WEBVTT - Polus Adds Credit Shorts, Sees Default Mountain Ahead 0:00:17.880 --> 0:00:20.599 Hello, and welcome to the Credit Edge Weekly Markets podcast. 0:00:20.680 --> 0:00:22.759 My name is James Crombie. I'm a senior editor at 0:00:22.800 --> 0:00:23.840 Bloomberg and. 0:00:23.800 --> 0:00:27.120 I'm Tim Rimington, a senior analyst covering basic materials at 0:00:27.160 --> 0:00:31.000 Bloomberg Intelligence. This week, we're very pleased to welcome Rob Deforne, 0:00:31.560 --> 0:00:34.600 chief investment officer at Polus Capital Management, which invests in 0:00:34.600 --> 0:00:37.240 special situations leveraged and structured credit. 0:00:37.479 --> 0:00:39.680 How are you, Rob, Oh, very well, thank you, Thanks 0:00:39.680 --> 0:00:40.440 for having me today. 0:00:40.680 --> 0:00:43.880 Great to have you here. So Rob, you founded baby 0:00:43.880 --> 0:00:48.040 Brook Capital back in twenty fourteen, which, after a merger 0:00:48.200 --> 0:00:51.400 with Karen Capital, went on to become Polus and now 0:00:51.440 --> 0:00:54.720 manages more than twelve billion in aum. Before that, you 0:00:54.720 --> 0:00:57.880 were a partner at Eton Park and previously at Millennium. 0:00:58.000 --> 0:01:00.440 So I have to say, as a highield analyst, I'm 0:01:00.480 --> 0:01:03.920 very excited to be here asking you the questions. It's 0:01:03.920 --> 0:01:08.080 normally the other way around, so I'm very excited to 0:01:08.080 --> 0:01:10.759 hear what you have to say and heading over to James. 0:01:11.000 --> 0:01:12.480 Yeah, So before we get to the questions, I just 0:01:12.480 --> 0:01:14.360 want to set the scene a bit. Markets are on 0:01:14.600 --> 0:01:17.360 edge after the US lost its triple A credit rating, 0:01:17.760 --> 0:01:19.800 Moody's was only really following the lead of the other 0:01:19.880 --> 0:01:22.800 rating agencies, so the cut should not have been a surprise, 0:01:23.120 --> 0:01:25.400 but it does come as another reminder of the fragile 0:01:25.440 --> 0:01:28.600 state of US government finances, calling into question the concept 0:01:28.600 --> 0:01:32.200 of risk free rate while also reigniting the Cell America trade. 0:01:32.640 --> 0:01:35.479 Despite this, credit markets are projecting an air of calm 0:01:35.600 --> 0:01:38.319 and optimism about the economy. All the losses from the 0:01:38.319 --> 0:01:41.160 so called Liberation Day have been erased. Bond spreads are 0:01:41.200 --> 0:01:43.360 back to where they were before the US announced tariffs 0:01:43.400 --> 0:01:47.440 that were effectively embargoes, but the tide didn't lift all boats. 0:01:47.560 --> 0:01:50.560 Spreads on the lowest quality corporate debt remain wide to 0:01:50.600 --> 0:01:53.840 long term averages, indicating some concern about whether the weak, 0:01:54.080 --> 0:01:57.840 highly indebted companies can survive as earnings decline and stagflation 0:01:58.000 --> 0:02:01.160 risks rise. So what do you make of it? Credit 0:02:01.160 --> 0:02:03.040 spreads would suggest that we're all in the clear now, 0:02:03.080 --> 0:02:05.120 everything's going to be okay. What's your take? 0:02:05.640 --> 0:02:09.640 Well, yes, I think the there's obviously been an amount 0:02:09.680 --> 0:02:12.720 of technical strength and credit hasn't there as they have 0:02:12.840 --> 0:02:15.840 been in most risk markets over the last few weeks. 0:02:15.919 --> 0:02:19.119 But you know, I don't think we necessarily see the 0:02:19.160 --> 0:02:23.040 fundamental picture having been the sounding of an all clear. 