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Speaker 1: Hello, and 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 gun To Stein,

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Speaker 1: chief investment officer for US Performing Credit and CLO's at

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Speaker 1: Soundpoint Capital Management. How are you gun To? I'm great,

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Speaker 1: Thank you, Thank you so much for joining us today.

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Speaker 1: We're excited to dig into your market views and the outlook.

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Speaker 1: Also delighted to welcome back Carmen Arroyo with Bloomberg News

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Speaker 1: in New York. Great to see you again, Carmen.

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Speaker 2: Thank you for having me.

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Speaker 1: James and from Bloomberg Intelligence. Excellent, have back on the show.

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Speaker 1: Rob Schiffman from Bloomberg Intelligence, How are you doing?

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Speaker 3: Best part of my day, James.

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Speaker 1: So let's start with you gun To. Great to see

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Speaker 1: you on the Credit Edge. Just to set the scene

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Speaker 1: a little bit, credit markets are trading at very bullish levels.

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Speaker 1: Bond spreads of the titus in two years, which means

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Speaker 1: you don't get compensated very much for the risk of

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Speaker 1: borrowers not paying you back. Corporate debt across the globe

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Speaker 1: is very much in demand. There seems to be some

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Speaker 1: signs of froth developing, which I hope we'll talk about

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Speaker 1: in a bit. All the optimism seems to be founded

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Speaker 1: on a belief that the US economy can avoid recession.

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Speaker 1: Companies are doing just fine with these much higher borrowing costs,

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Speaker 1: and rate cuts are only a matter of time, which

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Speaker 1: boosts demand for yield and will support anyone struggling to pay.

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Speaker 1: At the same time, we're seeing record levels of debt issuance.

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Speaker 1: US companies have a lot more refinancing to do this year,

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Speaker 1: and they're taking advantage of a window to sell a

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Speaker 1: lot more bonds. But there's also a boom going on

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Speaker 1: in private markets asset based finance, structured debt like lateralized

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Speaker 1: loan obligations and asset backed securities issues really are taking

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Speaker 1: advantage of investor demand. Here, there seems to be not

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Speaker 1: very much to worry about, although a lot of people

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Speaker 1: are saying that there's a trillion dollar commercial real estate

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Speaker 1: debt wall bearing down upon US. Nonetheless, people don't seem worried.

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Speaker 1: What's your take on to as a long term participant

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Speaker 1: in this market, our credit Mardi's offering fair value relative

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Speaker 1: to the risk, you know, I think.

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Speaker 4: That's a good question. James, and I would say, you

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Speaker 4: know that one, you know, at a high level, you know,

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Speaker 4: we we are in the camp that rates are going

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Speaker 4: to be higher for longer, and our view is generally

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Speaker 4: speaking that you know, the Fed's going to be careful

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Speaker 4: in terms of bringing down rates. You know that inflation

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Speaker 4: continues to be prevalent, and so we we we feel

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Speaker 4: that rates, you know, are more than likely going to

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Speaker 4: start coming down later in this year, and more than

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Speaker 4: likely is not going to be three cuts. You know,

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Speaker 4: our base case is more like you know, one or

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Speaker 4: two starting you know, arguably late summer, you know, early fall.

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Speaker 4: That that that that's our view. And so along with that,

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Speaker 4: you know, as in terms of positioning in terms of

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Speaker 4: the broad credit markets, you know, we do feel like

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Speaker 4: there's good value still in the leverage loan space. You know,

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Speaker 4: as you pointed out with with high yield, you know,

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Speaker 4: spreads are all time tights Kenley. If you're taking you know,

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Speaker 4: the view on high yield, you know you're also taking

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Speaker 4: a view on duration and rates, and you know, although

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Speaker 4: you know, we feel like rates at least in the

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Speaker 4: short end, are going to be coming down, you know

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Speaker 4: we'll see, you know, when they start actually coming down

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Speaker 4: at the back end, so you know that that that's

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Speaker 4: our view. We feel like, you know, as we progress,

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Speaker 4: you know, we we do continue to feel like there's

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Speaker 4: going to be a soft landing. So we're not you know,

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Speaker 4: overly worried about the economy, but we do feel like

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Speaker 4: there's better value in the leverage loan space. And there's

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Speaker 4: obviously a lot of different ways to play the leverage

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Speaker 4: loan space, including unlevered versus levered type strategies, you know,

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Speaker 4: such as in collateralized loan obligations.

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Speaker 1: But just let me stop you on the loan side.

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Speaker 1: On the you know, leverage loans has been you know,

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Speaker 1: a big rally, had a big ready last year as well,

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Speaker 1: it's kind of extended this year. A lot of people

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Speaker 1: do like the flow rate nature of it. The demand

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Speaker 1: is going up because the clo formation is going up

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Speaker 1: so quickly, and there you know, on a net basis,

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Speaker 1: the supply isn't really there, so that's you know, technically

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Speaker 1: that's pushing up prices. But on the other hand, you've

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Speaker 1: got you know, fundamental concerns about defaults. You've got you know,

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Speaker 1: we just had a piece recently on how the ratio

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Speaker 1: between companies earnings and their interest expenses fall into the

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Speaker 1: lowest levels since the pandemic, isn't there a lot of

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Speaker 1: risk building there?

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Speaker 4: Yeah, there's definitely some risk you know on you know,

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Speaker 4: on the flip side. You know, as you start looking forward,

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Speaker 4: you know, in terms of where we are from an

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Speaker 4: economic standpoint, if you you know, once again have to

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Speaker 4: buy into, so to speak, a soft landing. You know

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Speaker 4: that we feel you know that a lot of the

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Speaker 4: I mean, you know, when you start thinking about that

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Speaker 4: soft landing rates are going to be moving lower. That's

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Speaker 4: going to benefit a lot of these levered companies and

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Speaker 4: obviously companies that are borrowing on the floating rate side,

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Speaker 4: so that's going to be a direct benefit from them,

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Speaker 4: you know, I would say on you know, in addition,

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Speaker 4: on the supply side of the wage and at least

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Speaker 4: when what we're hearing, you know, talking to bankers is

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Speaker 4: that M and A is going to start picking up.

