up the evidence to give people conviction 0:01:36.760 --> 0:01:39.360 to say that we are now at a peak. So 0:01:39.440 --> 0:01:41.319 I think the harder part of the question is more 0:01:41.360 --> 0:01:44.399 related to the second part, which is the timing and 0:01:44.480 --> 0:01:50.240 extent of cuts to come. We do think actually there 0:01:50.280 --> 0:01:54.240 is scope for disappointment here in the sense that whilst 0:01:54.280 --> 0:01:57.800 it looks like we're traveling the right direction, now, you know, 0:01:58.440 --> 0:02:00.880 it's pretty likely to be bumpy. And I say that 0:02:00.960 --> 0:02:05.080 because this has to This has not been a normal 0:02:05.120 --> 0:02:08.080 cycle by any stretch. You know, when you think about 0:02:08.240 --> 0:02:13.080 the implications of COVID and wars and so on, making 0:02:13.800 --> 0:02:15.880 like for like comparisons that bit difficult, which means the 0:02:15.960 --> 0:02:18.600 data is going to continue to be pretty jumpy and 0:02:18.639 --> 0:02:22.880 hard to read from a trend perspective. So to the 0:02:22.919 --> 0:02:27.040 extent that people are becoming a little bit too you know, 0:02:27.400 --> 0:02:31.600 over a confident in that cut progression into next year, 0:02:31.680 --> 0:02:35.960 and we're maybe getting there that there is some scope 0:02:35.960 --> 0:02:38.480 for disappointment, but you know, bigger picture in longer term 0:02:38.600 --> 0:02:39.760 that that is where we're headed. 0:02:40.280 --> 0:02:42.720 Yeah, we've seen some big calls this week. UBS expects 0:02:42.720 --> 0:02:44.600 the FED cut rates by two hundred and seventy five 0:02:44.639 --> 0:02:47.880 basis points next year. That's almost four times what the 0:02:48.320 --> 0:02:50.200 you know, more than what the market's pricing right now. 0:02:50.280 --> 0:02:54.200 Morgan Sandy expects easing to start next June. Goldman maybe 0:02:54.360 --> 0:02:56.440 later in the year, but everyone is kind of getting 0:02:56.480 --> 0:03:01.600 more excited about easing starting next year. As you say, 0:03:01.639 --> 0:03:03.400 it's kind of the pace of it, and when it 0:03:03.440 --> 0:03:06.760 happens could be some big disappointment. But then from there, 0:03:06.919 --> 0:03:09.120 you know, because this is a credit show phrase, it 0:03:09.480 --> 0:03:11.680 where do we go from here in terms of credit? 0:03:11.720 --> 0:03:13.440 How does that inform your credit view? 0:03:14.200 --> 0:03:16.119 Yes, so, I mean, I think what we're thinking about 0:03:16.120 --> 0:03:19.640 at the moment from a more credit specific perspective is 0:03:19.639 --> 0:03:24.800 that the volatility markets, as so called fear gauges, I 0:03:24.800 --> 0:03:26.480 think is one of the most interesting things in the 0:03:26.520 --> 0:03:30.440 sense that equity and credit volatility are are pretty low here. 0:03:30.639 --> 0:03:32.840 If you look at the vics, for example, in equity space, 0:03:32.840 --> 0:03:35.240 I think we're sub fourteen right now, which is well 0:03:35.240 --> 0:03:40.760 below long term averages. The one outlier remains interest rate volatility, which, 0:03:41.120 --> 0:03:44.520 as we've just been talking about, is elevated because there 0:03:44.520 --> 0:03:48.320 is still some uncertainty around timing of peak and cuts 0:03:49.240 --> 0:03:51.720 to me in credit. There's quite a lot of sub 0:03:51.760 --> 0:03:56.240 sectors that have been disproportionately hurt by that inflated interest 0:03:56.280 --> 0:04:00.240 rate volatility regime over the last year eighteen months, and 0:04:00.760 --> 0:04:03.880 it's there that we think you're likely to see most 0:04:03.880 --> 0:04:05.760 of the benefit from what we think is going to 0:04:05.800 --> 0:04:10.880 be a movement of that pendulum from essentially inflation concerns 0:04:10.920 --> 0:04:14.640 towards growth concerns. You know, obviously, the longer we are 0:04:14.680 --> 0:04:18.520 at this higher for longer state of play, the more 0:04:18.720 --> 0:04:21.960 punishing it is going to be, inevitably for both consumers 0:04:22.040 --> 0:04:25.720 and for corporates in terms of earnings and balance sheet degradation. 