0:02:24.280 --> 0:02:26.040 You know, for us, I think as you as you 0:02:26.120 --> 0:02:30.600 alluded to, we were actually at pretty much embargo conditions 0:02:31.720 --> 0:02:35.800 and we've now gone to you know, from embargo and 0:02:35.880 --> 0:02:40.520 potential kind of meaningful shock, meaningful non linear moment for 0:02:40.560 --> 0:02:44.560 the economy, and we've pivoted that to know, a rewiring 0:02:44.639 --> 0:02:48.679 of trade, and from that kind of more acute kind 0:02:48.680 --> 0:02:52.120 of you know, let's call it real shock, we're moving 0:02:52.160 --> 0:02:57.160 into a more sustainable, but longer duration potentially rewiring of trade, 0:02:57.160 --> 0:03:00.200 which will just be you know, very very costly for 0:03:00.240 --> 0:03:06.320 the global economy and certainly for the US manufacturing goods, importers, 0:03:06.320 --> 0:03:09.600 et cetera. So you know, we definitely see the likelihood 0:03:09.600 --> 0:03:15.000 of a fundamental impact to be setting in and setting 0:03:15.040 --> 0:03:19.320 in for the medium term. So you know, it's with that, 0:03:19.400 --> 0:03:22.600 I think obviously the markets have there are those technical 0:03:22.639 --> 0:03:26.240 forces and kind of you know, people were underweight and 0:03:26.280 --> 0:03:29.760 they sold a lot of risk and they had cash 0:03:29.800 --> 0:03:33.240 balances coming into this, but they've really bought into the 0:03:33.360 --> 0:03:37.080 idea that an all clear has been sounded. From a 0:03:37.120 --> 0:03:40.240 pricing perspective, I think that does provide a medium term 0:03:40.280 --> 0:03:43.080 opportunity to take to take the other side. 0:03:42.840 --> 0:03:45.400 Of it, and I think just following on from that 0:03:45.480 --> 0:03:48.040 on the on the macro side. You know, one of 0:03:48.120 --> 0:03:49.880 the things that I've seen in my coverage and Basic 0:03:49.920 --> 0:03:54.200 Materials is essentially we've been in an industrial recession for 0:03:54.280 --> 0:03:58.680 the past three years already, from around twenty twenty two, 0:04:00.000 --> 0:04:03.560 and you know, we've heard again and again about this recovery, 0:04:03.640 --> 0:04:07.280 you know, this H two recovery that never really materializes. 0:04:07.880 --> 0:04:10.480 You know, do you think this shock that you know 0:04:10.560 --> 0:04:13.280 might be materializing now is going to be the sort 0:04:13.280 --> 0:04:17.760 of catalyst to sort of trigger another leg down. 0:04:18.360 --> 0:04:21.560 I think it is more likely than not. Would definitely 0:04:21.560 --> 0:04:25.680 be how we're thinking about it. So you know what 0:04:25.720 --> 0:04:28.800 you mentioned there about the sort of we have been 0:04:28.839 --> 0:04:31.880 in relatively tough conditions for the last three years, so 0:04:32.160 --> 0:04:36.720 we would absolutely agree with what we see. You know 0:04:37.200 --> 0:04:40.240 right now is obviously your market very very focused on 0:04:40.320 --> 0:04:43.239 sort of the next piece of information, the next piece 0:04:43.240 --> 0:04:46.800 of news, whether it's tariffs, whether it's you know, US 0:04:46.960 --> 0:04:49.680 rateing downgrades. But what it all really is is the 0:04:49.800 --> 0:04:52.400 end of a fifteen year cycle, and this is a 0:04:52.480 --> 0:04:56.560 late cycle. This is a late cycle time at the 0:04:56.720 --> 0:04:59.800 end of you know, ultimately a pretty long period in 0:05:00.120 --> 0:05:04.040 the most drawn out cycles that's been unsustainably and in 0:05:04.080 --> 0:05:10.160 many ways artificially sustained for a few extra years. And 0:05:11.320 --> 0:05:14.479 you know, is with that we do see as you say, 0:05:14.600 --> 0:05:19.120 kind of that industrial recession. Yeah, you know, they have 0:05:19.279 --> 0:05:22.080 been there have been various sub sectors that have been 0:05:22.160 --> 0:05:25.400 struggling for the last few years, which is what you 0:05:25.480 --> 0:05:28.839 get at the tail end of the cycle. You know, 0:05:28.880 --> 0:05:31.680 we've been told about the restocking that was coming in 0:05:31.760 --> 0:05:36.600 chemicals right for quite a while. There's obviously the early 0:05:36.680 --> 0:05:39.359 losers at the tail end of a cycle, which you know, 0:05:39.360 --> 0:05:43.359 if you're looking at basic materials, building products, and that 0:05:43.480 --> 0:05:49.159 exposure to the housing market which has been lackluster, you 0:05:49.160 --> 0:05:52.680 know since twenty twenty two, and the rise in interest 0:05:52.760 --> 0:05:55.839 rates globally. So there have been a number of sectors 0:05:55.920 --> 0:06:00.479 which have been stuttering. And you know what is actually 0:06:00.640 --> 0:06:04.240 