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Speaker 4: And you know, obviously you've seen some headlines around you know,

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Speaker 4: some M and A types of activities with uh, you know,

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Speaker 4: some public companies, including on the retail side. So we

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Speaker 4: feel like there is going to be M and A

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Speaker 4: picking up, and you know, along with that, you know,

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Speaker 4: we we will see some level of issuance on the

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Speaker 4: supply side. You know what. What I would also point out,

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Speaker 4: you know, is we're a big participant in the broadly

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Speaker 4: syndicated market. At least that's that's what I'm responsible for.

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Speaker 4: We do have a direct lending business as well. But

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Speaker 4: one of the benefits of you know, participating in the

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Speaker 4: broadly syndicated market where you know, you know, the a

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Speaker 4: large part of our market is fairly liquid, the loan's trade.

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Speaker 4: So what we can do in this particular marketplace, you know,

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Speaker 4: as an active manager, is reposition our portfolios around industries

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Speaker 4: that we like, companies that we like versus ones that

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Speaker 4: we don't like, and continue continue to maneuver the portfolios

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Speaker 4: over time and reshape them, you know, all the time.

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Speaker 4: And so that's really the benefit of participating in the

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Speaker 4: broadly syndicated market versus some of the other markets where

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Speaker 4: you know, you go in, you underwrite and basically your

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Speaker 4: you're spread lander over time, and it's really hard to

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Speaker 4: go ahead and get out of the position.

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Speaker 2: I was wondering if you could talk a little bit

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Speaker 2: more about that. Are there any sectors that you're liking

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Speaker 2: right now. Are you trading out of any positions that

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Speaker 2: you don't want to be in anymore? Is there any

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Speaker 2: type of company that you're done with?

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Speaker 4: Well, I would say, let me just frame it. In

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Speaker 4: some sectors that we like, you know, we're definitely we're

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Speaker 4: positive on the technology sector as a whole. And you know,

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Speaker 4: once again, looking at these companies as leverage lenders, you know,

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Speaker 4: in many cases, you know, we we we have limited upside.

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Speaker 4: You know, the best we can do is get paid

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Speaker 4: you know, par or effectively our money back, and you know,

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Speaker 4: things go bad, we get something materially less than par.

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Speaker 4: And I think, as we all know, recoveries in some

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Speaker 4: companies have been awful. Talking you know, Nickels dimes twenty

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Speaker 4: thirty cents on the dollar. So, you know, with the

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Speaker 4: nice thing about the technology space is what we've seen

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Speaker 4: with a lot of these companies that have actually been

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Speaker 4: growing even over the past few years, when you know,

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Speaker 4: maybe the broad swath of the economy hasn't. And then

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Speaker 4: the other nice pieces they literally have thousands of different customers,

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Speaker 4: recurring revenue streams, and in many cases these companies can

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Speaker 4: survive on their own. But they're also very nice, attractive

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Speaker 4: acquisition targets for strategics or other private equity firms that

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Speaker 4: are looking to go ahead and grow their business and

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Speaker 4: do bolt on acquisitions where you can add these types

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Speaker 4: of businesses on and basically, you know, create a lot

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Speaker 4: of synergies. So the way I think about, you know,

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Speaker 4: as a lender of things that I like, I like

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Speaker 4: businesses that are larger, that are divisible, and that at

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Speaker 4: times can be strategic in terms of if you need

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Speaker 4: to go ahead and sell and you know, different parts

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Speaker 4: of the business.

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Speaker 3: Hey, Guntherar, can I dig in a little bit deeper?

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Speaker 3: It's rob on this tech piece. We recently just less

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Speaker 3: we hosted a call with S and p's global tech

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Speaker 3: team and they noted a real dichotomy in ratings and

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Speaker 3: trajectory where larger high grade issuers were benefiting from AI demand,

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Speaker 3: but single B and below names, especially post LBO issuers

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Speaker 3: were really struggling even with the rates coming down generically

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Speaker 3: meaningfully higher rates than when they originally came to market,

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Speaker 3: and some were struggling with liquidity. Where are you most

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Speaker 3: comfortable down the curve and which sub sectors in technology

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Speaker 3: have you been adding to?

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Speaker 4: So in terms of the curve, I think you probably

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Speaker 4: know most of what we play is you know, lower rated,

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Speaker 4: so single be ish and you know, I would say,

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Speaker 4: you know, going back to your point, you know, many

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Speaker 4: of the l B O s that that that you

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Speaker 4: know we have in our you know space are you know,

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Speaker 4: are are free at best. You know, have have some

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Speaker 4: free cash flow and but not a lot, right, So

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Speaker 4: so you know what we're banking on is really you know,

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Speaker 4: the acid value of the businesses over time and the

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Speaker 4: growth over time. I would say, you know, as we

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Speaker 4: look forward, you know, going back to what I said,

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Speaker 4: with the view that rates are going to be coming down,

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Speaker 4: one that's going to be beneficial in terms of free

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Speaker 4: cash flow. And two you know, as as I think

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Speaker 4: you now you know, with rates coming down, there's kind

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Speaker 4: of the view that valuates for a lot of these

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Speaker 4: tech companies will go up, right, So you do get

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Speaker 4: those two benefits.

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Speaker 3: You know.

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Speaker 4: In addition, if you play the technology space, and.

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Speaker 3: Are there any subsectors within tech that you're more involved with?

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Speaker 4: Software is definitely one of our favorites.

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Speaker 3: So less capital intensive.

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Speaker 4: Yeah, that's right.

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Speaker 3: And what about from the rest of the T m

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Speaker 3: T space. You know, cable is a big part of

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Speaker 3: the high yield index. Are you participating in that space?

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Speaker 3: There's some pretty significant structural changes going on in both

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Speaker 3: cable and media, and just wondering what your views were.