0:04:27.600 --> 0:04:32.440 But actually the areas that we think are perhaps most 0:04:32.440 --> 0:04:36.720 interesting are ones that should be more shielded from that 0:04:37.120 --> 0:04:40.760 direct sensitivity, sensitivity to the underlying economy, because they tend 0:04:40.760 --> 0:04:43.240 to be areas of the market that have been hurt 0:04:43.279 --> 0:04:46.400 more by that interest rate volatility. So, you know, we 0:04:46.440 --> 0:04:50.080 don't think things are going to be getting easier from 0:04:50.120 --> 0:04:53.240 here for corporates. Actually far from it. We think there 0:04:53.279 --> 0:04:57.120 is going to be an inevitable increased headwind as companies 0:04:57.120 --> 0:04:59.640 start to think about refinancing to the new normal of 0:04:59.760 --> 0:05:05.200 much higher coupons. But there is a sufficient amount of 0:05:05.240 --> 0:05:08.120 the credit spectrum out there that I still think is 0:05:08.400 --> 0:05:12.200 priced quite interestingly that as long as you are not 0:05:12.360 --> 0:05:14.400 falling into the trap of thinking that there's going to 0:05:14.400 --> 0:05:17.159 be a rising tide floating all boats and you are 0:05:17.400 --> 0:05:21.360 quite discriminate when it comes to credit quality and security selection, 0:05:21.440 --> 0:05:23.359 I think it is still a pretty constructive environment. 0:05:24.080 --> 0:05:26.040 Is that a global view or do you have particular 0:05:26.400 --> 0:05:27.479 regional biases? 0:05:28.360 --> 0:05:30.760 Well, for the most part, it is a global view. 0:05:30.800 --> 0:05:32.960 I would say though that in the US, where the 0:05:33.000 --> 0:05:36.760 economy is and is likely to remain more resilient certainly 0:05:36.800 --> 0:05:39.720 than it is here in Europe, there is something of 0:05:39.760 --> 0:05:42.480 an offset to that from a credit perspective, which is 0:05:42.520 --> 0:05:46.480 that a lot of those gains or benefit I think 0:05:47.080 --> 0:05:51.840 go to shareholders first through more equity friendly behavior from 0:05:51.880 --> 0:05:55.240 those corporates, and we have seen and will see I 0:05:55.279 --> 0:05:59.919 think a lot of share buy back activity, hiking of 0:06:00.040 --> 0:06:04.039 dividends as well as you know to some extent debt 0:06:04.080 --> 0:06:06.320 funded M and A, and I think those things are 0:06:06.720 --> 0:06:09.719 more prevalent in the US, and I think just you know, again, 0:06:10.120 --> 0:06:12.560 sometimes taking a step back, people forget that in credit 0:06:12.600 --> 0:06:15.320 we don't like things to be too good because when 0:06:15.360 --> 0:06:18.159 times are too good, you know, that's when you need 0:06:18.360 --> 0:06:21.000 to be in equities frankly, and actually we love a 0:06:21.040 --> 0:06:25.280 muddle through. So you know that to me essentially cancels 0:06:25.320 --> 0:06:27.279 out the gains that you might have thought would be 0:06:27.279 --> 0:06:29.719 there for the US versus Europe or or the rest 0:06:29.760 --> 0:06:33.160 of the world. So to me, it's more about sector 0:06:33.200 --> 0:06:36.719 specific and credit quality specific that I think is the differentiation. 