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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 Jeremy Burton, portfolio

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Speaker 1: manager for US high yield and leverage loans at pine

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Speaker 1: Bridge Investments. How are you, Jeremy great?

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Speaker 2: Great to be here today, James, thanks so much for

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Speaker 2: joining us.

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Speaker 1: A very excited to have you on the show. We're

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Speaker 1: also delighted to welcome back co host Jody Lurie with

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Speaker 1: Bloomberg Intelligence.

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Speaker 2: Hello, Jody, Hello James, how are you great?

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Speaker 1: Thank you very much. So just to set the scene

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Speaker 1: of it here, US markets are rallying as rates come down,

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Speaker 1: the economy keeps chugging along, and investors look forward to

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Speaker 1: a new administration, which the bulls will think will be

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Speaker 1: very pro growth. Credit is on fire, and we've seen

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Speaker 1: a huge amount of borrowing by companies, with more to come.

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Speaker 1: In twenty twenty five. Private debt in particular has experienced

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Speaker 1: a meteoric rise. It's now a one point six trillion

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Speaker 1: dollar market, and it could well be worth tens of

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Speaker 1: trillions of dollars more when you add in all of

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Speaker 1: the asset based finance. Floating rate assets are in favor

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Speaker 1: as yields stay high and the mood is very risk

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Speaker 1: on but very tight bond spreads, tons of issuance and

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Speaker 1: rising fun flows. That doesn't mean that there's no problems

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Speaker 1: out there. Despite credit strategists and investors calling it a

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Speaker 1: golden age. The FED started to ease, but treasury yields

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Speaker 1: seems stuck above four percent, and the stated aims of

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Speaker 1: the next government all sound very inflationary, signaling a period

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Speaker 1: of higher for longer interest rates. That means elevated debt costs,

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Speaker 1: which will hurt borrowers across the board, especially the weak ones.

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Speaker 1: In the background, we have a lot of geoplogical risk,

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Speaker 1: which will only be amplified by the Trump trade wars. Plus,

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Speaker 1: the threat of recession hasn't gone away entirely, and a

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Speaker 1: downturn would really cause distress in credit markets. So, Jeremy,

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Speaker 1: where do we go from here? Our credit market's still

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Speaker 1: a good place to be in twenty twenty five, particularly

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Speaker 1: at the risky end.

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Speaker 3: Sure and thanks for having me today, James.

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Speaker 2: I think when we look at the credit markets, I think,

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Speaker 2: you know, for a lot of people who are not

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Speaker 2: involved in the credit markets, the first thing that comes

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Speaker 2: to mind is that valuations look full, right, Spreads are

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Speaker 2: fairly tight. We're now almost five years out of the pandemic.

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Speaker 2: You know, particularly in leverage finance, we see high yield

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Speaker 2: spreads that haven't been hidden sometime in many cases, you know,

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Speaker 2: prior to the Great Financial Crisis. I think, on the

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Speaker 2: other hand, there's reasons for that, and I also don't

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Speaker 2: think there's necessarily a massive catalyst for driving spreads wider

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Speaker 2: over the next twelve months. When you think about fundamentals,

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Speaker 2: like I said, we're approaching the five year anniversary the pandemic.

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Speaker 2: You know, the economic impact of the pandemic, both on

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Speaker 2: the economy as a whole and on individual sectors and credits,

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Speaker 2: it was very complex, and there was really this massive

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Speaker 2: butterfly effect we saw where we saw so many companies

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Speaker 2: were down in twenty twenty, so many companies were way

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Speaker 2: up in twenty twenty one on the results because of

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Speaker 2: really what in retrospect was an over correction on the

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Speaker 2: part of the government and over stimulus. And then since

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Speaker 2: then we've seen the I would call it almost seismic

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Speaker 2: ways over time in decreasing magnitude hit a lot of

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Speaker 2: industries and a lot of sectors. There's still some situations

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Speaker 2: where industries are seeing that. It's obviously been well reported.

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Speaker 2: Almost anything commercial commercial real estate related, particularly on office

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Speaker 2: is still seeing problems. But I think in our world,

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Speaker 2: in the leverage finance world, we have seen the magnitude

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Speaker 2: of that come down materially. You know, twenty twenty four

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Speaker 2: saw really for I would say ninety percent of the

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Speaker 2: issuer base in our world good enough results from a

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Speaker 2: fundamental perspective, some better than others, we haven't. What we

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Speaker 2: haven't seen in a few quarters is I always say,

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Speaker 2: new themes of the fourth degree butterfly impact from the

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Speaker 2: pandemic that we were still seeing up until recently. And

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Speaker 2: our outlook for twenty twenty five is really continued economic strength.

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Speaker 2: Everyone debated forever when was the recession coming. It just

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Speaker 2: didn't come. It really doesn't seem like it's coming in

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Speaker 2: the next twelve months either.

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Speaker 4: So Jeremy, you sound relatively optimistic, at least when it

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Speaker 4: comes to leverage finance, not so much on commercial real estate.

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Speaker 2: Well, I'm not an expert on commercial real estate, just

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Speaker 2: to be clear, but that's clearly one sector that's still

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Speaker 2: seeing an impact, of.

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Speaker 4: Course, and so you know, I'm a little bit concerned

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Speaker 4: because we recently just had our credit outlook event, right,

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Speaker 4: massive event. Lots of people on the street who, similar

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Speaker 4: to you, are pontificating about twenty twenty five. And I

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Speaker 4: think what was so interesting and uncomfortable for me as

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Speaker 4: a credit analyst was how optimistic everyone was. Right when

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Speaker 4: you hear that there's a general consensus on some sort

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Speaker 4: of take, you sort of pause and say, wait a minute,

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Speaker 4: where where could we go wrong? And why is everybody

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Speaker 4: so hyped up? How do you feel about that? I mean,

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Speaker 4: what are you sort of are you generally optimistic or

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Speaker 4: would you say that there are some pockets where you're

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Speaker 4: a little bit more concerned than others?

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Speaker 3: Yeah?

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Speaker 2: Sure, And obviously group think is always a risk, right

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Speaker 2: was it was in twenty twenty two and twenty twenty three.

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Speaker 2: In retrospect, it was probably a risk on the other side, right,

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Speaker 2: I mean the consensus was too negative. I take the

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Speaker 2: point that it could be too positive now. I think

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Speaker 2: I would differentiate a little bit between high yield and

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Speaker 2: loans at this point, you know, they are there are

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Speaker 2: very different different issuer bases right. And and you know

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Speaker 2: we always used to think about talk about high yield

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Speaker 2: and loans, how they are these related markets.

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Speaker 3: You know, high yield is actually.

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Speaker 2: Kind of in between loans on the one hand and

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Speaker 2: IG on the other hand, right, and it pivots between

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Speaker 2: an unsecured version of loans, which it was for much

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Speaker 2: of its history with similar issuers, or as it really

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Speaker 2: more is kind of now just a junkier version of IG.

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Speaker 2: You know, a lot of public corps right, fewer sponsor

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Speaker 2: owned credits. I think on the high yield side, what

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Speaker 2: we've seen over the past few years, given the rise

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Speaker 2: in rates, you know, there's been a lot of themes

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Speaker 2: out there. I think the number one thing we've seen

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Speaker 2: on the high yeld issuer base is companies have just

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Speaker 2: been a lot less opportunistic than they have been historically.

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Speaker 2: Twenty twenty one, companies were highly opportunistic. Why because you

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Speaker 2: could borrow at all time low yields right, due to

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Speaker 2: low all time lower rate and all time low spreads.

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Speaker 2: You know, since then, companies have just gotten much more conservative,

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Speaker 2: I think. I think on the high yeld side, I

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Speaker 2: think part of his rates, I think part of it

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Speaker 2: is just the general downturn m and a activity we've

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Speaker 2: seen during the Biden administration. The loan market's obviously been

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Speaker 2: a little bit different. It's a different issuer base. By definition,

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Speaker 2: the overwhelming majority of issuers in the loan market are opportunistic.