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Speaker 4: Yeah, so we definitely have exposure to cable. I would

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Speaker 4: say that, you know, once again, we're senior secured lenders

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Speaker 4: to you know, you know many of the cable names

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Speaker 4: out there, and I would say, you know, yes, there

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Speaker 4: there's some structural sifts. There's very topical situations going on

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Speaker 4: in particular out of Europe right now with Altis. You know,

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Speaker 4: going back to what I talked about earlier though that

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Speaker 4: that being said, you know, we do think there's a

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Speaker 4: lot of value to control the pipe into the consumer

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Speaker 4: and that over time that we're going to continue to

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Speaker 4: see more need for bandwidth and obviously controlling that pipe,

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Speaker 4: you know, there's value with that. And I would say,

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Speaker 4: you know, going back to what I said earlier about

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Speaker 4: being a lender, you know, these are definitely businesses that

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Speaker 4: are large. Many have different geographic regions that you know,

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Speaker 4: so worst case you could sell off regions, there could

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Speaker 4: be other strategic buyers. And also you know that you

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Speaker 4: can easily create synergies if if some large player wanted

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Speaker 4: to buy another company and go ahead and create synergies.

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Speaker 4: So you know, I think it goes back to kind

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Speaker 4: of what what what I talked about looking for as

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Speaker 4: a lender, or we're trying to protect our downside. You know,

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Speaker 4: these are you know, Cable is not a bad place. Definitely,

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Speaker 4: you have to be thoughtful as to your timing, you know,

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Speaker 4: with all of this and et cetera.

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Speaker 3: Just as a follow I know James has got some

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Speaker 3: more broader macro issues. What about from the areas you

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Speaker 3: want to avoid?

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Speaker 4: Yeah, I would say, you know, once again, as as

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Speaker 4: a lender, areas that were you know, less comfortable with

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Speaker 4: are going to be retail. You know, typically you know

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Speaker 4: a leverage retailer. As a term loan lender, you're typically

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Speaker 4: behind some sort of an asset back to facility. And

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Speaker 4: you know, these are businesses that have a lot of

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Speaker 4: operating leverage that you could be three times leverage today

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Speaker 4: and you could be six times leveraged, you know, in

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Speaker 4: you know, in a heartbeat, and you know, if God

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Speaker 4: forbids something goes bad with these business is you have

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Speaker 4: to provide capital to support them. You know, if you

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Speaker 4: had to go into a bankruptcy et cetera. So that

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Speaker 4: that's definitely an area that we're less favorable on. I

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Speaker 4: would say another area that we're also, you know, not

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Speaker 4: terribly comfortable with is is commercial mortgage companies out there.

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Speaker 4: And you know, you know, once again, we're somewhat uncomfortable

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Speaker 4: with what's going on in the commercial real estate space.

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Speaker 4: And and you know, at the end of the day,

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Speaker 4: you know where some of the valuations are going to

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Speaker 4: be coming in, both on the loans that are outstanding

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Speaker 4: as well as on the properties as as people start

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Speaker 4: taking prints, you know, in terms of the values.

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Speaker 1: So I'm glad you've brought up altis. It's definitely the

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Speaker 1: elephant in the room for the CLO market right now.

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Speaker 1: But in terms of leverage loans, it kind of takes

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Speaker 1: us back to the default idea. And you know, defaults

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Speaker 1: are running higher than junk bonds. Recoveries are also very low,

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Speaker 1: So there's a kind of a there's a lot of

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Speaker 1: risk in this market. You know, maybe there's liquid as

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Speaker 1: you can trade in and out, but but how do

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Speaker 1: you head yourself against that risk? What do you do well?

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Speaker 4: I mean, it goes back to the basics, James, And

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Speaker 4: you know, I'd say that, you know, when you initially,

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Speaker 4: you know, underwrite a company, it's it's it's like I said,

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Speaker 4: it's it's my general view that you know, bigger is better.

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Speaker 4: You know, larger companies typically have more liquidity, you know, pockets.

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Speaker 4: You know, we we we can talk a little bit

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Speaker 4: about all peace. You know, clearly there's there's issues and

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Speaker 4: challenges there. But you know that being said, he has

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Speaker 4: been able to go ahead and come up with a

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Speaker 4: number of different ways to create some level of liquidity.

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Speaker 4: And the question is how's he going to be deploying

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Speaker 4: that liquidity to go ahead and deleverage the company. But

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Speaker 4: you know, that's one of the benefits of a larger

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Speaker 4: scale type of business versus the smaller businesses that just

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Speaker 4: don't have a lot of different liquidity options. So that

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Speaker 4: that that that that's number one. And I would say that,

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Speaker 4: you know, in terms of you know, the you know,

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Speaker 4: as we look at at defaults and recoveries, I would say,

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Speaker 4: you know, being one of the bigger players in the

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Speaker 4: leverage loan space is obviously helpful if for whatever reason,

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Speaker 4: you have to go through some sort of a liability

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Speaker 4: management exercise. You know, typically being one of the larger players,

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Speaker 4: you have some benefits of providing some credit support on

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Speaker 4: the exit.

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Speaker 1: So the default rate, we're sort of hearing about the

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Speaker 1: level around six percent for leverage loans, but that includes

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Speaker 1: I think distressed exchanges. What's your expectation this year for

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Speaker 1: leverage loan default rates?

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Speaker 4: So we think it's it's going to tick up, you know,

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Speaker 4: I I you know the number that that I've been using,

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Speaker 4: and I think it actually might come in a little

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Speaker 4: lower is three and a half percent. James, that's kind

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Speaker 4: of that that I've been using. But like I said,

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Speaker 4: I might I think I might be coming in a

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Speaker 4: little lower than that.

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Speaker 2: Maybe we can talk a little bit now about private markets.

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Speaker 2: Private cared has been growing a lot over the past

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Speaker 2: few years, and in twenty twenty three we saw lenders

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Speaker 2: take out a lot of broadly syndicated the loans out

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Speaker 2: of the market and refinance them into direct lending. Are

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Speaker 2: you worried about some sort of competition over supply given

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Speaker 2: that there's not a lot of supply in the loan market,

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Speaker 2: and you mentioned M and A, but those deals could

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Speaker 2: also go private. Is there any type of concern on

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Speaker 2: that front?