the most interesting, to be honest, is over that three years, 0:06:04.400 --> 0:06:09.880 how you know we have avoided major issues already, right, 0:06:09.960 --> 0:06:13.320 I mean I think that this, you know, our characterization 0:06:13.480 --> 0:06:16.880 of the market, well the economy in a late cycle 0:06:16.960 --> 0:06:20.880 period really does suggest that, you know, we are to 0:06:20.880 --> 0:06:23.839 some extent on borrow time and you're really looking for 0:06:23.960 --> 0:06:27.640 kind of what is the catalyst that tips it over 0:06:27.680 --> 0:06:31.280 the edge in the end. And I think those kind 0:06:31.320 --> 0:06:35.920 of very heavy goods associated sectors that you mentioned, which 0:06:35.960 --> 0:06:41.120 are have interest rate sensitive end consumer demand are clearly 0:06:41.160 --> 0:06:44.880 the ones which have been the weaker since twenty two 0:06:45.760 --> 0:06:49.960 because those are the places where you know, end demand 0:06:50.080 --> 0:06:53.360 was more constrained by the traditional interst rate function and 0:06:53.400 --> 0:06:57.719 how it impacts consumer spending. I think kind of so 0:06:57.880 --> 0:07:00.200 for us, you know, we really do feel that for 0:07:01.279 --> 0:07:04.320 whatever shot comes down the pipe, we do think most 0:07:04.480 --> 0:07:08.920 likely tariffs, but you know, it could equally be sovereign funding, 0:07:08.960 --> 0:07:11.520 et cetera. There are several there are several things that 0:07:11.560 --> 0:07:14.400 are kind of available at the end of this economic 0:07:14.440 --> 0:07:17.640 cycle to be the ultimate one that breaks this breaks 0:07:17.680 --> 0:07:21.720 the camera's back, as it were. But you know, they 0:07:21.760 --> 0:07:25.960 all sit within a context of, you know, credit wasn't 0:07:26.000 --> 0:07:29.040 that credit worthy over the last couple of years. You know, 0:07:29.360 --> 0:07:33.720 we are looking at very very high debt to cash 0:07:33.760 --> 0:07:38.640 flow statistics. We're looking at extremely high amounts adjustments of 0:07:38.760 --> 0:07:42.200 adjustments to earnings, and none of these things can really 0:07:42.240 --> 0:07:46.840 pay your debt, you know. So that's why the market 0:07:46.920 --> 0:07:49.640 is somewhat more fragile in the credit sector is somewhat 0:07:49.640 --> 0:07:55.160 more fragile in the lower rated spectrum to these forces. 0:07:55.760 --> 0:07:58.360 I feel like we've been talking about this scenario for 0:07:58.480 --> 0:07:59.800 years though, in terms of, you know, the end of 0:07:59.800 --> 0:08:02.840 the cycle and a big distressed cycle coming, and there's 0:08:02.840 --> 0:08:05.200 all this money been raised for that strategy, and yeah, 0:08:05.240 --> 0:08:07.160 it just never happens, you know, certainly on mass. I 0:08:07.160 --> 0:08:09.600 mean there's there's specific situations. You see, there's companies that 0:08:09.600 --> 0:08:12.120 you kind of see dropping into trouble and you know 0:08:12.160 --> 0:08:14.120 that they're going to get into worse trouble. But you 0:08:14.120 --> 0:08:17.680 know the size of that that opportunity just seems so 0:08:17.720 --> 0:08:19.840 small relative to the whole market. So so why should 0:08:19.840 --> 0:08:21.760 we worry? Now, what's the tipping point that we're really 0:08:21.760 --> 0:08:24.360 focused on. What are the signs that you're seeing to 0:08:24.440 --> 0:08:25.200 show that's coming. 0:08:25.800 --> 0:08:29.720 Yeah, Look, it's the process, right, The creation of of 0:08:29.720 --> 0:08:34.080 of excess misallocated credit is very much a process, and 0:08:34.120 --> 0:08:37.600 it takes place over a sustained period of time, and 0:08:38.600 --> 0:08:42.439 that you know, that was really the build up of 0:08:43.000 --> 0:08:46.600 debt through that low interest rate period that we've had 0:08:46.640 --> 0:08:51.520 since the GFC. So you know, the statistics really are 0:08:51.559 --> 0:08:53.720 that we have seen that incredible pick up in just 0:08:53.760 --> 0:08:57.280 the amount of the volume of sub investment. Great credit. 