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Speaker 2: Why because they're leverage buyouts, right Those are by definition opportunistic.

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Speaker 2: I also think in the loan market. I mean, look,

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Speaker 2: we've we've certainly seen issuance over this year. We've not

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Speaker 2: seen a lot of true net new issuance. We've seen

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Speaker 2: a lot of refinancings, a lot of repricings. There's been

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Speaker 2: some re leveragings, not as many as I would have

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Speaker 2: thought based on where spreads are at this point. And

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Speaker 2: so I do take comfort in some of that, honestly,

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Speaker 2: from a credit perspective. The thing that gives me a

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Speaker 2: lot of pause right now and some concern is the

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Speaker 2: lack of net new supply versus the abount of demand

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Speaker 2: out there. And we're really seeing that in the loan market.

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Speaker 2: You know, I came into work yesterday and I saw

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Speaker 2: twenty emails about loan primary launches, and probably eighteen of

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Speaker 2: them were just repricings. Net new borrowing activity in the

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Speaker 2: loan market, it's still really low. I see estimates out

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Speaker 2: there that it's going to pick up next year.

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Speaker 3: Let's see.

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Speaker 2: I saw there were a lot of estimates the beginning

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Speaker 2: of twenty twenty four is going to pick up as well,

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Speaker 2: and it just really didn't. And there's a lot of

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Speaker 2: demand out there, and that's really what's driving spreads where

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Speaker 2: they are, I think, more than anything else.

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Speaker 4: So you talk about spreads, but I think there's a

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Speaker 4: lot of conversation and I think you guys wrote about

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Speaker 4: this as well, about spread versus absolute yield, right, and

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Speaker 4: what we're thinking there in terms of where there's potential opportunity.

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Speaker 2: Yeah, sure, And so in high yield, I think, particularly

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Speaker 2: the beginning of twenty twenty four, there was a lot

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Speaker 2: of opportunity on this front where you saw things that

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Speaker 2: were trading optically at low spreads and optically at low yields,

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Speaker 2: but at prices below par, and there was a pull

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Speaker 2: to par trade that went on as twenty twenty six

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Speaker 2: twenty twenty seven maturities got refinanced. We're still seeing some

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Speaker 2: of that that activity. You know, we keep seeing twenty

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Speaker 2: twenty seven and twenty twenty eight bonds in the high

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Speaker 2: yelled market, not necessarily with high coupons. I mean we're

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Speaker 2: not talking with three handle coupons, but still with with

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Speaker 2: with five and six handle coupons getting refinanced, and you

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Speaker 2: know that is a total return opportunity in excess of

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Speaker 2: what the spread and yield is. But look clearly the

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Speaker 2: way that average bond price in the high yeld market

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Speaker 2: it has come up. Part of that is also we've

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Speaker 2: actually seen you know, a fair amount of issuance this year,

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Speaker 2: a lot of it's been refinancing, not true net new

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Speaker 2: new issuance. That's also you know, inorganically pulled the average

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Speaker 2: price up. Now on the loan side, it's obviously tougher

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Speaker 2: at this point. You know, there's a big chunk of

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Speaker 2: the market that is you know, effectively at negative spread

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Speaker 2: duration at this point because it gets repriced, right, you know,

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Speaker 2: having something bid at par and a half in the

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Speaker 2: loan market, it's not really good in general, that's the

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Speaker 2: world we're in though right now.

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Speaker 1: The supply, demand and balance point that you make though

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Speaker 1: Germany is very important. We've been following that for a

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Speaker 1: long time that you know, there is just a lot

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Speaker 1: of demand for mostly just looking at the yield for

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Speaker 1: all fixed income. And on the other side, there's not

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Speaker 1: much net new supply across the board. Most of the

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Speaker 1: new deals have been for refinancing, so the net is

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Speaker 1: getting squeezed. The demand is going up, and there's being

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Speaker 1: you know, also this pressure to fund privately for some

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Speaker 1: borrowers as well. So supply is disappearing, demand is going up.

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Speaker 1: Why does that give you pause?

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Speaker 2: Though?

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Speaker 1: Can you just break it down for us? Is it

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Speaker 1: resulting in miss priced risk?

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Speaker 3: Right? I don't think it is yet.

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Speaker 2: The risk is that it will, right, any time you

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Speaker 2: get in a situation and the credit markets where there's

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Speaker 2: not enough supply and too much demand. You know, in general,

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Speaker 2: people are not in the business of sending money back

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Speaker 2: to their clients, right, and so eventually the market as

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Speaker 2: a whole managers want to remain invested. For colos, it's

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Speaker 2: really a necessity, right, you have to remain invested, and

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Speaker 2: that leads to the risk that the market as a

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Speaker 2: whole will make subpar credit decisions. I think if you

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Speaker 2: look at twenty twenty one, you know it's all time

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Speaker 2: low yields. I think when you look at the amount

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Speaker 2: of lemy, you know liability management activity you've seen in

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Speaker 2: the loan market over the past two years. They're not

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Speaker 2: all twenty twenty one vintages. A lot of them are

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Speaker 2: twenty twenty one vintages on deals that were, you know,

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Speaker 2: underwritten at a time where yields were very low and

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Speaker 2: the economy was in a lot of flux because of

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Speaker 2: the pandemic. And clearly there's a lot of these situations

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Speaker 2: that leverage has gone up and cash flow is negative

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Speaker 2: because of where rates have gone. Right, it's both sides

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Speaker 2: of the story. It's companies have had earnings deterioration and

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Speaker 2: rates have gone up for some of those. So that's

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Speaker 2: my concern. You know, I think about you always in

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Speaker 2: the credit market. To me, you always think about vintages,

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Speaker 2: whether it's in the loan market or the high yeld market,

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Speaker 2: and you think about the credit decisions the market is

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Speaker 2: making in those years. I am a little concerned that

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Speaker 2: we are setting ourselves up for one of those. That's

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Speaker 2: at the end of the day from the manager's perspective,

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Speaker 2: where it's important not to take excess risk in that

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Speaker 2: sort of market. It's always tough. You want to remain

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Speaker 2: invested at the end of the day. You're always you're

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Speaker 2: oft in loved with the decision. Do you want to

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Speaker 2: under yield the market or do you want to over

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Speaker 2: risk the market? I think time will Time has told

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Speaker 2: you and experience has told you in these sorts when

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Speaker 2: these years come, you want to be under risk. You

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Speaker 2: don't want to be over yield. It will cost you

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Speaker 2: on the other side.

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Speaker 1: Not thing we've learned over the is that you know,

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Speaker 1: is all relative. And when we look at the spreads,

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Speaker 1: not on an outright basis, but between the different ratings buckets,

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Speaker 1: they are very compressed. You know, look at the gap

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Speaker 1: between single B and triple C. It just gets tighter

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Speaker 1: and tied to which to me, you know, I'm not

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Speaker 1: a portfolio manager, so you can correct me if I'm wrong.

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Speaker 1: That seems to be mispriced risk. It just gets you know,

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Speaker 1: I mean, it cannot be the same spread on a

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Speaker 1: single beevers the triple C bond ken it well.

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Speaker 2: It depends on the details of the individual credit. Of course,

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Speaker 2: the devil is always in the details and credit. There

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Speaker 2: are triple C situations that are better than single these situations.

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Speaker 3: When you think about what is triple C and what's

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Speaker 3: in triple C, it's a mix and.

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Speaker 2: Particularly in high yield, because high yield you've got companies

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Speaker 2: that are intentionally triple C and companies that are unintentionally

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Speaker 2: trible C. And the loan market is different because the

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Speaker 2: broadly syndicated loan market, it really is, for the most part,

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Speaker 2: it is a bus and better market. And this is

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Speaker 2: obviously one of the things that's created part of the

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Speaker 2: direct lending private credit opportunity, right, because the broadly syndicated

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Speaker 2: loan market doesn't really deal well with stuff that's triple

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Speaker 2: C rated.