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Speaker 4: Well, I think what you're seeing and I think you

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Speaker 4: guys put an article out not too long ago about

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Speaker 4: you know, a lot of the private credit stuff, or

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Speaker 4: some of the private credit stuff coming back to the

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Speaker 4: broadly syndicated market. You know, I think the reality is

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Speaker 4: that the broadly syndicated market is just a you know,

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Speaker 4: a place where you know, you can get tighter and

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Speaker 4: cheaper execution. And so you know, as you know what

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Speaker 4: was done in the private credit market from what I'm hearing,

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Speaker 4: you know, all protections rolling off on a lot of

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Speaker 4: these deals that were done last year, you know, they're

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Speaker 4: starting to move over to the broadly syndicated market. So

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Speaker 4: you know that that that that's what I see in

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Speaker 4: the near term.

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Speaker 1: So leverage loan prices just keep going up. Is that

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Speaker 1: the outlook for the rest of you I.

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Speaker 4: Don't know about Dot James. I think that they can

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Speaker 4: grind up a bit, but we're going to be hit

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Speaker 4: with some supply. And in addition to that, you know,

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Speaker 4: there's you know, there's more than likely going to be

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Speaker 4: some level of volatility, you know, whether it's in the

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Speaker 4: rate market, you know, or the equity markets that you know,

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Speaker 4: I think, you know, seem to be so fairly fully

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Speaker 4: valued at this point in time, and you know that

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Speaker 4: at the end of the day, the leverage loan space

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Speaker 4: is you know, a relative value part of you know,

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Speaker 4: the credit you know chain. And so if if we

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Speaker 4: see some weakness, I yield more than likely we will

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Speaker 4: see some weakness in the leverage loan space. And and

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Speaker 4: I would go back to where you know, if you're

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Speaker 4: you know, an active credit manager, that hopefully you can

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Speaker 4: you can be repositioning and taking advantage of this type

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Speaker 4: of volatility. But Canley, in my mind, this is not

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Speaker 4: necessarily a bad volatility. This is, you know, good volatility

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Speaker 4: because you're an active manager and you should be able

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Speaker 4: to figure out when to go ahead and put the

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Speaker 4: risk on and when to take it off, and you

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Speaker 4: know which sectors, which companies to buy, and which ones

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Speaker 4: to sell versus you know, the flip side of that.

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Speaker 4: If you're purely a spread lender, you know you're just

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Speaker 4: going to go ahead and you know, let the spread

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Speaker 4: and the leverage whatever you have on just kind of

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Speaker 4: you really drive your returns.

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Speaker 3: Jameson mentioned all tease. I think it's just too big

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Speaker 3: of an It feels like too big of an item

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Speaker 3: just to leave there. I wonder whether or not. You

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Speaker 3: think this is really an issue that's causing have it

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Speaker 3: across the CLO market? You know, is it a one off?

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Speaker 3: And if it's not, you know what other altisses are

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Speaker 3: there that might be out there that could cast some

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Speaker 3: sort of larger web of negativity, especially since you know,

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Speaker 3: everything seems to be priced to perfection these days. Are

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Speaker 3: there are there technical issues that people really aren't seeing

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Speaker 3: right now that they're just getting a hint of.

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Speaker 4: Yeah, Look, I think all teas is clearly an issue

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Speaker 4: for Europe right and in particular, you know, the European

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Speaker 4: scilow market. You know, I was over in Europe two

359
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Speaker 4: weeks ago, and and you know, I was told that

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Speaker 4: for some European managers that you know, all tees could

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Speaker 4: be you know, up to four percent, you know, in

362
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Speaker 4: terms of some of their deals at least you know,

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00:19:39,560 --> 00:19:45,640
Speaker 4: across you know, all the different silos that all tees has.

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Speaker 4: And you know, so in the US, it you know

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Speaker 4: it it's a relevant uh name, you know, across the board.

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Speaker 4: But you know, we we have a much more diverse

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Speaker 4: and a very very large mar market over here, so

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Speaker 4: we can we can and and many of us have

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Speaker 4: a lot of divers our portfolios. But you know, I

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Speaker 4: think your your question is a good one. You know, look,

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Speaker 4: you know that there there are a number of very

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Speaker 4: very large names, and the reality is, you know, the

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Speaker 4: skill O market where it you know in the US

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Speaker 4: controls roughly sixty plus percent of you know, investments in

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Speaker 4: in broadly syndicated. You know that that many of the

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Speaker 4: larger players are going to have you size and very

377
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Speaker 4: large positions in a number of these names. You know that,

378
00:20:41,720 --> 00:20:44,480
Speaker 4: you know it. You know it's something that we all

379
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Speaker 4: have to be thoughtful around in terms of how we're

380
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Speaker 4: managing our portfolios. And and Kenley, you know hopefully we're

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Speaker 4: you know, we're early in terms of exiting you know,

382
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Speaker 4: these positions, and you know hopefully that you know that

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Speaker 4: active management piece is is helpful over time. But you know,

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Speaker 4: I keep on coming back to that that you know,

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Speaker 4: and by the way, there's no difference in terms of

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Speaker 4: that versus you know, some of the larger issuance in

387
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Speaker 4: the high yield space. And you know, once again just

388
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Speaker 4: with active management, you know, hopefully you know, we're crude

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Speaker 4: in terms of how we're we're managing that risk across

390
00:21:23,880 --> 00:21:26,240
Speaker 4: all the different structures. You know, I would say, you know,

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Speaker 4: the celos obviously have a lot of you know, structural

392
00:21:30,040 --> 00:21:34,640
Speaker 4: features to go ahead and and you know mitigate kind

393
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Speaker 4: of risk concerns were just within the structures in terms

394
00:21:38,000 --> 00:21:42,160
Speaker 4: of you know, position sizing. You know, if the triple cs,

395
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Speaker 4: et cetera, where they basically you can force different types

396
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Speaker 4: of constraints and maybe even de leveraging of the deals.

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Speaker 2: So we're talking a little bit about CLOS and over

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Speaker 2: the past two years, clos have had not great years.

399
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Speaker 2: The equity was not working, the arbitruct was not year.

400
00:22:01,359 --> 00:22:03,280
Speaker 2: But now they seem to be back, and we've seen

401
00:22:03,280 --> 00:22:05,959
Speaker 2: issuance kind of boom in the past couple of months.

402
00:22:06,600 --> 00:22:09,679
Speaker 2: There's more people buying triple a's what's kind of your

403
00:22:09,680 --> 00:22:13,399
Speaker 2: outlook on that front. Do you expect spreads to come in?