0:06:37.839 --> 0:06:41.080 So you say credit quality, would you go lower under 0:06:41.120 --> 0:06:44.799 a skill would you so high your bards, leverage loans 0:06:44.839 --> 0:06:48.800 or would you prefer stay more higher graded investment grade 0:06:49.080 --> 0:06:52.039 given the macro environment and then the fact that we 0:06:52.120 --> 0:06:52.800 might be a peak. 0:06:53.800 --> 0:06:57.360 Yeah, I mean, this has been an incredibly interesting year 0:06:57.400 --> 0:06:59.920 because despite what everyone might have thought at the begin 0:07:00.240 --> 0:07:03.360 the year, you've seen some pretty outstanding returns from the 0:07:03.480 --> 0:07:07.120 very lowest quality of credit, particularly triple C rated credit, 0:07:07.560 --> 0:07:10.360 which I believe is still double digit returns here today 0:07:10.400 --> 0:07:13.800 as of today. Know that is something that I think 0:07:13.840 --> 0:07:16.320 most people would be very surprised to have heard at 0:07:16.320 --> 0:07:18.200 the start of this year, and it's been a combination 0:07:18.280 --> 0:07:21.760 of the fact that recessionary fears have been delayed and 0:07:21.920 --> 0:07:24.880 or canceled, depending on your view. But also there's a 0:07:24.960 --> 0:07:29.120 technical element to this, which is, you know, perhaps less appreciated, 0:07:29.800 --> 0:07:32.280 the market itself is shrinking. You know, high yield as 0:07:32.280 --> 0:07:34.280 an asset class is shrunk roughly ten percent in the 0:07:34.320 --> 0:07:38.160 last year. Most estimates have it shrinking again by another 0:07:38.320 --> 0:07:41.840 five next year, and essentially that means there's less stuff 0:07:41.880 --> 0:07:44.440 to buy in a market where things have proved more 0:07:44.480 --> 0:07:47.600 resilient than what most people thought. Now. I don't think 0:07:47.680 --> 0:07:50.640 that's going to continue forever, and I certainly wouldn't want 0:07:50.640 --> 0:07:54.280 to base a constructive view on triple C credit on 0:07:54.320 --> 0:07:56.160 the fact that there's less of it to buy. And 0:07:56.480 --> 0:07:58.800 actually there is an element of that market that I 0:07:58.840 --> 0:08:02.400 think will also end up being paper gains, only in 0:08:02.520 --> 0:08:06.080 terms of what that has been achieved this year, you know, 0:08:06.160 --> 0:08:09.680 private credits emergence has been an interesting element of that 0:08:09.800 --> 0:08:12.960 as well. Generally speaking, there has been less M and 0:08:13.040 --> 0:08:16.600 A and LB activity this year, but what activity there 0:08:16.600 --> 0:08:19.680 has been has seen a competing source of funding for that, 0:08:19.760 --> 0:08:23.400 and again that's fueling this shrinking of the market. So 0:08:24.800 --> 0:08:26.720 there are always going to be exceptions. But I would 0:08:26.720 --> 0:08:29.760 say at this point that you know, being higher quality 0:08:29.920 --> 0:08:32.839 in your allocations from a multi asset credit perspective is 0:08:33.280 --> 0:08:36.160 likely to pay off well going to next year. And 0:08:36.240 --> 0:08:38.719 actually you don't really need to stretch in order to 0:08:39.400 --> 0:08:42.840 achieve some pretty meaningful yields here, which is another, you know, 0:08:43.000 --> 0:08:47.640 comforting thing to think about. When we think about relative 0:08:47.720 --> 0:08:50.400 value and credit, we try as much as possible to 0:08:50.440 --> 0:08:54.240 extend the discussion beyond just simple spread. And obviously a 0:08:54.280 --> 0:08:57.080 lot of people will will will focus on spread. You know, 0:08:57.080 --> 0:08:59.720 what's the spread, what's the default rate? Are we compensated? 