0:08:57.400 --> 0:09:00.600 You know, we're not worried about credit in general. Investment 0:09:00.640 --> 0:09:03.320 grade balance sheets are very strong, and you know, there 0:09:03.400 --> 0:09:07.600 was a corporate windfall from effectively the pandemic and the 0:09:07.640 --> 0:09:11.840 pandemic in era stimulus. So investment grade companies are about 0:09:11.840 --> 0:09:14.400 as about as good as they have been. Yeah, they've 0:09:14.760 --> 0:09:18.080 they've maybe overspent a little bit on buybacks, right, you know, 0:09:18.240 --> 0:09:20.960 ultimately and kind of left a bit of leverage on 0:09:21.080 --> 0:09:24.600 balance sheets. There are, of course a few exceptions which 0:09:24.640 --> 0:09:28.080 are a little bit weak, but you know, by and 0:09:28.160 --> 0:09:30.800 large igs okay. But high yield went from being that 0:09:30.880 --> 0:09:34.240 niche asset class to you know, very much mainstream post 0:09:34.240 --> 0:09:38.240 to GFC maybe five hundred billion dollars of loan and 0:09:38.520 --> 0:09:43.280 high year bonds outstanding, which is now five trillion dollars. Right, 0:09:43.520 --> 0:09:46.360 ten x the number of names, you've ten x the amount. 0:09:47.600 --> 0:09:49.880 But in that period of time, actually a lot of 0:09:49.880 --> 0:09:52.520 the sort of number of eyeballs looking at things has 0:09:52.559 --> 0:09:58.280 been outsourced to passive you know, passive purchasing. So the 0:09:58.559 --> 0:10:00.599 the kind of that has a lot the kind of 0:10:00.640 --> 0:10:02.600 a man of scrutiny on a lot of the single 0:10:02.679 --> 0:10:06.720 names to be reduced. So we definitely have kind of 0:10:06.720 --> 0:10:09.079 through that process. You know. My point here is really 0:10:09.160 --> 0:10:12.040 that we have been building up this misallocation as a 0:10:12.080 --> 0:10:15.320 process and then kind of you know, credit always gets 0:10:15.360 --> 0:10:18.920 to the same tipping point at the end of a cycle, 0:10:18.960 --> 0:10:22.160 which is what is the point where you sort of 0:10:22.160 --> 0:10:26.000 compare your growth rate the G, with your financing costs, 0:10:26.040 --> 0:10:29.480 your interest rate the R, and what matters to servicing 0:10:29.559 --> 0:10:32.240 credit is you kind of need a bigger G and 0:10:32.280 --> 0:10:37.120 a smaller R. And obviously, through the period of low 0:10:37.200 --> 0:10:41.120 interest rates the reason why credit was misallocated. Then you 0:10:41.160 --> 0:10:43.560 can see that from kind of how much credit grew 0:10:44.000 --> 0:10:47.200 relative to GDP, right, you know, so much more credit 0:10:47.200 --> 0:10:51.320 growth than there than there was GDP growth. And you 0:10:51.400 --> 0:10:53.160 get to the end of that process where you didn't 0:10:53.160 --> 0:10:55.559 need much G. Right, you didn't need to be producing 0:10:55.640 --> 0:10:59.199 much G you know, pre pandemic because because the R 0:10:59.320 --> 0:11:02.559 was so low. Come out of kind of the pandemic era, 0:11:03.760 --> 0:11:06.440 you know, twenty twenty two onwards, and we've seen kind 0:11:06.480 --> 0:11:08.880 of the R, the financing costs, the risk free rate 0:11:08.960 --> 0:11:13.120 for the economy pick up, but we haven't really seen 0:11:13.400 --> 0:11:18.120 a ton of real growth. And then the thing that 0:11:18.200 --> 0:11:20.840 kind of obviously everyone who was said, have said, well, look, 0:11:20.960 --> 0:11:23.480 the moment where your our versus G mixed, your ORE 0:11:23.640 --> 0:11:27.360 rises quickly and your G is constrained because you know, 0:11:27.440 --> 0:11:30.720 the economy is ultimately interest rates sensitive, was when we 0:11:30.760 --> 0:11:33.439 went into the hiking cycle of twenty two, And I 0:11:33.520 --> 0:11:36.920 think it's pretty fair to say that would be attributed 0:11:36.960 --> 0:11:40.520 to be a pretty good, you know, kind of starting 0:11:40.679 --> 0:11:44.599 bell for the the the unraveling of what at the 0:11:44.640 --> 0:11:47.280 time was a sort of twelve or thirteen year period 0:11:47.320 --> 0:11:50.480 of pick up in debt. The reason why it didn't 0:11:51.559 --> 0:11:54.960 is not, in