404
00:22:13,480 --> 00:22:16,280
Speaker 2: Do you think this is like going to stay like

405
00:22:16,359 --> 00:22:18,040
Speaker 2: this the rest of the year. Do you think issuance

406
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Speaker 2: is going to slow down?

407
00:22:19,480 --> 00:22:23,400
Speaker 4: Yeah, look that that that that's an interesting question. And

408
00:22:23,760 --> 00:22:27,640
Speaker 4: you know, I would say that I was around the

409
00:22:27,680 --> 00:22:33,000
Speaker 4: institutionalization of the leverage loan space, you know, going back

410
00:22:33,119 --> 00:22:36,840
Speaker 4: you know, you know, post the financial crisis, where you know,

411
00:22:37,040 --> 00:22:39,400
Speaker 4: can't leak you know, many consultants didn't even know what

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Speaker 4: leverage loans were. And now it's it's viewed as an

413
00:22:43,560 --> 00:22:46,159
Speaker 4: asset class, right, you know, just not not only in

414
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Speaker 4: scillow form, but in you know, kind of institutional form.

415
00:22:50,960 --> 00:22:55,280
Speaker 4: There's the funds ETFs. Uh, you know, consultants, have you

416
00:22:55,520 --> 00:23:00,879
Speaker 4: exposure to floating rate loans, et cetera. And I would

417
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Speaker 4: say it feels to me that on the CLO liability

418
00:23:06,800 --> 00:23:10,959
Speaker 4: side that we are starting to really take off in

419
00:23:11,080 --> 00:23:15,439
Speaker 4: terms of you know, the magnitude and the breadth of

420
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Speaker 4: the investor base across all the liability stack, not just

421
00:23:20,119 --> 00:23:22,680
Speaker 4: you know, at the at the top, you know, but

422
00:23:22,680 --> 00:23:25,720
Speaker 4: but but you know, across the board. And and I'm

423
00:23:25,760 --> 00:23:30,159
Speaker 4: seeing you know, many traditional you know, asset management firms

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Speaker 4: that have, you know, or are buying into whether it's

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Speaker 4: triple a's, double a's or triple b's, but even down

426
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Speaker 4: at the junior parts of the capitol structchu stack, namely, uh,

427
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Speaker 4: you know, double b's and triple b's. So that that

428
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Speaker 4: that in a case and point you know, I think

429
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Speaker 4: you guys probably have seen this, but you know, the

430
00:23:53,280 --> 00:23:55,080
Speaker 4: e t F, you know, the growth just in the

431
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Speaker 4: E t F side of the equation for you know slow, uh,

432
00:23:59,800 --> 00:24:02,320
Speaker 4: like abilities, namely Triple A's has really grown.

433
00:24:02,760 --> 00:24:06,240
Speaker 2: Do you have any expectation or estimate of like issuance

434
00:24:06,359 --> 00:24:07,240
Speaker 2: for the year.

435
00:24:07,840 --> 00:24:10,760
Speaker 4: The numbers that I've seen, you know, for this year

436
00:24:10,800 --> 00:24:13,879
Speaker 4: in terms of issuance are roughly one hundred and thirty billion.

437
00:24:14,359 --> 00:24:17,280
Speaker 4: I think February what was like the second largest or

438
00:24:17,840 --> 00:24:20,920
Speaker 4: month you know, in history in terms of the amount

439
00:24:21,000 --> 00:24:25,560
Speaker 4: of new issue issuance in this close space. You know,

440
00:24:25,680 --> 00:24:26,919
Speaker 4: I don't know that we're going to be able to

441
00:24:26,920 --> 00:24:29,800
Speaker 4: go continue to go at the same pace that February was,

442
00:24:29,840 --> 00:24:32,080
Speaker 4: but there's no doubt that there is going to be

443
00:24:32,480 --> 00:24:35,800
Speaker 4: you know, it feels like there's going to be some

444
00:24:35,920 --> 00:24:39,520
Speaker 4: good growth this year, especially versus last year, and on.

445
00:24:39,480 --> 00:24:41,560
Speaker 1: The new buy is going to I mean, who are

446
00:24:41,600 --> 00:24:42,879
Speaker 1: you seeing You don't have to mention the names of

447
00:24:42,880 --> 00:24:44,800
Speaker 1: the companies, but what kinds of investor you're sining? Is

448
00:24:44,840 --> 00:24:47,200
Speaker 1: it sovereign? Well, isn't it a fund?

449
00:24:47,800 --> 00:24:52,200
Speaker 4: Yeah, it's really it's really broad James. Yeah, it's it's look,

450
00:24:52,320 --> 00:24:54,560
Speaker 4: you know, going back, you know, four or five years ago,

451
00:24:55,119 --> 00:24:57,920
Speaker 4: like if you were playing you know, if you're replacing

452
00:24:58,600 --> 00:25:01,240
Speaker 4: a skill, oh, you know, the the investor base would

453
00:25:01,280 --> 00:25:05,960
Speaker 4: be you know, total return funds, hedge funds, some you

454
00:25:06,000 --> 00:25:09,840
Speaker 4: know Keenhley credit managers that would be buying them as uh.

455
00:25:10,000 --> 00:25:13,359
Speaker 4: Now you know it's it's it's broad it's insurance companies,

456
00:25:13,440 --> 00:25:19,840
Speaker 4: it's it's acid you know, asset management firms. Uh, you know,

457
00:25:20,080 --> 00:25:25,320
Speaker 4: like fixed income funds. You know, it's you know, banks

458
00:25:25,359 --> 00:25:29,280
Speaker 4: are definitely broad based. Banks globally are buying the top

459
00:25:29,320 --> 00:25:29,919
Speaker 4: of the stack.

460
00:25:30,240 --> 00:25:33,280
Speaker 2: I was wondering a little bit about the equity portion

461
00:25:34,200 --> 00:25:36,880
Speaker 2: because over the past two years we've seen a lot

462
00:25:36,920 --> 00:25:39,520
Speaker 2: of the like kind of like companies just racing our

463
00:25:39,560 --> 00:25:42,600
Speaker 2: ass managers just raising their own funds and doing deals

464
00:25:42,600 --> 00:25:45,359
Speaker 2: with captive equity. I was wondering if you're seeing that

465
00:25:45,520 --> 00:25:49,040
Speaker 2: change and go back to a more like normal process

466
00:25:49,080 --> 00:25:51,080
Speaker 2: where the equity is actually syndicated.