0:09:01.160 --> 0:09:04.040 I think for many end investors the yield number is 0:09:05.040 --> 0:09:07.959 just as important, arguably more important, and because of what's 0:09:07.960 --> 0:09:11.360 happened to underlying government bond yields and cash rates, the 0:09:11.720 --> 0:09:17.640 yields on offer today are very attractive versus history, and moreover, 0:09:17.960 --> 0:09:20.560 the actual cash price of the bond you're buying is 0:09:20.800 --> 0:09:23.240 very low compared to history. I think the average cash 0:09:23.280 --> 0:09:25.320 price in hw you, for example, right now is about 0:09:25.320 --> 0:09:28.040 eighty eight cents in the dollar. Investment grade not dissimilar, 0:09:28.080 --> 0:09:30.679 maybe nineteen ninety one cents in the dollar. And this, 0:09:31.040 --> 0:09:34.079 you know, this makes the capital appreciation potential of the 0:09:34.120 --> 0:09:36.880 acid class that bit greater. There's nothing in the way 0:09:36.880 --> 0:09:40.079 of ceilings to hit, whether it be call option related 0:09:40.160 --> 0:09:43.360 or otherwise. And you know, I do think that, you know, 0:09:44.360 --> 0:09:47.680 still being pretty foot on the gas, but foot on 0:09:47.679 --> 0:09:49.640 the gas in the higher quality segment of the market 0:09:49.720 --> 0:09:50.880 is the right way to play this. 0:09:51.440 --> 0:09:53.920 You notice that the levi's loan market has been shrinking 0:09:53.960 --> 0:09:55.600 this year, and a lot of that has to do 0:09:55.760 --> 0:09:58.559 with the rise of private credit, which which many people 0:09:58.559 --> 0:10:01.240 are saying, so the goal an age of private credit 0:10:02.000 --> 0:10:06.840 investors are very bullish on the asset class. Given peak race, 0:10:06.880 --> 0:10:09.760 do you think is still going to be the golden era? 0:10:09.960 --> 0:10:12.080 And tell me what do you how you think through 0:10:12.160 --> 0:10:15.360 the interplay of private credit and leverage loans. 0:10:15.160 --> 0:10:17.920 Yeah, I mean, the leverage market is an interesting one 0:10:17.960 --> 0:10:21.520 because it gives you an insight into the immediate effect 0:10:21.760 --> 0:10:25.240 of that coupon change that we are experiencing because of 0:10:25.320 --> 0:10:29.600 underlying rates. Because it's a floating rate instrument, the interest 0:10:29.640 --> 0:10:32.920 coverage ratios that you see today have already taken the 0:10:32.960 --> 0:10:35.520 full brunt of that pain. Whereas asset classes like high 0:10:35.559 --> 0:10:38.280 yield and investment grade being more fixed in nature, haven't 0:10:38.360 --> 0:10:41.200 yet to any meaningful degree. So there has already been 0:10:41.200 --> 0:10:42.640 a decent amount of pain in there, and I would 0:10:42.640 --> 0:10:47.000 say similarly, some of that has been not fully absorbed 0:10:47.000 --> 0:10:50.040 in terms of market prices because the market has been shrinking, 0:10:50.080 --> 0:10:51.960 there's less of it to buy, and it's been artificially 0:10:51.960 --> 0:10:57.520 propped up to some extent. The Again, I would say 0:10:57.520 --> 0:11:01.439 that the differentiation there is not as pronounced as I 0:11:01.480 --> 0:11:03.600 would have liked like it to be in order to 0:11:03.600 --> 0:11:06.840 be more constructive. In the leverage loan space generally speaking, 0:11:06.960 --> 0:11:13.040 is dominated by you know, private companies and financially levered companies, 0:11:13.800 --> 0:11:17.679 and the other thing that concerns me is we're coming 0:11:17.720 --> 0:11:19.880 in off the back of a decade or more of 0:11:20.040 --> 0:11:25.160 continuously declining covenant quality, and you're already starting to see 0:11:25.200 --> 0:11:28.600 that take effect in terms of the low recovery rates 0:11:28.600 --> 0:11:32.000 that are being realized on restructuring and default scenarios in 0:11:32.400 --> 0:11:35.360 the levers loan market. Now, it's not moving the needle 0:11:35.480 --> 0:11:37.480 yet because the default rate is only you know, one 0:11:37.520 --> 0:11:39.840 two percent, but we are going to go to three 0:11:39.920 --> 0:11:44.040 and four and possibly five and above, and you know, 0:11:44.120 --> 0:11:47.960 if you are experiencing recovery rates in the event of 0:11:48.000 --> 0:11:50.160 default that are say, half what they might have been 0:11:50.840 --> 0:11:54.959 long term history wise, then that becomes