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Speaker 3: Hyld's little bit different.

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Speaker 2: Right, So you have companies that are actually performing well

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Speaker 2: that are triple C rated and may or may not

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Speaker 2: have a chance to get out of triple C. They're

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Speaker 2: trible C because probably it was an LBO, doesn't have

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Speaker 2: to be an LBO, but there was some sort of opportunity.

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Speaker 2: You also have companies, on the other hand, where there's

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Speaker 2: been some sort of earning deterioration, and we see we've

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Speaker 2: seen those two different types of credits bucket very distinctly

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Speaker 2: over time. Right.

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Speaker 3: You have the.

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Speaker 2: Issuers that have gone downhill organically in many cases because

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Speaker 2: they have business models that have some sort of secular

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Speaker 2: challenge to them or some sort of question about their

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Speaker 2: long term viability versus unsecured at in credits that are

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Speaker 2: just very highly leveraged, because they're intentionally highly leveraged.

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Speaker 1: So if you're not worried about mispriced risks right now,

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Speaker 1: what would make you worry? When do you think it

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Speaker 1: might happen? You know, what are the signs you're looking

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Speaker 1: for that it is getting mispriced?

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Speaker 2: Yeah, I think it's when we're going to get an

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Speaker 2: economic slowdown, right and and that's when I'm thinking about

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Speaker 2: what's going to get underwritten next year. I do hope

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Speaker 2: there's a pickup in net new issues. I think it

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Speaker 2: would be good for our market. I think we're in

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Speaker 2: a tough situation right now, particularly on the LBO side,

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Speaker 2: where yields are high on the one hand, and equity

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Speaker 2: valuations are also high. And I get that, and I

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Speaker 2: get the math is just tough right now for a

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Speaker 2: lot of LBOs. You know, look, things will, things should

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Speaker 2: go back into balance over time. I'm just hoping that

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Speaker 2: the thing that it takes to get us back into

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Speaker 2: balance is not is not bad.

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Speaker 3: Credit underwriting decisions as a whole.

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Speaker 2: On the market, and when we see pricings now, sometimes

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Speaker 2: the choice right, it's for an issuer. You know, repricing

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Speaker 2: isn't necessarily the worst thing that can happen. Releveraging is

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Speaker 2: the worst thing that can happen, right, because an issuer

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Speaker 2: can say, hey, I'm paying sover plus three fifty, I

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Speaker 2: want to reprice to three hundred. The other alternative in

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Speaker 2: many of those cases is to keep it at three

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Speaker 2: fifty and just take a dividend, right, And these are

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Speaker 2: the choices that issuers.

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Speaker 3: Make right now.

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Speaker 2: I mean, honestly, it's not the end of the world.

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Speaker 2: We're still seeing mainly repricings. There's actually been some deals

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Speaker 2: that it's a combo dividend plus repricing. That's like the

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Speaker 2: worst case scenario, I guess. But these are the decisions

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Speaker 2: that market participants are going to have to make.

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Speaker 4: So Jeremy to talk a little bit about how you

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Speaker 4: mentioned how companies are acting more conservatively post pandemic in

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Speaker 4: terms of their balance sheet at large, but then you

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Speaker 4: also talk about how companies are repricing plus dividend. Right,

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Speaker 4: And I'm thinking about in the context of next year,

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Speaker 4: with so much uncertainty about the new administration, so much

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Speaker 4: uncerned about what's going on, how do you feel comfortable,

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Speaker 4: you know, even looking at a tripleC company and if

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Speaker 4: it is because of LBO situations, right, even if there's

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Speaker 4: a reason behind their tripleC, how do you feel comfortable

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Speaker 4: with it with so much macroeconomic uncertainty? And how do

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Speaker 4: you feel that they're still going to keep to that

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Speaker 4: conservative balance sheet?

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Speaker 3: Yeah?

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Speaker 2: So when I say companies are behaving more conservatively, and

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Speaker 2: I should have been a little bit more clear, I

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Speaker 2: really mean regular way corporate public companies right that universe.

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Speaker 2: You know, within LBO world, there's a wide range of

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Speaker 2: situations that have been more conservative versus situations that have

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Speaker 2: been less conservative. I think in the corporate world, you know,

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Speaker 2: the one thing that's happened recently is clearly the election

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Speaker 2: that clearly could make a difference. You know, M and

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Speaker 2: A activity has been way down. I don't think it's

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Speaker 2: just because of you know, I hear sometimes people talk about, oh,

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Speaker 2: this deal, it could have happened in twenty twenty three,

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Speaker 2: twenty twenty four, you know they weren't going to block that.

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Speaker 2: But that's not all it's about, right, I think a

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Speaker 2: lot of a lot of the deal activity that didn't

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Speaker 2: happen over the past few years, was not just concerned

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Speaker 2: that a deal was going to get blocked, but it

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Speaker 2: was also well, it was going to be a nine

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Speaker 2: month review versus a four month review. Right, And there's

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Speaker 2: a cost to that. There's a dollar cost in terms

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Speaker 2: of advisors and all sorts of stuff like that. But

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Speaker 2: there's also an opportunity costs.

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Speaker 3: Right, you're kind of.

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Speaker 2: On hold, just waiting to make sure the deal gets closed.

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Speaker 2: There's opportunity costs in that there's been increased remedy costs

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Speaker 2: and deals that have gotten approved. I think we certainly

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Speaker 2: could see in corporate world, you know, in public company

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Speaker 2: corporate world, a pickup in definanced in an a activity,

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Speaker 2: particularly given where yields are back down a little bit

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Speaker 2: now in IG and high yield. So when I say

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Speaker 2: more conservative, that's really the market I was talking about.

354
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Speaker 2: You know, on the on the sponsor side, it's just

355
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Speaker 2: not in their bones to be conservative, let's be honest.

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Speaker 2: You know, when you do get some of those situations,

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Speaker 2: it usually involves an IPO exit for the sponsor. That's

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Speaker 2: really the situation where they all of a sudden see

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Speaker 2: a value in being more conservative because they need a

360
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Speaker 2: balance sheet that is sellable as an IPO, right, and

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Speaker 2: seven times leverage is not sellable.

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Speaker 3: As an IPO. You know, you want to be four

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Speaker 3: four and a half.

364
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Speaker 2: Or something like that.

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Speaker 4: I'm hearing a lot of discussion of supply demand and

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Speaker 4: melons from you. Right. So you have lack of supply

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Speaker 4: of lbo's, lack of supply of definanced MNA on the

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Speaker 4: on the public side, then you also have a lack

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Speaker 4: of new issues supply, right. And so we've seen in

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Speaker 4: this I mean since the Great Financial Crisis, we've seen

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Speaker 4: just massive amounts of covenant light issuance. When you're looking

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Speaker 4: at individual deals and you're looking at individual situation, what's

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Speaker 4: the type of stuff that gives you pause? What's the

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Speaker 4: type of stuff that that sort of turns your stomach

375
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Speaker 4: when there's so little out there to protect you as

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Speaker 4: a lender?

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Speaker 3: Right, I think.

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Speaker 2: Across all the corporate credit markets or all the public

379
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Speaker 2: corporate credit markets, whether it's IG you know, high yield

380
00:17:45,920 --> 00:17:49,679
Speaker 2: broadly syndicate loans, right, there's been a general deterioration in

381
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Speaker 2: documentation that's been going on for the entire life of

382
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Speaker 2: the market.

383
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Speaker 3: Right that this isn't.

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Speaker 2: New And even in the broadly syndicate loan space, which

385
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Speaker 2: is probably you know, the last of the markets to

386
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Speaker 2: really get bad documentation. That's been going on for a while.