467
00:25:51,720 --> 00:25:57,080
Speaker 4: We we are seeing, I mean, one, you know, many

468
00:25:57,400 --> 00:26:01,640
Speaker 4: folks have captive equity. We are starting to see more

469
00:26:01,720 --> 00:26:05,800
Speaker 4: interest in terms of third party equity as well. So

470
00:26:06,720 --> 00:26:10,080
Speaker 4: definitely that's the case. And I would say, you know,

471
00:26:10,359 --> 00:26:13,000
Speaker 4: the liability tightening is definitely helping that.

472
00:26:13,480 --> 00:26:17,080
Speaker 2: And on the liability tightening, do you have any expectations

473
00:26:17,359 --> 00:26:19,560
Speaker 2: sure this triple A spreads are going Are they going

474
00:26:19,600 --> 00:26:21,800
Speaker 2: to be around one hundred basis points.

475
00:26:21,560 --> 00:26:23,920
Speaker 4: By your end, I think that that that I mean,

476
00:26:24,000 --> 00:26:27,400
Speaker 4: right now they're roughly one fifty, so that would continue

477
00:26:27,400 --> 00:26:31,280
Speaker 4: to be a really big move. I like, I think

478
00:26:31,320 --> 00:26:34,800
Speaker 4: they can maybe compress a little bit, but you know,

479
00:26:34,800 --> 00:26:37,679
Speaker 4: I'm not expecting them to go in that tight I mean,

480
00:26:37,720 --> 00:26:40,520
Speaker 4: things can always, you know, surprise us. You know, I

481
00:26:40,560 --> 00:26:45,439
Speaker 4: would say, you know, when you step back for a

482
00:26:45,520 --> 00:26:50,960
Speaker 4: minute here, in general, you know, higher rates typically mean

483
00:26:51,280 --> 00:26:54,640
Speaker 4: a little bit more volatility than lower rates. Right, so

484
00:26:54,760 --> 00:26:56,879
Speaker 4: as we look forward, you know, because you know that

485
00:26:57,000 --> 00:27:00,240
Speaker 4: that's my base case, higher rates for longer going to

486
00:27:00,320 --> 00:27:03,680
Speaker 4: have some level of volatility. There is correlation across a

487
00:27:03,720 --> 00:27:07,280
Speaker 4: lot of these markets. So and you know we're also

488
00:27:07,560 --> 00:27:11,600
Speaker 4: moving into you know, an election, right which could also

489
00:27:11,640 --> 00:27:13,560
Speaker 4: create some level of volatility.

490
00:27:13,800 --> 00:27:16,360
Speaker 3: So listen, It's not that often we get to talk

491
00:27:16,440 --> 00:27:19,040
Speaker 3: to somebody who manages as much money as you do,

492
00:27:19,080 --> 00:27:22,160
Speaker 3: and people are always asking what the smart money is doing,

493
00:27:22,600 --> 00:27:24,679
Speaker 3: and I think, you know, they certainly don't want to

494
00:27:24,720 --> 00:27:26,359
Speaker 3: know from me. But the question I get all the

495
00:27:26,400 --> 00:27:29,800
Speaker 3: time is what's the next in Vidia? I think we

496
00:27:30,119 --> 00:27:32,119
Speaker 3: get it from a credit perspective, the best case is

497
00:27:32,160 --> 00:27:35,119
Speaker 3: par But if you're thinking about asset growth. You know,

498
00:27:35,200 --> 00:27:38,040
Speaker 3: are there a couple of names out there that you'd

499
00:27:38,119 --> 00:27:41,119
Speaker 3: like to highlight that you think people are supposed to

500
00:27:41,200 --> 00:27:43,479
Speaker 3: be taking a look at that are undervalue, that have

501
00:27:43,960 --> 00:27:46,119
Speaker 3: much greater growth potential than others.

502
00:27:46,440 --> 00:27:52,240
Speaker 4: You know, I would say, you know, we're leverage loan investors,

503
00:27:52,280 --> 00:27:56,919
Speaker 4: so typically are upsides capped and we have all, you know,

504
00:27:57,000 --> 00:28:00,879
Speaker 4: typically a lot of downside. I would say, you know

505
00:28:00,960 --> 00:28:04,439
Speaker 4: that in terms of you know, total return opportunity, I

506
00:28:04,440 --> 00:28:08,920
Speaker 4: would I would look at some of the secured bonds

507
00:28:08,960 --> 00:28:11,879
Speaker 4: that are out there, you know, because you know, in

508
00:28:11,920 --> 00:28:14,320
Speaker 4: a lot of cases, you have the floors of being

509
00:28:14,359 --> 00:28:18,199
Speaker 4: a secured you know, participant in the capital structure of

510
00:28:18,240 --> 00:28:22,359
Speaker 4: these companies, but the upside of a bond and you

511
00:28:22,400 --> 00:28:25,359
Speaker 4: know that could obviously be anywhere from you know, five

512
00:28:25,400 --> 00:28:30,359
Speaker 4: to ten points any cases. You know, companies don't like

513
00:28:30,400 --> 00:28:33,800
Speaker 4: having secured bonds in their capital structure, so they might

514
00:28:33,840 --> 00:28:37,919
Speaker 4: actually take them out, you know, then then later so

515
00:28:38,280 --> 00:28:40,080
Speaker 4: you know that that that that's where I would kind

516
00:28:40,080 --> 00:28:42,600
Speaker 4: of focus. And you know, names that you know, we're

517
00:28:42,680 --> 00:28:45,200
Speaker 4: we're pretty comfortable with are going to be names like

518
00:28:45,240 --> 00:28:47,240
Speaker 4: Life Point, you know, et cetera. One of the hospital

519
00:28:47,240 --> 00:28:49,560
Speaker 4: companies you know that that I think has done a

520
00:28:49,600 --> 00:28:53,560
Speaker 4: pretty good job here recently in terms of delivering results.