my view, because the economy is no 0:11:55.080 --> 0:11:58.040 longer interst rate sensitive or as interest rates sensitive as 0:11:58.040 --> 0:12:01.360 it was, is actually that it was a very unusual 0:12:01.400 --> 0:12:05.320 period where that monitor tightening came with an enormous fiscal loosening, 0:12:06.160 --> 0:12:09.880 so the monasary tightening didn't bite as much as it 0:12:09.960 --> 0:12:13.800 otherwise would have done, not only the fiscal loosening that 0:12:13.840 --> 0:12:16.280 we saw twenty two to twenty three, twenty four, but 0:12:16.360 --> 0:12:20.280 also kind of the legacy unspent fiscal funds from twenty 0:12:20.320 --> 0:12:22.720 to twenty one. So really it has to be thought 0:12:22.760 --> 0:12:26.200 of as a stock flow impact, which is ordinarily you know, 0:12:26.360 --> 0:12:29.480 twenty two's interest rate cycle and the aftermath of it 0:12:29.480 --> 0:12:33.880 would have created those higher interest rates, higher financing costs, 0:12:34.480 --> 0:12:38.040 which would have you know, really started the pinch on 0:12:39.559 --> 0:12:43.800 corporate credit balance sheets. But the economy was just awash 0:12:43.880 --> 0:12:46.679 with fiscal money and then got more physical money, and 0:12:46.720 --> 0:12:50.080 that did kind of that unsustainable element did did draw 0:12:50.160 --> 0:12:53.800 out this tail end of the cycle. But you know, 0:12:54.400 --> 0:12:57.120 the forces of physics and the forces of finance, you know, 0:12:57.440 --> 0:12:59.920 they don't change, right, This is just a stock flower, 0:13:00.800 --> 0:13:04.080 and we went into the usual kind of bad flow 0:13:04.200 --> 0:13:09.200 piece of lower growth and higher financing costs, but with 0:13:09.360 --> 0:13:12.880 a much larger stock, much larger buffer for the economy 0:13:13.520 --> 0:13:15.720 to take it. But you know, we call this time 0:13:15.840 --> 0:13:18.320 under tension, right, which is also the corporate don't. They 0:13:18.360 --> 0:13:22.280 don't roll over at the first moment of a higher 0:13:22.320 --> 0:13:25.200 interest rate. You kind of have to leave in place 0:13:25.320 --> 0:13:28.520 that period of higher interest rates and lower growth for 0:13:28.679 --> 0:13:31.640 a longer period. Is the time under tension, not just 0:13:31.679 --> 0:13:34.960 the existence attention. And that time is a little bit 0:13:35.000 --> 0:13:38.760 drawn more drawn out this time because of because of 0:13:38.800 --> 0:13:42.280 the support that offset the monetary tightening that we had. 0:13:43.360 --> 0:13:46.200 But it is real, right, and you do see kind 0:13:46.240 --> 0:13:49.199 of it's more of a niche practice, but obviously you've 0:13:49.200 --> 0:13:54.600 been a massive pickup in liability management distressed exchanges, and 0:13:54.760 --> 0:14:00.119 we've had a pretty meaningful sort of default rate across 0:14:00.600 --> 0:14:03.240 leverage loans and high yield right you know, for a 0:14:03.360 --> 0:14:06.880 robust part of the cycle, it's been non zero, which 0:14:06.920 --> 0:14:10.720 is which is unusual and is now being followed up. 0:14:10.840 --> 0:14:13.120 What's super interesting right now when you think about that 0:14:13.200 --> 0:14:17.240 kind of the impact that interest rates have. You know, 0:14:17.360 --> 0:14:20.880 we're now starting to see that pickup in delinquencies, you know, 0:14:20.960 --> 0:14:26.680 certainly in the US across credit card, auto loan, obviously 0:14:26.840 --> 0:14:29.360 the end of student loan for bearns, the impact that 0:14:29.360 --> 0:14:31.840 that has an f A h A mortgages. So I 0:14:31.840 --> 0:14:35.200 think a large part of kind of that delayed reaction 0:14:35.520 --> 0:14:40.120 coming through from from interest rate hikes is starting to 0:14:40.120 --> 0:14:44.080 be seen in the data in the in the US consumer. 