387
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Speaker 2: I think in the loan market in particular, the big

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Speaker 2: change it's occurred in the past few years is not

389
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Speaker 2: that the documentation has gotten worse, but the sort of

390
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Speaker 2: acceptable standards of what flies and what doesn't fly, and

391
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Speaker 2: what's okay for a sponsor to do that that will

392
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Speaker 2: just be forgotten six months later on the next deal.

393
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Speaker 2: I think that's changed a lot. I don't think it

394
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Speaker 2: comes necessarily from a bad place. I get LPs and

395
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Speaker 2: private equity funds. They're interested in having sponsors make the

396
00:18:32,320 --> 00:18:36,160
Speaker 2: best economic outcome for them, you know, and for them

397
00:18:36,200 --> 00:18:39,040
Speaker 2: in that fun not necessarily I think historically there's been

398
00:18:39,080 --> 00:18:40,680
Speaker 2: a concern on the part of some sponsor as well,

399
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Speaker 2: do I want to do this or that, because people

400
00:18:42,359 --> 00:18:44,359
Speaker 2: are going to remember down the road. Now if you're

401
00:18:44,359 --> 00:18:46,679
Speaker 2: an LPN of particular fund, you don't necessarily care about that.

402
00:18:46,720 --> 00:18:48,760
Speaker 2: You have a different set of interests. And I think

403
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Speaker 2: that's actually what's changed more in the past couple of years.

404
00:18:52,280 --> 00:18:56,800
Speaker 2: It's really the definition of what's become acceptable and what's

405
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Speaker 2: fair game and what's not fair game. I think when

406
00:18:59,200 --> 00:19:01,119
Speaker 2: we look at individual deals, you know, look at the

407
00:19:01,200 --> 00:19:04,280
Speaker 2: end of the day, we always we always talk about

408
00:19:04,320 --> 00:19:06,480
Speaker 2: this as a firm, and it is in group. You know,

409
00:19:06,560 --> 00:19:08,240
Speaker 2: documentation is only going to help you so much the

410
00:19:08,320 --> 00:19:09,960
Speaker 2: end of the day. Your number one protection is buying

411
00:19:10,000 --> 00:19:13,040
Speaker 2: good credits. And that's not always totally within your control

412
00:19:13,080 --> 00:19:15,960
Speaker 2: because things can happen that are unexpected, right, But at

413
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Speaker 2: the end of the day, choosing good credits, regardless of

414
00:19:18,440 --> 00:19:21,080
Speaker 2: whether the documentation is good or bad, that's your number

415
00:19:21,080 --> 00:19:23,720
Speaker 2: one defense. Right over a long period of time. I

416
00:19:23,720 --> 00:19:27,000
Speaker 2: think sometimes the ones that are the most just I

417
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Speaker 2: would I don't want to say disgusting, because this isn't

418
00:19:28,920 --> 00:19:31,440
Speaker 2: a moral thing to me. It certainly is some participants

419
00:19:31,440 --> 00:19:33,240
Speaker 2: in our market. The way they talk about it, I

420
00:19:33,320 --> 00:19:38,080
Speaker 2: think it's where people have identified certain certain risk situations,

421
00:19:38,119 --> 00:19:40,520
Speaker 2: like there's going to be an asset sale, the sponsor

422
00:19:40,560 --> 00:19:43,360
Speaker 2: has telegraphed it, and they're not willing to put any

423
00:19:43,400 --> 00:19:46,800
Speaker 2: sort of protections against that asset sale in the documents,

424
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Speaker 2: and it still clears the market, right, And I think

425
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Speaker 2: those are the ones sometimes when we talk about these

426
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Speaker 2: with our analysts as a team, these are the ones

427
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Speaker 2: we were going to we're going to be most focused on.

428
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Speaker 2: You can obviously never totally protect yourself against the unknown.

429
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Speaker 2: But when the sponsor in the company you're telling you

430
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Speaker 2: they are likely to do this, and that the document

431
00:20:06,000 --> 00:20:08,199
Speaker 2: has baked in that that is going to result in

432
00:20:08,240 --> 00:20:10,520
Speaker 2: an increase in leverage that's not being priced in in

433
00:20:10,560 --> 00:20:13,040
Speaker 2: the spread, that's probably not the That's probably the one

434
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Speaker 2: to pass on, right, That would be my take on it.

435
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Speaker 1: And as you said earlier, lmes are on the rise

436
00:20:17,960 --> 00:20:20,639
Speaker 1: liability management exchanges, which you know, for our listeners who

437
00:20:20,720 --> 00:20:23,719
Speaker 1: haven't been following it closely, you know, basically there there

438
00:20:23,760 --> 00:20:25,719
Speaker 1: is some kind of exchange that is coercive and you're

439
00:20:25,760 --> 00:20:27,879
Speaker 1: losing some money on it, and you're waking up to

440
00:20:27,880 --> 00:20:29,919
Speaker 1: the fat. Some investors are waking up the fat that

441
00:20:30,080 --> 00:20:33,040
Speaker 1: maybe they should have read the documents more carefully because

442
00:20:33,080 --> 00:20:35,280
Speaker 1: of just the sort of issue you're you're mentioning. But

443
00:20:35,520 --> 00:20:38,240
Speaker 1: so as an investor, I mean, clearly, because of the

444
00:20:38,280 --> 00:20:40,439
Speaker 1: demand supply, you don't have a lot of leverage, you

445
00:20:40,480 --> 00:20:44,440
Speaker 1: don't have a lot of a stick against against these things.

446
00:20:44,440 --> 00:20:46,560
Speaker 1: I mean, how do you protect yourself? How do you

447
00:20:46,560 --> 00:20:48,480
Speaker 1: you know, what do you do in these situations, you

448
00:20:48,480 --> 00:20:51,439
Speaker 1: can see these precedents being set on the LME side.

449
00:20:51,680 --> 00:20:53,480
Speaker 1: There's going to be more of them. As one of

450
00:20:53,520 --> 00:20:56,480
Speaker 1: our guests recently said, this is just capitalism at work.

451
00:20:57,800 --> 00:21:00,919
Speaker 2: Yes, I mean, this is the ultimate free market, you know,

452
00:21:01,040 --> 00:21:03,879
Speaker 2: I heard I heard a recent comment by someone who's

453
00:21:04,000 --> 00:21:07,040
Speaker 2: a restructuring lawyer in Europe saying, you know, the US.

454
00:21:07,320 --> 00:21:08,879
Speaker 2: You know, people in the US have been pushing for

455
00:21:08,920 --> 00:21:11,359
Speaker 2: this sort of stuff for years, just like freedom to

456
00:21:11,400 --> 00:21:14,800
Speaker 2: do what you're allowed to do Europe. You know, in

457
00:21:14,840 --> 00:21:17,360
Speaker 2: many countries in Europe used to stereotypically have very weak

458
00:21:17,400 --> 00:21:19,719
Speaker 2: creditor protections. It's not the opposite, right, you know, France

459
00:21:19,840 --> 00:21:23,359
Speaker 2: is the bulwark of credit or protection now, and it's

460
00:21:23,400 --> 00:21:26,120
Speaker 2: it's sort of a joke because you know, the Americans

461
00:21:26,160 --> 00:21:27,920
Speaker 2: were always saying, oh, why can't you do this stuff

462
00:21:27,920 --> 00:21:29,480
Speaker 2: over here? We'll look at where you are now in

463
00:21:29,520 --> 00:21:31,479
Speaker 2: the US. Right, That's sort of the situation we're in.

464
00:21:31,800 --> 00:21:35,320
Speaker 2: I think there's three general categories of things you can do.

465
00:21:35,480 --> 00:21:37,240
Speaker 2: One is just good credit work.

466
00:21:37,280 --> 00:21:37,800
Speaker 3: To begin with.

467
00:21:38,800 --> 00:21:41,399
Speaker 2: Most of the lemy that we see going on, the

468
00:21:41,440 --> 00:21:44,680
Speaker 2: starting goal of the sponsor was not to go through lemy.