521
00:28:53,880 --> 00:28:54,360
Speaker 3: I've gone there.

522
00:28:54,480 --> 00:28:57,400
Speaker 2: I have a question because you joined sound Point right

523
00:28:57,440 --> 00:29:00,520
Speaker 2: after the company bought a short or bloom and so

524
00:29:00,840 --> 00:29:04,040
Speaker 2: I was wondering, how's that transition going. Has the combination

525
00:29:04,680 --> 00:29:05,280
Speaker 2: worked out?

526
00:29:05,960 --> 00:29:09,920
Speaker 4: Yes, it is a company at Yeah, it's worked out nicely.

527
00:29:10,040 --> 00:29:10,240
Speaker 3: You know.

528
00:29:10,280 --> 00:29:13,920
Speaker 4: We we we were fortunate to go ahead and bring

529
00:29:13,960 --> 00:29:19,840
Speaker 4: on board a number of people, and I would say

530
00:29:20,480 --> 00:29:23,560
Speaker 4: both on the investment side as well as on the

531
00:29:23,600 --> 00:29:26,760
Speaker 4: non investment side. I would say on the investment side,

532
00:29:27,200 --> 00:29:30,880
Speaker 4: we have five of their more analysts, you know, the

533
00:29:30,880 --> 00:29:33,960
Speaker 4: the you know, working with them has been fantastic, it's been.

534
00:29:34,960 --> 00:29:37,560
Speaker 4: But in addition to that, we brought over a number

535
00:29:37,600 --> 00:29:44,600
Speaker 4: of their quantitative strategists that that that work directly for

536
00:29:45,560 --> 00:29:50,160
Speaker 4: the investment team in terms of putting together data and

537
00:29:50,200 --> 00:29:52,840
Speaker 4: analytics as well as uh, you know, a lot of

538
00:29:52,880 --> 00:29:55,960
Speaker 4: information for us on the investment side. And it's been

539
00:29:56,360 --> 00:29:59,400
Speaker 4: you know great, you know, working with all these folks.

540
00:30:00,040 --> 00:30:03,240
Speaker 4: So I think the the acquisition or merger or whatever

541
00:30:03,320 --> 00:30:05,600
Speaker 4: we want to call it, at least in my mind,

542
00:30:05,640 --> 00:30:06,680
Speaker 4: couldn't have gone better.

543
00:30:07,040 --> 00:30:10,959
Speaker 1: Just going back to something you said earlier about liquidity,

544
00:30:11,160 --> 00:30:13,080
Speaker 1: that you find it fairly easy to trade in and

545
00:30:13,160 --> 00:30:16,880
Speaker 1: out of loans. The conventional wisdom in markets has always

546
00:30:16,880 --> 00:30:19,480
Speaker 1: been that loans have been relatively illiquid compared to high

547
00:30:19,520 --> 00:30:22,720
Speaker 1: yield bonds particularly, And I just wondered, you know, how

548
00:30:22,720 --> 00:30:25,160
Speaker 1: would you compare the two How is how easy or

549
00:30:25,160 --> 00:30:28,800
Speaker 1: difficult is it to trade big blocks? And you know, what,

550
00:30:28,800 --> 00:30:31,080
Speaker 1: what are the relative differences between the two markets right

551
00:30:31,120 --> 00:30:32,200
Speaker 1: now in tons of liquidity?

552
00:30:32,640 --> 00:30:32,840
Speaker 2: Yeah?

553
00:30:32,880 --> 00:30:35,880
Speaker 4: No, I I think that's you know, another good question, James.

554
00:30:35,880 --> 00:30:40,840
Speaker 4: I would say, for for look, the larger, broadly syndicated

555
00:30:41,480 --> 00:30:48,120
Speaker 4: names that are that that one can trade with most

556
00:30:48,360 --> 00:30:51,440
Speaker 4: dealers that that are away from one particular agent bank

557
00:30:51,880 --> 00:30:55,160
Speaker 4: are going to be highly liquid. I think in some

558
00:30:55,240 --> 00:30:58,800
Speaker 4: cases there is one agent bank that that I really

559
00:30:58,840 --> 00:31:03,920
Speaker 4: don't want to to name, that with that particular institution

560
00:31:04,120 --> 00:31:07,400
Speaker 4: you can trade with them and they generally provide good liquidity.

561
00:31:07,880 --> 00:31:10,120
Speaker 4: But you know, with a lot of the other names

562
00:31:10,320 --> 00:31:12,880
Speaker 4: where you can broadly trade them with you know, five

563
00:31:13,000 --> 00:31:18,440
Speaker 4: or seven different counterparties, you can execute you know, multiple

564
00:31:18,480 --> 00:31:23,880
Speaker 4: millions on a regular way, just as you can in bombs. Right,

565
00:31:24,080 --> 00:31:27,560
Speaker 4: So I would say that they're very similar in terms

566
00:31:27,560 --> 00:31:32,240
Speaker 4: of the ability to execute for most larger names.

567
00:31:32,640 --> 00:31:35,120
Speaker 1: Okay, and to sort of feedback off Rob's question about

568
00:31:35,120 --> 00:31:36,640
Speaker 1: the next and video, and just to sort of wrap

569
00:31:36,680 --> 00:31:38,840
Speaker 1: things up a bit, if you look at everything you're

570
00:31:39,040 --> 00:31:42,160
Speaker 1: you're you're surveying right now in terms of investment opportunities,

571
00:31:42,160 --> 00:31:44,640
Speaker 1: what do you think the best relative value is right

572
00:31:44,680 --> 00:31:46,840
Speaker 1: now for let's say, just for this year.