0:14:44.360 --> 0:14:46.120 We're going to have it in Europe as well, with 0:14:46.200 --> 0:14:49.840 a kind of moderate upwards drifting NPL. So you know, 0:14:50.000 --> 0:14:52.680 think about it. We think about it as kind of 0:14:52.960 --> 0:14:55.720 you know, the foothills before the mountain, as you can 0:14:55.800 --> 0:14:58.880 kind of go on the slower sent and then and 0:14:58.920 --> 0:15:01.400 then it kind of picks up more broadly after that. 0:15:01.640 --> 0:15:05.080 So you don't always need a shock. I think like 0:15:05.160 --> 0:15:08.960 the financial markets love to look for that one shock, 0:15:09.400 --> 0:15:12.240 and it could actually just be a set of things 0:15:12.280 --> 0:15:16.600 building in the background. If you allow me to the 0:15:16.720 --> 0:15:20.000 labor my R versus G thing for a little bit longer, 0:15:20.040 --> 0:15:22.400 I would say that, Well, the reason why tariffs are 0:15:22.400 --> 0:15:28.080 a really interesting one is because they in it as 0:15:28.120 --> 0:15:31.360 a supply shop for the US and a demand shock 0:15:31.480 --> 0:15:36.600 for everyone that exports to the US, so simultaneous supply 0:15:36.680 --> 0:15:41.200 demand shop. We don't see many simultaneous supply demand shocks, 0:15:41.680 --> 0:15:45.760 So that's you know, highly likely to be a lower G, 0:15:47.280 --> 0:15:49.400 and for every unit of lower G, you're going to 0:15:49.440 --> 0:15:53.200 have a slightly stickier R. As we know sort of 0:15:53.240 --> 0:15:57.280 central banks should be it should be slightly harder for 0:15:57.320 --> 0:16:00.200 them to react to slow down in growth because this 0:16:00.240 --> 0:16:03.560 is something that raises prices, even if it's only on 0:16:03.600 --> 0:16:07.640 a one time basis. I dispute that, but you know, 0:16:07.640 --> 0:16:12.760 because it's a supply shot. But you know, the you know, 0:16:12.960 --> 0:16:17.560 you will make the G versus our mechanic harder. So 0:16:17.600 --> 0:16:22.400 the interesting thing about about tariffs is you stop. You know, 0:16:22.560 --> 0:16:26.440 My view would be we are starting with a difficult 0:16:26.480 --> 0:16:29.840 starting point for the end of a cycle. Big pickup 0:16:29.880 --> 0:16:34.880 in debt it has been sort of artificially extended by that, 0:16:35.160 --> 0:16:37.560 by that fiscal policy, which is effectively allowed kind of 0:16:37.840 --> 0:16:41.160 three years of additional poor management for those corporates to 0:16:41.360 --> 0:16:44.240 stick into place, and then you're hitting it with you know, 0:16:44.320 --> 0:16:46.480 what should be a credit negative shock at the end. 0:16:46.600 --> 0:16:50.200 So it's very difficult time to be a kind of 0:16:50.320 --> 0:16:56.040 highly levered corporate because obviously it is a companies do 0:16:56.120 --> 0:16:58.680 have the ability to react to some of these things. 0:16:59.120 --> 0:17:01.200 But if you've got a lot of debt than your 0:17:01.440 --> 0:17:04.879 ability aware with all an effect of deep degrees of 0:17:04.960 --> 0:17:09.400 freedom to act are meaningfully lower. And so I think 0:17:09.480 --> 0:17:12.399 kind of, you know, leverage is really the enemy for 0:17:12.440 --> 0:17:13.560 a corporate at this time. 0:17:14.359 --> 0:17:16.720 And in terms of your strategy, you know, how are 0:17:16.800 --> 0:17:20.200 you how are you positioned to take advantage of that view? 0:17:20.359 --> 0:17:24.600 You know, you mentioned perhaps US markets might see more 0:17:24.600 --> 0:17:27.480 opportunities there. You know, I think that's interesting, you know, 0:17:27.520 --> 0:17:30.679 covering chemicals, the US has actually been until recently one 0:17:30.720 --> 0:17:33.360 of the stronger markets and Europe's been the weak one. 0:17:33.680 --> 0:17:36.880 But perhaps with the tariff shock that's now going to reverse. 