quite painful from 0:11:54.960 --> 0:11:57.720 a loss given default perspective, and suddenly, you know, that 0:11:57.840 --> 0:12:00.280 extra premium that you thought you were receiving in terms 0:12:00.280 --> 0:12:04.480 of spread quite quickly gets eaten away at. You know, 0:12:04.520 --> 0:12:07.160 private credits emergence is another very interesting one, and I 0:12:07.160 --> 0:12:09.960 do think that you can argue that in normal market 0:12:10.000 --> 0:12:13.800 conditions it's probably a positive for the public market space 0:12:13.920 --> 0:12:16.840 in the sense that it's an additional potential source of 0:12:16.880 --> 0:12:21.400 funding and therefore another area that more stress corporates can 0:12:21.520 --> 0:12:25.160 can look to to pull at. And it's also shrinking 0:12:25.200 --> 0:12:28.839 our market, so it's adding that technical positive as well. 0:12:29.600 --> 0:12:33.240 There is obviously some potential concerns and red flags about 0:12:33.240 --> 0:12:35.040 it as well, though, which I think would be more 0:12:35.080 --> 0:12:39.720 relevant in a more dysfunctional market. You know, people estimate 0:12:39.760 --> 0:12:42.400 that private credit has now reached something like a trillion 0:12:42.440 --> 0:12:44.640 dollars in size, which puts it roughly the same size 0:12:44.640 --> 0:12:47.520 as the US high you market. Now. It took fifty 0:12:47.600 --> 0:12:49.760 years and more for US hih yield to get to 0:12:49.760 --> 0:12:53.240 the size it is today. Private credit barely existed ten 0:12:53.320 --> 0:12:55.440 years ago. That on its own to me is something 0:12:55.440 --> 0:12:58.200 of you know, a concern or something to be monitored, 0:12:59.120 --> 0:13:03.560 as is obviously the opacity of the returns and frankly 0:13:03.600 --> 0:13:07.720 the opacity of the fundamentals because it's not a rated 0:13:08.120 --> 0:13:10.800 asset class, but where it rated, I would imagine that 0:13:10.840 --> 0:13:13.000 the likes of SMP in modies would probably rate its 0:13:13.000 --> 0:13:16.440 single BEE or thereabouts. And you know, as we know 0:13:16.520 --> 0:13:19.120 from the public market side, anything in single B space 0:13:19.160 --> 0:13:23.320 is currently undergoing a coupon shift from three four, five 0:13:23.360 --> 0:13:27.719 six percent to nine ten, eleven, twelve percent, and that 0:13:27.840 --> 0:13:31.439 is not going to be absorbed cleanly and easily. And 0:13:31.760 --> 0:13:34.599 the lack of lookthrough is something that I find it 0:13:34.679 --> 0:13:36.000 quite difficult to have conviction on. 0:13:36.600 --> 0:13:38.160 So do you expect a lot of defaults there? I mean, 0:13:38.200 --> 0:13:40.080 we might not even see them because the lenders just 0:13:40.160 --> 0:13:42.280 keep extending, right well. 0:13:42.360 --> 0:13:45.760 That is part of the problem related to loose covenants 0:13:45.800 --> 0:13:49.280 in general, is that the ability to as they say, 0:13:50.000 --> 0:13:53.560 extend and pretend because covenants are loose enough to do so, 0:13:54.520 --> 0:13:58.200 means that eventually, if there is a restructuring, that the 0:13:58.240 --> 0:14:00.640 recovery rates that are that bit lower. And actually I 0:14:00.679 --> 0:14:04.120 think if you look at the high YO market, which 0:14:04.120 --> 0:14:08.160 has better data, there's a very large percentage of the 0:14:08.200 --> 0:14:12.240 defaults that happen are companies that have previously defaulted. So 0:14:12.280 --> 0:14:14.880 if you're not very good to start with, then you know, 0:14:15.280 --> 0:14:20.360 it's difficult to reinvent a bad business essentially. So you know, 0:14:20.560 --> 0:14:24.000 all these things, combined with the performance that that low 0:14:24.200 --> 0:14:27.560 quality has had year to date, give us quite a 0:14:27.640 --> 0:14:29.720 high degree of confidence that it's an area that you 0:14:29.760 --> 0:14:34.440 can confidently not invest in materially here and focus on 0:14:34.520 --> 0:14:35.200 higher quality. 