573
00:31:47,480 --> 00:31:51,240
Speaker 4: Well, that's why I you know, I came back to

574
00:31:52,040 --> 00:31:54,480
Speaker 4: the leverage loan space, right. I think if you look

575
00:31:54,520 --> 00:31:57,640
Speaker 4: at you know, leverage loans, you know I was looking here,

576
00:31:57,720 --> 00:32:00,600
Speaker 4: you know, in preparation for this call. You know, if

577
00:32:00,640 --> 00:32:03,880
Speaker 4: you look at the five year sharp ratio for loans,

578
00:32:04,640 --> 00:32:06,680
Speaker 4: you know, I think it's like zero point eighty five, So,

579
00:32:07,200 --> 00:32:10,640
Speaker 4: you know, good returns with relatively low volatility. I think

580
00:32:10,680 --> 00:32:14,280
Speaker 4: with the view that and that's on lever right, so

581
00:32:14,400 --> 00:32:16,760
Speaker 4: with the view that that rates are going to be

582
00:32:16,840 --> 00:32:19,800
Speaker 4: higher for longer, I think that continues to be a

583
00:32:19,840 --> 00:32:20,800
Speaker 4: pretty good place to be.

584
00:32:21,520 --> 00:32:24,280
Speaker 1: And what about the things that that you're already worried about.

585
00:32:24,320 --> 00:32:26,320
Speaker 1: We've had one guest on this show recently saying that

586
00:32:26,600 --> 00:32:29,320
Speaker 1: commercial real estate could blow up four hundred banks in

587
00:32:29,360 --> 00:32:32,560
Speaker 1: the US, which presumably would ripple through everything and be

588
00:32:32,760 --> 00:32:36,200
Speaker 1: very problematic for the loan market. What do you what

589
00:32:36,280 --> 00:32:36,960
Speaker 1: are you worried about?

590
00:32:37,680 --> 00:32:40,680
Speaker 4: You know, I think what you're worry about is what

591
00:32:40,720 --> 00:32:44,760
Speaker 4: you really don't know, and you know, so you have

592
00:32:44,840 --> 00:32:50,560
Speaker 4: to be directionally prepared, you know, for you know, for

593
00:32:50,760 --> 00:32:53,520
Speaker 4: you know, with with an outlook. And I would say

594
00:32:54,200 --> 00:32:57,520
Speaker 4: right now, in general, you know, our portfolios are going

595
00:32:57,560 --> 00:33:02,480
Speaker 4: to be somewhat defensive positioned in terms of you know

596
00:33:02,560 --> 00:33:07,560
Speaker 4: when and more liquid. You know, the portfolios where we

597
00:33:07,640 --> 00:33:10,840
Speaker 4: have a lot of flexibility are going to have very limited,

598
00:33:10,880 --> 00:33:16,760
Speaker 4: lower quality type of exposure, namely triples, et cetera. But

599
00:33:16,920 --> 00:33:19,640
Speaker 4: you know, and you know, so that's how we're positioned.

600
00:33:19,680 --> 00:33:22,920
Speaker 4: We think that with the higher rate environment that we're

601
00:33:22,960 --> 00:33:25,480
Speaker 4: going to continue to have some level of volatility. I

602
00:33:25,480 --> 00:33:27,920
Speaker 4: don't think it's going to be catastrophic. I do think,

603
00:33:28,320 --> 00:33:30,640
Speaker 4: you know, going back to the commercial real estate question,

604
00:33:31,280 --> 00:33:33,520
Speaker 4: I think you know that the FED and everybody is

605
00:33:33,520 --> 00:33:35,680
Speaker 4: is you know that there's a lot of things that

606
00:33:35,680 --> 00:33:38,120
Speaker 4: they're keeping an eye on, but that's one of them.

607
00:33:38,480 --> 00:33:41,880
Speaker 4: And directionally, as rates go lower, that will be helpful.

608
00:33:42,200 --> 00:33:44,120
Speaker 4: But at the same time you know that that there

609
00:33:44,120 --> 00:33:47,360
Speaker 4: has to be a revaluation in terms of you know

610
00:33:47,480 --> 00:33:50,480
Speaker 4: what a lot of these properties are worth, and you

611
00:33:50,520 --> 00:33:53,800
Speaker 4: know we're you know we're we're where folks are in

612
00:33:53,920 --> 00:33:56,160
Speaker 4: terms of the mortgage is outstanding to that.

613
00:33:56,840 --> 00:33:59,400
Speaker 1: Great stuff to sign IF Industment off for the US

614
00:33:59,440 --> 00:34:02,240
Speaker 1: Performing credit and CLO's at Soundpoint Capital Management. It's been

615
00:34:02,280 --> 00:34:04,400
Speaker 1: a pleasure having you on the credit edge. Many thanks,

616
00:34:04,800 --> 00:34:07,160
Speaker 1: thank you. Also want to say a big thanks to

617
00:34:07,280 --> 00:34:10,080
Speaker 1: Carmen Arroyo with Bloomberg News. Brilliant to see you again, cheers,

618
00:34:10,120 --> 00:34:12,200
Speaker 1: Thank you so much, James, and to Robert Schiffman with

619
00:34:12,239 --> 00:34:14,560
Speaker 1: Bloomberg Intelligence. Great to have you back on the show.

620
00:34:14,880 --> 00:34:15,920
Speaker 3: Great times, James.

621
00:34:16,160 --> 00:34:18,560
Speaker 1: You can find all Carmen Arroyo's great scoops on the

622
00:34:18,600 --> 00:34:22,160
Speaker 1: Bloomberg Terminal and of course at Bloomberg dot com. Also

623
00:34:22,320 --> 00:34:25,640
Speaker 1: check out Rob Schiffman's excellent analysis on the Terminal or

624
00:34:25,680 --> 00:34:27,920
Speaker 1: call him directly. He's a great guy to talk to,

625
00:34:28,280 --> 00:34:32,160
Speaker 1: and Bloomberg Intelligence is a fantastic resource. And please do

626
00:34:32,200 --> 00:34:34,920
Speaker 1: subscribe wherever you get your podcasts. We're on Apple, Spotify

627
00:34:34,960 --> 00:34:39,200
Speaker 1: and all good podcast providers, including the Bloomberg Terminal. Give

628
00:34:39,280 --> 00:34:41,600
Speaker 1: us a review, tell your friends, or email me directly

629
00:34:41,640 --> 00:34:46,440
Speaker 1: at jcrombieight at Bloomberg dot Net. I'm James Cromby. It's

630
00:34:46,440 --> 00:34:48,359
Speaker 1: been a pleasure having you join us again next week

631
00:34:48,480 --> 00:35:09,399
Speaker 1: on the Credit Edge