0:17:37.960 --> 0:17:41.159 Yeah, yeah, I mean, how we're positioning for it is 0:17:42.440 --> 0:17:46.360 we do have a more substantial book of single name 0:17:46.880 --> 0:17:52.440 high your credit shorts. So we have increased the let's 0:17:52.480 --> 0:17:55.680 call it the percentage exposure of the fund as well 0:17:55.720 --> 0:17:58.639 as the number of names that we're exposed to, because 0:17:59.480 --> 0:18:03.440 you know, as I mentioned, if you came into if 0:18:03.440 --> 0:18:07.879 you came into this year, you know, we were certainly thinking, well, 0:18:09.720 --> 0:18:12.760 there is that general misallocation in credit, right, and there's 0:18:12.760 --> 0:18:16.440 obviously kind of those misallocations could be poor quality yearnings, 0:18:16.560 --> 0:18:20.679 weaker businesses from a cyclical or secular basis, then you 0:18:20.800 --> 0:18:24.840 impose on it. Additionally the tariff issue. You understand, there's 0:18:24.920 --> 0:18:29.879 kind of our number of different sectors at play. Challenges 0:18:29.920 --> 0:18:32.960 for consumer discretionary businesses as there's just less real link 0:18:33.040 --> 0:18:37.240 and that impacts lots of different service and goods businesses. 0:18:37.480 --> 0:18:40.119 As I mentioned earlier, the housing cycles being struggling, so 0:18:40.400 --> 0:18:43.560 there's a lot of different sectors that are actually impacted here. 0:18:44.440 --> 0:18:48.800 So really what we're we've been looking for is week 0:18:48.960 --> 0:18:55.000 company with high leverage. We obviously like subordination as well 0:18:55.840 --> 0:18:58.199 in shorts, because if someone sits ahead of you in 0:18:58.240 --> 0:19:04.920 the queue in one of your restructurings, then the recovery 0:19:04.960 --> 0:19:07.679 is clearly likely to be lower. Right, Because we're obviously 0:19:07.720 --> 0:19:11.680 selecting for high loss given default, looking for those low recoveries. 0:19:11.920 --> 0:19:14.919 We're selecting for a high probability of default. The company 0:19:14.920 --> 0:19:20.120 has leverage. We business cyclically challenged because of the because 0:19:20.119 --> 0:19:22.720 of the particular dynamics in the end markets that might 0:19:22.720 --> 0:19:28.280 be unfolding. So you know, basically expanding by number the 0:19:28.840 --> 0:19:32.720 set of situations that we have, but also increasing the 0:19:32.800 --> 0:19:35.399 number of them that we have Paris would draw in 0:19:35.480 --> 0:19:41.520 a larger larger set of names, clearly, But as I 0:19:41.640 --> 0:19:44.160 mentioned earlier, you know, we are talking to several thousand 0:19:44.280 --> 0:19:47.320 names in the high yield market. So if you were 0:19:47.359 --> 0:19:50.119 to say we focus on the bottom ten or twenty 0:19:50.160 --> 0:19:53.560 percent of names by quality, that's still one thousand names 0:19:53.640 --> 0:19:56.320 that we could be looking at and pouring over to find, 0:19:56.400 --> 0:19:59.640 let's say the weakest one hundred and fifty or two 0:19:59.720 --> 0:20:04.200 hundre hundred. So it's really mean about kind of screening 0:20:04.480 --> 0:20:09.480 and looking for more weaker situations, trying to understand what 0:20:09.480 --> 0:20:12.720 would a cyclical slow down globally mean for that business, 0:20:13.240 --> 0:20:16.399 what would the tariff cost mean for that business. I mean, 0:20:16.480 --> 0:20:19.639 we've seen kind of a lack generally of commentary from 0:20:19.720 --> 0:20:23.160 companies and therefore you know they have not been educating 0:20:23.200 --> 0:20:30.200 analysts on the exact costs right of tariffs to them. 0:20:30.720 --> 0:20:33.280 Obviously a lot of them will hide behind well, I'd 0:20:33.280 --> 0:20:37.440 buy my things from a US based distributor, right, You're like, yes, 0:20:37.480 --> 0:20:41.200 in the US based distributor probably purchased it from somewhere 0:20:41.200 --> 0:20:43.639 else that wasn't in the US. Right, So you know, 0:20:43.720 --> 0:20:47.080 the clarity of the information there isn't super clean. But 0:20:47.240 --> 0:20:51.360 ultimately an enormous amount of intermediate products do you come 0:20:51.359 --> 0:20:55.600 into the US from other countries, So there's a lot 0:20:55.640 --> 0:21:00.000 of analytical work to do there. We would spread our 0:21:00.119 --> 0:21:03.840 bets these days in terms of kind of the number 0:21:03.880 --> 0:21:10.119 of situations we would look at quite simply because the 0:21:10.280 --> 0:21:13.360 nature of restructurings has changed, Right. You know, we see 0:21:13.359 --> 0:21:17.800 a lot of distress exchanges in lmes, and what those 0:21:17.880 --> 0:21:21.640 really are is sort of, you know, in the nicest 0:21:21.680 --> 0:21:25.119 possible way, is you know, avoiding a default that should 0:21:25.119 --> 0:21:29.920 have happened now and almost always pushing into the future. Right. 