0:14:36.240 --> 0:14:39.280 Oh, you mentioned recoveries, and they've been shockingly low in 0:14:39.320 --> 0:14:42.440 the US for the leverage low market, loan recoveries are 0:14:42.520 --> 0:14:46.320 down at ten to twenty cents, and many people attribute 0:14:46.320 --> 0:14:49.520 that to some most called lender and lender violence, where 0:14:50.400 --> 0:14:55.080 sponsors and some lenders push down other lenders. We haven't 0:14:55.080 --> 0:14:57.880 seen that yet in Europe. Do you think that that 0:14:58.000 --> 0:14:59.920 will never come to the shores or do you exp 0:15:00.040 --> 0:15:01.160 that are you braced for it? 0:15:03.040 --> 0:15:07.280 I don't think there's any significant reason why it wouldn't 0:15:07.320 --> 0:15:09.640 come here. I think this is really to do with 0:15:10.800 --> 0:15:13.440 data set and size of sample, which so far has 0:15:13.480 --> 0:15:15.480 been quite small. As I mentioned, you know, default rates 0:15:15.480 --> 0:15:18.840 so far have been relatively small. Now there's more of 0:15:18.880 --> 0:15:22.000 them in the US generally because the US is in 0:15:22.080 --> 0:15:25.920 aggregate a lower rated asset class and it has more 0:15:26.280 --> 0:15:29.480 percentage of triple c's to start with. Now, triple C 0:15:29.600 --> 0:15:32.680 credit I think fifty percent of the time doesn't make 0:15:32.720 --> 0:15:35.280 it to maturity, you know, from issuance, which means that 0:15:35.320 --> 0:15:36.760 you're never to be going to find more of them 0:15:36.840 --> 0:15:40.600 in that part of the market. Now, through a recessionary 0:15:40.600 --> 0:15:43.160 period where default rates increase, you're going to get a 0:15:43.200 --> 0:15:46.240 bigger sample pool. And I don't think there's a significant 0:15:46.280 --> 0:15:50.800 difference when it comes to covenant language to suggest that 0:15:51.120 --> 0:15:53.240 Europe would be in some way immune to some of 0:15:53.280 --> 0:15:54.720 that type of behavior. 0:15:55.520 --> 0:15:58.160 So you do sound quite cautious phraser a role. I mean, 0:15:58.160 --> 0:16:01.200 obviously wea credit people, so we ah cautious naturally, But 0:16:01.680 --> 0:16:04.560 do you feel that we are that we have just 0:16:04.600 --> 0:16:08.120 delayed the big blow up that we were somewhat fearing 0:16:08.160 --> 0:16:09.080 at the beginning of this year. 0:16:10.240 --> 0:16:12.320 No, I mean, and actually thanks for pointing out that, 0:16:12.320 --> 0:16:16.280 because I don't want to appear too cautious. I think 0:16:16.280 --> 0:16:18.520 it's important to remember that most of what we look 0:16:18.560 --> 0:16:22.200 at is perfectly fine in terms of its ability to 0:16:22.280 --> 0:16:26.720 weather through somewhat harder times, and in fact, you know, 0:16:26.760 --> 0:16:30.080 if you're talking about investment grade and the vast majority 0:16:30.120 --> 0:16:33.440 of the double B space, let's say, declines of five 0:16:33.520 --> 0:16:35.840 ten percent of EBITD something like that, you know, as 0:16:35.840 --> 0:16:39.160 a mild recessionary. If that type environment, which is probably 0:16:39.200 --> 0:16:42.680 most people's case for going to next year for most 0:16:42.680 --> 0:16:45.640 of those companies, if not the vast majority of those companies, 0:16:45.680 --> 0:16:49.200 all that means is dialing down their dividend payments, dialing 0:16:49.240 --> 0:16:51.800 down share buybacks, you know, maybe holding off on debt 0:16:51.840 --> 0:16:54.720 funded m and A. It's you know, it doesn't need 0:16:54.760 --> 0:16:57.760 to be more than that. Having said that, you know, 0:16:57.800 --> 0:17:00.640 I think when you're going into that type