469
00:21:44,760 --> 00:21:47,520
Speaker 2: These are all situations where something has not gone according

470
00:21:47,520 --> 00:21:50,960
Speaker 2: to plan. It is generally a combination of earnings being

471
00:21:51,040 --> 00:21:55,440
Speaker 2: down by some degree combined with interest rates have gone up, right,

472
00:21:55,520 --> 00:21:55,920
Speaker 2: And so.

473
00:21:57,359 --> 00:21:58,679
Speaker 3: There's some stuff where it's like there's.

474
00:21:58,520 --> 00:22:01,160
Speaker 2: A maturity coming up in twenty twenty five, twenty twenty six,

475
00:22:01,520 --> 00:22:03,320
Speaker 2: that you got to do something, you got to restructure

476
00:22:03,320 --> 00:22:06,560
Speaker 2: it or or or in court or out of court,

477
00:22:06,600 --> 00:22:08,280
Speaker 2: right because there's a maturity. There's a whole lot of

478
00:22:08,280 --> 00:22:11,199
Speaker 2: other situations. A lot of them are twenty twenty one

479
00:22:11,320 --> 00:22:14,280
Speaker 2: vintage deals that have maturities in twenty twenty eight. You

480
00:22:14,320 --> 00:22:17,680
Speaker 2: have time on the maturity, but unlike in some prior cycles,

481
00:22:17,720 --> 00:22:20,359
Speaker 2: particularly after the financial crisis, you also have an interest

482
00:22:20,440 --> 00:22:22,600
Speaker 2: rate problem and a free cash flow problem now, and

483
00:22:22,640 --> 00:22:24,480
Speaker 2: so sponsors are left with the choice do I put

484
00:22:24,520 --> 00:22:26,120
Speaker 2: in more money or do I try to get something

485
00:22:26,160 --> 00:22:29,080
Speaker 2: out of creditors. I don't find it shocking that they're

486
00:22:29,119 --> 00:22:31,520
Speaker 2: taking the latter one, And particularly in the case of

487
00:22:31,520 --> 00:22:34,240
Speaker 2: many of these situations, I think it's one thing when

488
00:22:34,240 --> 00:22:36,840
Speaker 2: you think about something that goes into some sort of

489
00:22:36,920 --> 00:22:41,960
Speaker 2: stress because it's a cyclical downturn, that is much easier

490
00:22:41,960 --> 00:22:44,119
Speaker 2: to me if I'm an equity owner to say Hey,

491
00:22:44,160 --> 00:22:45,840
Speaker 2: I want to put more money into this because I

492
00:22:45,840 --> 00:22:47,639
Speaker 2: think this is going to turn and I want to

493
00:22:47,680 --> 00:22:49,720
Speaker 2: see the other side of it. A lot of the

494
00:22:49,720 --> 00:22:51,760
Speaker 2: stress we're seeing right now, and a lot of these

495
00:22:51,800 --> 00:22:54,360
Speaker 2: ELMI names, they're not in cyclical sectors, you know, they're

496
00:22:54,359 --> 00:22:56,840
Speaker 2: in healthcare, they're in software, right and these are some

497
00:22:56,960 --> 00:23:00,560
Speaker 2: situations that maybe we're just poorly underwritten by both the

498
00:23:00,560 --> 00:23:03,600
Speaker 2: sponsor and the credit markets. Those are tougher situations. I

499
00:23:03,640 --> 00:23:05,680
Speaker 2: get it for anyone to put more money in in

500
00:23:05,760 --> 00:23:08,600
Speaker 2: a subordinate point in the capital structure. So the first

501
00:23:08,600 --> 00:23:10,640
Speaker 2: thing you can do is basic credit work. The second thing,

502
00:23:10,680 --> 00:23:12,480
Speaker 2: and I think we've definitely seen it this year, is

503
00:23:13,320 --> 00:23:17,360
Speaker 2: the number of managers, particularly on more of the real

504
00:23:17,400 --> 00:23:19,880
Speaker 2: money side and the COLO side, that are far more

505
00:23:19,920 --> 00:23:24,840
Speaker 2: active in these situations early versus later. That's increased dramatically.

506
00:23:25,000 --> 00:23:27,560
Speaker 2: Everyone wants to be an initial party. If there's a group,

507
00:23:28,240 --> 00:23:30,360
Speaker 2: everyone wants to get in touch with whoever the law

508
00:23:30,400 --> 00:23:33,320
Speaker 2: firm is. There's some very repeat law firms on a

509
00:23:33,320 --> 00:23:35,600
Speaker 2: lot of these deals. Everyone wants to make sure that

510
00:23:35,640 --> 00:23:37,520
Speaker 2: they're more active than they used to be. Whereas it

511
00:23:37,600 --> 00:23:40,040
Speaker 2: used to be there was a very clear delineation between

512
00:23:40,080 --> 00:23:43,119
Speaker 2: I would say more active hedge fund style investors and

513
00:23:43,160 --> 00:23:45,240
Speaker 2: sort of the rest of the real money community, which

514
00:23:45,280 --> 00:23:50,000
Speaker 2: is more passive. That's definitely changed, And those are the

515
00:23:50,000 --> 00:23:53,280
Speaker 2: main things you can do the documentation. I think you

516
00:23:53,400 --> 00:23:56,359
Speaker 2: need to assume that most deals in our market, unless

517
00:23:56,359 --> 00:23:58,919
Speaker 2: it was underwritten as a stressed or some sort of

518
00:23:58,920 --> 00:24:02,400
Speaker 2: rescue financing, there's a loophole. And if one loopool got

519
00:24:02,400 --> 00:24:05,560
Speaker 2: closed closed, someone's going to find another loophole at the

520
00:24:05,640 --> 00:24:06,160
Speaker 2: end of the day.

521
00:24:06,480 --> 00:24:08,080
Speaker 1: But everyone comes on the show and says that they

522
00:24:08,080 --> 00:24:09,719
Speaker 1: want to do the right deals. You know, they want

523
00:24:09,760 --> 00:24:11,880
Speaker 1: to do the good deals, not the bad deals. So everyone,

524
00:24:12,119 --> 00:24:13,760
Speaker 1: you know, and as we've discussed, you know there's too

525
00:24:13,800 --> 00:24:16,679
Speaker 1: much demand for limited supply show me. There are going

526
00:24:16,720 --> 00:24:18,199
Speaker 1: to be some mistakes.

527
00:24:18,000 --> 00:24:20,679
Speaker 2: Yes, of course, and we've seen that that you know.

528
00:24:21,040 --> 00:24:23,680
Speaker 2: I think one of the most most interesting things about

529
00:24:23,680 --> 00:24:25,600
Speaker 2: the past year has been you know, if you look

530
00:24:25,600 --> 00:24:27,520
Speaker 2: at the default rates, and when I say default rate,

531
00:24:27,560 --> 00:24:30,200
Speaker 2: I'm including distress restructurings because at this point I think

532
00:24:30,240 --> 00:24:34,000
Speaker 2: you kind of have to. It's an overwhelming majority of workouts.

533
00:24:34,600 --> 00:24:36,320
Speaker 2: There's a clear difference between the highield market and the

534
00:24:36,359 --> 00:24:38,760
Speaker 2: loan market. Right now, the loan market the default rate

535
00:24:38,800 --> 00:24:41,360
Speaker 2: including l ME, has continued to increase over the over

536
00:24:41,400 --> 00:24:43,480
Speaker 2: the course of the past year, really driven by a

537
00:24:43,480 --> 00:24:46,320
Speaker 2: lot of these twenty twenty one vintage deals. High yield

538
00:24:46,440 --> 00:24:48,920
Speaker 2: hasn't had that to the same degree. There's been some

539
00:24:48,920 --> 00:24:51,199
Speaker 2: some large restructurings in the high yield market, you know,

540
00:24:51,320 --> 00:24:54,160
Speaker 2: not exclusively in media telecom, but a lot in media telecom,

541
00:24:54,600 --> 00:24:56,800
Speaker 2: but we've continued to see that in the loan market.