0:21:29.960 --> 0:21:32.720 You know, the majority of these companies do not make it. 0:21:32.760 --> 0:21:37.960 You're buying time, but ultimately buying that time doesn't actually 0:21:38.359 --> 0:21:42.439 generate success for the equity owner of the business. And 0:21:42.840 --> 0:21:46.520 it's because of that kind of appetite to pursue those transactions. 0:21:46.520 --> 0:21:49.600 You're seeing a lot of you know, the definition of 0:21:49.680 --> 0:21:53.399 zombie has widened, right from something that's sort of looked 0:21:53.400 --> 0:21:55.960 like it might not have been able to pay the 0:21:56.320 --> 0:22:00.280 interest and principle on its debt to literally one where 0:22:00.280 --> 0:22:02.920 the creditor said, you don't have to pay me anymore. 0:22:03.119 --> 0:22:06.639 Let's just pretend that you know, we're still with you know, 0:22:06.840 --> 0:22:09.280 this is still a performing credit. So it's because of 0:22:09.280 --> 0:22:11.159 that kind of dynamic in the market that we like 0:22:11.200 --> 0:22:13.800 to kind of shield ourselves maybe from what we see 0:22:13.840 --> 0:22:17.960 as as those sort of not full restructurings. 0:22:18.640 --> 0:22:21.719 Yeah, I'd actually like to push a bit further on 0:22:21.760 --> 0:22:24.119 the on the ownership and kicking the can down the 0:22:24.200 --> 0:22:26.720 road theme. But before we do that, I think it 0:22:26.720 --> 0:22:29.560 would be quite interesting to hear a little bit more 0:22:29.560 --> 0:22:33.439 about the mechanics of how you shot these names. Are 0:22:33.440 --> 0:22:37.639 you looking to do it physically synthetically? Can you talk about, 0:22:37.680 --> 0:22:40.199 you know, how you manage some of the risks, you know, 0:22:40.240 --> 0:22:43.840 they're quite expensive short sometimes, you know, the liquidity can 0:22:43.880 --> 0:22:46.920 be an issue. You know, perhaps even any examples you're 0:22:46.920 --> 0:22:47.520 able to share. 0:22:48.400 --> 0:22:50.560 Well, to be honest with you, I think the biggest 0:22:51.480 --> 0:22:54.320 the biggest way of managing your risk there is is 0:22:54.359 --> 0:22:56.840 to leave as few footprints as you can. Right. So 0:22:57.040 --> 0:23:00.359 one of the reasons why we have you know, a 0:23:00.400 --> 0:23:05.320 lot of shorts, so you know, hundreds, is so that 0:23:05.600 --> 0:23:09.320 we're not exposed to any single name and the instability 0:23:09.359 --> 0:23:14.080 of repo or the ability to borrow bonds in any 0:23:14.080 --> 0:23:16.560 one of those names. We don't tend to use a 0:23:16.560 --> 0:23:20.119 lot of synthetic, so we don't tend to use a 0:23:20.119 --> 0:23:22.720 lot of CDs. I think both sides of the Atlantic 0:23:22.760 --> 0:23:25.720 have obviously seen lots of high profile examples over the 0:23:25.840 --> 0:23:29.240 years of CDs not really being a particularly efficient tool 0:23:29.400 --> 0:23:35.160 for taking a view on on credit. You know, plenty 0:23:35.200 --> 0:23:39.159 of high profile examples where company went bust but CDs 0:23:39.240 --> 0:23:44.040 was uphaned or you know, engineered default or what have you. So, yeah, 0:23:44.119 --> 0:23:47.800 we stick to the physical market, but leave no footprints. Really, 0:23:47.960 --> 0:23:51.200 So if we if we have you know, if we 0:23:51.480 --> 0:23:57.000 spend the effort analytical time, research, you know, research time, 0:23:57.119 --> 0:24:01.200 research expense on finding as men of the weak names 0:24:01.200 --> 0:24:05.000 as possible, we can have a smaller position in each one. 0:24:05.720 --> 0:24:08.720 Therefore there isn't going to be crowded repo in them, 0:24:09.240 --> 0:24:15.359 and and and as a result, you know, the cost 0:24:15.400 --> 0:24:18.600 tends to be lower, the availabilities higher, the liquidity risk 0:24:18.720 --> 0:24:21.040 is lower, so we kind of manage around that, to 0:24:21.359 --> 0:24:24.359