of mark environment, 0:17:01.040 --> 0:17:04.119 it's important to think about the premiums that you're being 0:17:04.160 --> 0:17:06.640 paid for different types of company. So, you know, real 0:17:06.720 --> 0:17:12.560 sort of laser eye attention on cyclicality, premium, country premium, 0:17:13.080 --> 0:17:16.680 the premium for owning a private company versus a public company. Obviously, 0:17:17.080 --> 0:17:18.760 you know, from that perspective, I think that's a really 0:17:18.800 --> 0:17:22.399 important one in the credit space because going into harder 0:17:22.400 --> 0:17:25.240 times public companies, I think people sometimes forget it's that 0:17:25.320 --> 0:17:27.800 bit easier for them to raise other forms of capital 0:17:27.840 --> 0:17:29.720 you know, they can do a rights issue, they're more 0:17:29.760 --> 0:17:33.399 readily available to do non core asset sales and so on. 0:17:33.440 --> 0:17:36.480 And I think, you know, these are all ultimately not 0:17:36.600 --> 0:17:39.800 great if we were sitting here having an equity podcast, frankly, 0:17:39.840 --> 0:17:41.359 And I do think that some of these grafts that 0:17:41.680 --> 0:17:44.440 will show you right now that yields and credit are 0:17:44.680 --> 0:17:49.400 significantly above yields of dividend yields, they to me, from 0:17:49.440 --> 0:17:52.280 a more multi asset perspective, would suggest that people need 0:17:52.320 --> 0:17:54.920 to remember that you know, you can pay a dividend, 0:17:54.920 --> 0:17:57.919 but you must pay a coupon. And that feels like 0:17:57.960 --> 0:17:59.440 that's the type of environment we're going to be going 0:17:59.440 --> 0:17:59.960 to next year. 0:18:00.640 --> 0:18:03.239 So to use your phrase the laser like focus, I mean, 0:18:03.280 --> 0:18:05.520 where are the best opportunities right now? You have a 0:18:05.560 --> 0:18:09.919 really big broad remit, you look at everything. What is 0:18:09.960 --> 0:18:13.400 the best thing to invest in, you know, by product, 0:18:13.760 --> 0:18:15.600 by geography, by sector? 0:18:16.280 --> 0:18:19.119 Yes, I think I think probably the two things that 0:18:19.160 --> 0:18:21.600 we're trying to hone in on are what has been 0:18:21.840 --> 0:18:24.840 hurt by interest rate volatility and what's been hurt by 0:18:24.960 --> 0:18:28.600 just generally this rise in yields that has already taken 0:18:28.640 --> 0:18:31.800 that pain. So that brings me to areas like, you know, 0:18:31.920 --> 0:18:35.720 the long end of the investment grade market where cash 0:18:35.760 --> 0:18:38.800 prices are phenomenally low and you're not talking about having 0:18:38.840 --> 0:18:41.800 to buy bad companies to access that. You're you're buying 0:18:42.280 --> 0:18:45.920 real blue chips at fifty and sixty cents on the dollar. Here, 0:18:46.280 --> 0:18:50.160 That to me is an underappreciated advantage when it comes 0:18:50.160 --> 0:18:52.800 to convexity, when it comes to jump to default risk, 0:18:52.840 --> 0:18:57.159 when it comes to access to upside event risk. And again, 0:18:57.280 --> 0:19:00.880 you know, CFOs of companies are not stupid, and they 0:19:00.920 --> 0:19:03.959 are knowing that that they're going to be in harder times. 0:19:04.560 --> 0:19:06.760 I think they will be more incentivized to look at 0:19:06.760 --> 0:19:09.720 their cap structures and think about being more preemptive and opportunistic. 