542
00:24:57,119 --> 00:24:59,359
Speaker 2: I don't you know, I don't think that the default

543
00:24:59,400 --> 00:25:01,000
Speaker 2: rate is going to at three and a half or

544
00:25:01,000 --> 00:25:03,040
Speaker 2: three and three quarters in the loan market next year.

545
00:25:03,080 --> 00:25:05,720
Speaker 2: But I don't think it's going down to one and

546
00:25:05,800 --> 00:25:07,960
Speaker 2: a quarter or wherever the high yeld market is right now.

547
00:25:08,080 --> 00:25:10,320
Speaker 2: I still think we'll see a gap between the two markets.

548
00:25:10,359 --> 00:25:12,480
Speaker 1: And recovery is also dropping, you know, we just saw

549
00:25:12,480 --> 00:25:15,160
Speaker 1: from Fitch saying that they're below forty on average, forty

550
00:25:15,200 --> 00:25:17,359
Speaker 1: percent on average this year compared to more than fifty

551
00:25:17,440 --> 00:25:19,800
Speaker 1: last year. Do recoveries keep going down?

552
00:25:20,200 --> 00:25:22,080
Speaker 2: Well, I think recovery is always a tough thing to

553
00:25:22,119 --> 00:25:24,399
Speaker 2: look at, right because we always think about recovery in

554
00:25:24,400 --> 00:25:26,919
Speaker 2: the traditional context of when something goes through a chapter,

555
00:25:27,520 --> 00:25:29,919
Speaker 2: chapter eleven, right, and there's just a resetting of the

556
00:25:29,960 --> 00:25:33,200
Speaker 2: capital structure. Many of these L and ME transactions, particularly

557
00:25:33,240 --> 00:25:36,040
Speaker 2: the ones where there is no maturity coming up, they

558
00:25:36,080 --> 00:25:39,080
Speaker 2: are that's they're not traditional restructurings. They are almost like

559
00:25:39,160 --> 00:25:41,840
Speaker 2: a restructuring one point oh and there's probably going to

560
00:25:41,920 --> 00:25:43,920
Speaker 2: be in many of these cases a two point oh

561
00:25:43,960 --> 00:25:46,760
Speaker 2: down the road. So oftentimes you look at the recovery

562
00:25:46,920 --> 00:25:48,840
Speaker 2: if you want to define it as you know, where

563
00:25:48,840 --> 00:25:52,080
Speaker 2: the old loan was trading before the restructuring occurred. Many

564
00:25:52,160 --> 00:25:53,760
Speaker 2: of those are not at bad levels. Many of them

565
00:25:53,760 --> 00:25:55,919
Speaker 2: are in the sixties and seventies, which we always think

566
00:25:55,960 --> 00:25:59,640
Speaker 2: about in the past is the quote unquote standard average

567
00:25:59,640 --> 00:26:03,320
Speaker 2: recovery for first line loans. But in many of these situations,

568
00:26:03,920 --> 00:26:06,240
Speaker 2: nothing's been fixed. It's caan has been kicked down the

569
00:26:06,280 --> 00:26:08,320
Speaker 2: road for a few years. You know you're going to

570
00:26:08,400 --> 00:26:11,879
Speaker 2: get some pick interest, but still things need to recover

571
00:26:12,080 --> 00:26:13,959
Speaker 2: in order for there not to be another restructuring. So

572
00:26:14,240 --> 00:26:16,920
Speaker 2: I always it's always a tough metric to look at.

573
00:26:16,920 --> 00:26:20,440
Speaker 2: I see the charts of how recoveries have changed over time.

574
00:26:20,760 --> 00:26:23,240
Speaker 2: It's always very heavily dependent on what's the cohort of

575
00:26:23,240 --> 00:26:25,919
Speaker 2: things that are actually defaulting right at that point in

576
00:26:26,000 --> 00:26:29,080
Speaker 2: time that can change pretty materially over time, and clearly

577
00:26:29,119 --> 00:26:32,600
Speaker 2: a lot of these Lemy transactions we're pulling forward restructurings

578
00:26:32,600 --> 00:26:34,920
Speaker 2: that in prior market cycles would have occurred in twenty

579
00:26:34,920 --> 00:26:35,720
Speaker 2: six and twenty seven.

580
00:26:35,840 --> 00:26:38,920
Speaker 4: Okay, so I'm going to switch gears a little bit. Jeremy.

581
00:26:39,080 --> 00:26:43,240
Speaker 4: You mentioned healthcare and software companies, and I know that

582
00:26:43,400 --> 00:26:46,640
Speaker 4: your team has written a bunch about tariffs and what

583
00:26:46,680 --> 00:26:52,639
Speaker 4: the implications are for different sectors within credit, and of

584
00:26:52,680 --> 00:26:55,159
Speaker 4: course you know Big tech is certainly has a target

585
00:26:55,280 --> 00:27:00,000
Speaker 4: on his back healthcare as well. What sectors are you

586
00:27:00,280 --> 00:27:03,240
Speaker 4: focused on for the positive which ones for the negative?

587
00:27:04,280 --> 00:27:06,840
Speaker 2: Yeah, look, leverage, finance. It's always a mix between credit

588
00:27:06,880 --> 00:27:11,840
Speaker 2: selection and sector allocation. You know, over over a full cycle,

589
00:27:13,640 --> 00:27:16,640
Speaker 2: credit selection dominates. That's just at the end of the day.

590
00:27:16,880 --> 00:27:20,040
Speaker 2: There's a handful of sectors where there's real themes, like

591
00:27:20,040 --> 00:27:23,240
Speaker 2: like energy in some parts in the cycle, like consumers.

592
00:27:23,240 --> 00:27:25,560
Speaker 2: Certainly during the pandemic, the sectors are talking all the

593
00:27:25,640 --> 00:27:30,240
Speaker 2: leisure related sectors were highly topical for correlated reasons. That's

594
00:27:30,320 --> 00:27:33,280
Speaker 2: not always been the case in the past, where when

595
00:27:33,280 --> 00:27:36,080
Speaker 2: there's a slowdown, I think when you think about when

596
00:27:36,119 --> 00:27:38,959
Speaker 2: I said talked about loans earlier. I mentioned software and healthcare.

597
00:27:38,960 --> 00:27:41,359
Speaker 2: It's not like there's anything inherently wrong with those sectors.

598
00:27:41,400 --> 00:27:43,879
Speaker 2: They're the largest sectors in the loan market, so almost

599
00:27:43,880 --> 00:27:46,119
Speaker 2: by definition, they're going to make up a good chunk

600
00:27:46,320 --> 00:27:48,800
Speaker 2: of the problem in the law market. You know, they're

601
00:27:48,800 --> 00:27:50,879
Speaker 2: big sectors in the lower market because they're low capex

602
00:27:50,920 --> 00:27:54,359
Speaker 2: businesses right there, and they're theoretically at least, you know,

603
00:27:54,600 --> 00:27:58,320
Speaker 2: highly recurring revenue types of businesses. When I think about

604
00:27:58,359 --> 00:28:02,040
Speaker 2: sectors from here, we know that we're more positive on

605
00:28:02,520 --> 00:28:06,800
Speaker 2: or less positive on. There's not a lot that jump

606
00:28:06,840 --> 00:28:07,800
Speaker 2: out big time.

607
00:28:08,080 --> 00:28:08,240
Speaker 3: You know.

608
00:28:08,280 --> 00:28:10,679
Speaker 2: I think energy has clearly had a great run in

609
00:28:10,760 --> 00:28:13,000
Speaker 2: high yield over the past few years. I think we

610
00:28:13,040 --> 00:28:16,119
Speaker 2: still like energy, but it's it's it's getting tougher and

611
00:28:16,160 --> 00:28:20,600
Speaker 2: tougher to see a very strong outperformance story at this point.

612
00:28:20,680 --> 00:28:22,399
Speaker 2: And so that's the type of sector where we're you know,

613
00:28:22,440 --> 00:28:24,240
Speaker 2: we've been making some moves to go from I would

614
00:28:24,280 --> 00:28:26,000
Speaker 2: say call it an overweight to more of a market

615
00:28:26,080 --> 00:28:30,119
Speaker 2: weight position. It's and it's not negative necessarily on the credit.

616
00:28:30,200 --> 00:28:33,240
Speaker 2: It's just pricing is tight, right, and it's a sector

617
00:28:33,240 --> 00:28:35,720
Speaker 2: where that's a sector where there's been a massive amount

618
00:28:35,880 --> 00:28:38,719
Speaker 2: of arising star activity over the past few years. And

619
00:28:38,760 --> 00:28:41,840
Speaker 2: so even as you think about how that sector changed

620
00:28:42,560 --> 00:28:45,040
Speaker 2: in terms of composition and really changed the whole the

621
00:28:45,520 --> 00:28:48,720
Speaker 2: whole high yield index, you know, starting in twenty twenty,

622
00:28:48,720 --> 00:28:50,800
Speaker 2: when you had that all that fall and angel activity,

623
00:28:50,800 --> 00:28:53,400
Speaker 2: you know, all that's gone now, right, and so you're

624
00:28:53,680 --> 00:28:55,960
Speaker 2: you're what you're left with is good companies, but more

625
00:28:56,040 --> 00:28:58,720
Speaker 2: high heeld companies, right than companies that are more traditional

626
00:28:58,720 --> 00:28:59,560
Speaker 2: ig stories.

627
00:29:00,640 --> 00:29:03,920
Speaker 3: Look. On the consumer side, yes, you're right, it's been

628
00:29:04,080 --> 00:29:04,960
Speaker 3: very gung.

629
00:29:04,800 --> 00:29:07,280
Speaker 2: Ho, Hurrah, hurrah. For the most part, it's been an

630
00:29:07,280 --> 00:29:11,760
Speaker 2: incredible run since the since the pandemic. I echo, I'm

631
00:29:11,800 --> 00:29:15,040
Speaker 2: a former consumer analyst myself. I covered gaming, lodging, and leisure.

632
00:29:15,640 --> 00:29:17,640
Speaker 2: It was quite a ride over the course of are

633
00:29:17,640 --> 00:29:19,160
Speaker 2: the same, Yeah, it was. It was quite a ride

634
00:29:19,200 --> 00:29:21,360
Speaker 2: over the course of the pandemic and then the years after.

635
00:29:21,560 --> 00:29:25,160
Speaker 2: You know, the cruise names went from issuing a lot

636
00:29:25,200 --> 00:29:28,280
Speaker 2: of paper in twenty twenty because they needed cash, to

637
00:29:28,560 --> 00:29:30,920
Speaker 2: trading tight in twenty twenty one, and then going back

638
00:29:30,920 --> 00:29:33,479
Speaker 2: to stress levels in twenty twenty two to now at

639
00:29:33,520 --> 00:29:35,400
Speaker 2: the point where you know, it's all trading like it's

640
00:29:35,400 --> 00:29:39,680
Speaker 2: almost ig right, what a ride? You know, I think

641
00:29:39,720 --> 00:29:42,720
Speaker 2: there's you know, I don't have an obvious reason why

642
00:29:42,760 --> 00:29:47,120
Speaker 2: that's not going to continue. The consumer still seems pretty strong,

643
00:29:47,240 --> 00:29:50,200
Speaker 2: and I do believe in the long term shift from

644
00:29:50,680 --> 00:29:53,360
Speaker 2: goods to experiences. I don't think that's going away. I

645
00:29:53,360 --> 00:29:56,000
Speaker 2: think that's a secular shift that's gone on, and I

646
00:29:56,000 --> 00:29:57,800
Speaker 2: don't I don't really see any reason why that's not

647
00:29:57,840 --> 00:29:58,680
Speaker 2: going to continue.

648
00:29:59,200 --> 00:30:01,240
Speaker 4: So let's go in to that a little bit more, Jeremy,

649
00:30:01,480 --> 00:30:05,760
Speaker 4: because we recently did our most recent iteration of US travel.

650
00:30:06,080 --> 00:30:09,560
Speaker 4: We do a survey every half year, and our results

651
00:30:09,560 --> 00:30:13,600
Speaker 4: came out a little while ago. We saw that the

652
00:30:14,440 --> 00:30:17,440
Speaker 4: average vacationer is planning on spending more in twenty five

653
00:30:17,480 --> 00:30:21,120
Speaker 4: over twenty four, and that amount is, or the percentage

654
00:30:21,160 --> 00:30:23,520
Speaker 4: that said that is greater than what we saw last

655
00:30:23,560 --> 00:30:26,520
Speaker 4: year going into twenty four. So more people are planning

656
00:30:26,560 --> 00:30:30,080
Speaker 4: on spending more next year versus we're planning on spending

657
00:30:30,080 --> 00:30:35,520
Speaker 4: more going into this year. And that's encouraging for me.

658
00:30:36,200 --> 00:30:39,000
Speaker 4: But also then I sort of wonder, okay, where are

659
00:30:39,040 --> 00:30:42,880
Speaker 4: the pockets of trouble within consumer, And of course regional

660
00:30:42,920 --> 00:30:47,440
Speaker 4: gaming is constantly talked about. Then you hear the narrative

661
00:30:47,560 --> 00:30:50,760
Speaker 4: coming from companies and they say, well, it's actually proof

662
00:30:50,920 --> 00:30:54,960
Speaker 4: that regional gaming is actually defensive during recessions. And I

663
00:30:54,960 --> 00:30:57,880
Speaker 4: think they based it off of the most recent recession,

664
00:30:57,960 --> 00:31:02,040
Speaker 4: right or the Great Financial Crisis, not necessarily over the

665
00:31:02,120 --> 00:31:07,080
Speaker 4: life of one hundred years of recessions. So I mean,

666
00:31:07,120 --> 00:31:10,200
Speaker 4: I guess my question for you, Jeremy is, as you're

667
00:31:10,280 --> 00:31:11,800
Speaker 4: thinking about it, you know, you don't want to just

668
00:31:11,840 --> 00:31:14,200
Speaker 4: say leisure as a whole. You don't want to say

669
00:31:14,520 --> 00:31:16,880
Speaker 4: consumer goods as a whole, because there are pockets of

670
00:31:16,920 --> 00:31:21,000
Speaker 4: positive pockets negative. Are you sort of putting on your

671
00:31:21,680 --> 00:31:25,240
Speaker 4: prior consumer hat and sort of picking and choosing, or

672
00:31:25,320 --> 00:31:29,320
Speaker 4: are you really sticking to your current hat of Okay,

673
00:31:29,360 --> 00:31:30,920
Speaker 4: I'm going to look at it on a credit by

674
00:31:30,920 --> 00:31:33,240
Speaker 4: credit basis. I'm not necessarily going to pull in my

675
00:31:33,280 --> 00:31:37,520
Speaker 4: prior knowledge and really kind of go gung ho in

676
00:31:37,560 --> 00:31:38,280
Speaker 4: what I do now.

677
00:31:39,080 --> 00:31:40,520
Speaker 2: I think you have to stick at it from a

678
00:31:40,560 --> 00:31:43,520
Speaker 2: credit by credit basis. And you know, if you think

679
00:31:43,560 --> 00:31:46,920
Speaker 2: about the cruisers in particular, certain the large cruisers have

680
00:31:47,640 --> 00:31:50,120
Speaker 2: not always been totally correlated by on how they've traded

681
00:31:50,120 --> 00:31:53,200
Speaker 2: over the past few years, They've been pretty correlated. There

682
00:31:53,200 --> 00:31:55,800
Speaker 2: are certainly some smaller operators in that space that have

683
00:31:55,880 --> 00:31:58,600
Speaker 2: not traded in the same way, and smaller business models

684
00:31:58,720 --> 00:32:01,920
Speaker 2: that have for one reason or another, you know, had

685
00:32:01,960 --> 00:32:05,400
Speaker 2: trouble coming back, and there are some a handful of

686
00:32:05,400 --> 00:32:08,640
Speaker 2: them that have gone through restructurings and maybe need to

687
00:32:08,640 --> 00:32:11,400
Speaker 2: go through another restructuring, and there's some real questions about

688
00:32:11,440 --> 00:32:12,440
Speaker 2: the viability.