0:19:10.200 --> 0:19:11.439 So I think you're going to see more in the 0:19:11.440 --> 0:19:15.800 way of tender activity, can sense solicitations, early addressing of 0:19:15.960 --> 0:19:19.040 front end bonds. All that leads me to believe that 0:19:19.320 --> 0:19:21.879 focusing on cash price of securities is going to be 0:19:21.960 --> 0:19:26.560 really important. Away from that, I think areas like the 0:19:26.560 --> 0:19:31.440 corporate hybrid space in Europe are particularly interesting. They have 0:19:31.520 --> 0:19:35.320 suffered somewhat in sympathy with the pain that eighty one 0:19:35.440 --> 0:19:38.439 financials have had in Europe this year. Even though they 0:19:38.440 --> 0:19:43.159 have nothing really to do with financials or indeed that 0:19:43.640 --> 0:19:48.000 security type, other than they are another form of subordinated 0:19:48.359 --> 0:19:52.320 perpetual debt. That part of the market, to me, is 0:19:52.400 --> 0:19:56.359 quite dislocated from straight debt, and I think will ultimately 0:19:56.359 --> 0:20:00.399 be one of the major beneficiaries of normalized of that 0:20:00.440 --> 0:20:03.399 interest rate volatility regime. Another one actually will be the 0:20:03.400 --> 0:20:05.760 eighty one market itself. And you know, you've seen some 0:20:05.880 --> 0:20:09.600 recent primary market deals, probably most notably the UBS deal, 0:20:10.520 --> 0:20:13.880 which underlines just how big the pent up demand is 0:20:13.920 --> 0:20:16.480 for yielded paper in that space. In fact, from what 0:20:16.560 --> 0:20:21.159 I read, the order book on that deal equated to 0:20:21.280 --> 0:20:24.000 nearly twenty percent of the size of the entire market 0:20:24.040 --> 0:20:28.640 for eighty one's never mind UBS. So you know, those 0:20:28.680 --> 0:20:31.560 are two areas that I think it's worth leaning on here. 0:20:31.960 --> 0:20:36.240 I think the structured credit space is also pretty interesting. Again, 0:20:36.680 --> 0:20:39.000 the floating rate nature of it means that it's now 0:20:39.960 --> 0:20:44.200 at some very attractive yields, and being able to access 0:20:44.240 --> 0:20:49.400 that complexity and illiquidity premium in lieu of more sensitivity 0:20:49.440 --> 0:20:51.520 to the underlying economy is something that I think will 0:20:51.560 --> 0:20:54.280 continue to be an interesting thing to be done. And 0:20:54.480 --> 0:20:59.359 you are going to see more broad participation from a 0:20:59.359 --> 0:21:01.680 whole host of different types of investor base in that 0:21:01.720 --> 0:21:05.000 structure credit area continue and I think that will continue 0:21:05.040 --> 0:21:09.200 to add to the quality of that as an allocation. 0:21:08.800 --> 0:21:11.359 Type, massive area multitude of sins. So what do you 0:21:11.400 --> 0:21:14.600 mean by structure credit here? Is it clos? Is it nbs, 0:21:14.680 --> 0:21:16.320 is it CMBs? What are you talking about here? 0:21:16.560 --> 0:21:20.000 Yeah, I'm predominantly talking here. You know, if I was 0:21:20.000 --> 0:21:22.560 to choose within that spectrum, we would probably be focused 0:21:22.600 --> 0:21:26.680 mostly on the European CLO space in the investment grade 0:21:26.720 --> 0:21:29.080 parts of that cap structure. And from a risk reward perspective, 0:21:29.080 --> 0:21:32.360 if you look at where triple B CLO tranches are 0:21:32.400 --> 0:21:37.159 currently pricing, to me, there's a very significant premium to 0:21:37.640 --> 0:21:40.560 for example, I Track's crossover or CDX hig yield in 0:21:40.600 --> 0:21:44.520 terms of looking at some of the comparable spread in 0:21:44.760 --> 0:21:48.680 public markets. And you know that won't always be the case, 0:21:48.680 --> 0:21:51.680 and I think it's important to be sizing those types 0:21:51.680 --> 0:21:54.520 of allocations appropriately. But the fact that they do not 0:21:54.760 --> 0:21:56.720 correlate that highly on a day to day, week to 0:21:56.720 --> 0:21:58.359 week basis with a lot of other things that we 0:21:58.400 --> 0:22:01.080 look at mean that they are official to an overall 0:22:01.119 --> 0:22:04.679 multi asset credit allocation. I would also say there are 0:22:04.720 --> 0:22:07.880 ears that we don't like at all right now, emerging 0:22:07.880 --> 0:22:09.919