689
00:32:12,040 --> 00:32:12,760
Speaker 3: Of their businesses.

690
00:32:13,960 --> 00:32:15,600
Speaker 2: To me, I always come back to the end of

691
00:32:15,640 --> 00:32:18,040
Speaker 2: the day, I think I think in the high yield

692
00:32:18,080 --> 00:32:20,600
Speaker 2: market and in the loan market, I think the sector

693
00:32:20,640 --> 00:32:23,160
Speaker 2: themes work better on the larger companies. I think on

694
00:32:23,240 --> 00:32:26,560
Speaker 2: the smaller companies that are more of the challengers and

695
00:32:26,600 --> 00:32:29,280
Speaker 2: the laggards and sectors and not necessarily the global leaders.

696
00:32:29,320 --> 00:32:30,720
Speaker 2: You know, we don't have a lot of sectors where

697
00:32:30,760 --> 00:32:33,600
Speaker 2: we have global leaders in our market, but cruising and

698
00:32:33,640 --> 00:32:37,440
Speaker 2: regional gaming we do, right, And I think it's easier

699
00:32:37,480 --> 00:32:40,120
Speaker 2: to take those sector themes on some of those companies

700
00:32:40,240 --> 00:32:44,160
Speaker 2: versus you know, when you're looking at a you know,

701
00:32:44,600 --> 00:32:49,160
Speaker 2: fifty million dollar evendal leisure company or a single property,

702
00:32:49,280 --> 00:32:51,760
Speaker 2: or you know a regional gaming company that has three

703
00:32:51,760 --> 00:32:54,000
Speaker 2: to five properties or something like that, all of the

704
00:32:54,000 --> 00:32:56,360
Speaker 2: which are thirty years old or something like that.

705
00:32:56,960 --> 00:32:59,280
Speaker 3: You need to differentiate there. Well.

706
00:32:59,320 --> 00:33:01,600
Speaker 2: I always think, I always think in a downturn that

707
00:33:02,640 --> 00:33:05,440
Speaker 2: you know, everyone gets hurt in a downturn, but the

708
00:33:05,520 --> 00:33:08,880
Speaker 2: companies that had a pre existing challenge or have not

709
00:33:09,440 --> 00:33:12,960
Speaker 2: have not invested well in their businesses over time, or

710
00:33:13,000 --> 00:33:16,600
Speaker 2: suffer or facing some sort of technological change, right, they're

711
00:33:16,600 --> 00:33:18,320
Speaker 2: gonna get hit worse. And if you think about to

712
00:33:18,360 --> 00:33:21,480
Speaker 2: the crisis, you can think about, let's say the media industry, Right,

713
00:33:21,720 --> 00:33:23,040
Speaker 2: the entire industry got hit.

714
00:33:23,480 --> 00:33:24,840
Speaker 3: Everything was print related.

715
00:33:24,960 --> 00:33:27,560
Speaker 2: Basically, all the trends that you had been seeing negative

716
00:33:27,560 --> 00:33:32,320
Speaker 2: on print advertising accelerated rapidly during the Great Financial Crisis.

717
00:33:32,880 --> 00:33:37,320
Speaker 2: The percentage of US advertising was in print just got decimated, right,

718
00:33:37,720 --> 00:33:39,200
Speaker 2: I would think, you know, if you want to compare

719
00:33:39,200 --> 00:33:42,840
Speaker 2: that to something like regional gaming, you know, I think

720
00:33:42,840 --> 00:33:46,400
Speaker 2: there are aspects of regional gaming that are probably somewhat

721
00:33:46,440 --> 00:33:49,360
Speaker 2: defensive in a downturn, particularly as we've seen the growth.

722
00:33:49,360 --> 00:33:52,840
Speaker 2: And I would call it more luxury type leisure activities

723
00:33:52,880 --> 00:33:56,880
Speaker 2: amongst the broad swath of Americans that that regional gaming

724
00:33:56,960 --> 00:34:00,520
Speaker 2: is almost more of a cheaper entertainment. Sounds crazy to

725
00:34:00,520 --> 00:34:02,120
Speaker 2: talk about it that way, but I always talked about

726
00:34:02,120 --> 00:34:03,360
Speaker 2: it that way when I was an analyst.

727
00:34:03,400 --> 00:34:04,400
Speaker 3: I think you could see that.

728
00:34:04,640 --> 00:34:06,640
Speaker 2: But I think if you think about a property that's

729
00:34:06,800 --> 00:34:09,440
Speaker 2: thirty five years old and hasn't been invested in as

730
00:34:09,520 --> 00:34:12,120
Speaker 2: in a competitive market, is that going to be defensive?

731
00:34:12,160 --> 00:34:13,960
Speaker 2: I don't know about that, right, And I think that's

732
00:34:13,960 --> 00:34:15,840
Speaker 2: the sort of credit work that we're always doing in

733
00:34:15,880 --> 00:34:16,879
Speaker 2: a situation like that.

734
00:34:17,440 --> 00:34:19,920
Speaker 4: And I guess in the context of you know, so

735
00:34:20,440 --> 00:34:23,640
Speaker 4: you talk about the cruise lines, and I'm in agreement

736
00:34:23,719 --> 00:34:26,480
Speaker 4: with you that there's been a lot of movement in tandem,

737
00:34:26,680 --> 00:34:29,800
Speaker 4: and we are finally starting to see a divergence between

738
00:34:29,800 --> 00:34:33,560
Speaker 4: the companies in terms of their strategies to de lever

739
00:34:33,880 --> 00:34:37,440
Speaker 4: or not or base all of the delevering off of

740
00:34:37,480 --> 00:34:42,640
Speaker 4: ebdout growth versus actual debt repayment. Right, And so we

741
00:34:42,719 --> 00:34:44,719
Speaker 4: have a few companies that are definitely getting close to

742
00:34:44,800 --> 00:34:47,600
Speaker 4: investment grade. And one thing I wonder for the high

743
00:34:47,640 --> 00:34:50,239
Speaker 4: yield space is how impactful that's going to be once

744
00:34:50,280 --> 00:34:55,200
Speaker 4: we sort of see that shift, that rising star shift finally,

745
00:34:55,320 --> 00:34:59,600
Speaker 4: how that's going to affect consumer at large? Right? You know,

746
00:34:59,800 --> 00:35:01,960
Speaker 4: if a large part of your consumer space has been

747
00:35:02,440 --> 00:35:06,600
Speaker 4: benefiting from the momentum within certain companies in certain sectors.

748
00:35:07,000 --> 00:35:10,040
Speaker 4: Now they've gone into IG. I mean, you know what

749
00:35:10,440 --> 00:35:11,880
Speaker 4: then is left behind.

750
00:35:12,239 --> 00:35:13,680
Speaker 3: Right, and we've clearly seen that trend.

751
00:35:13,840 --> 00:35:15,920
Speaker 2: We saw that trend in twenty twenty three right across

752
00:35:15,960 --> 00:35:18,680
Speaker 2: a lot of sectors where you know, in twenty twenty

753
00:35:18,719 --> 00:35:21,640
Speaker 2: and twenty twenty one, we had seen all particularly twenty twenty,

754
00:35:21,719 --> 00:35:23,799
Speaker 2: we'd seen all this fallen angel activity. It took the

755
00:35:23,800 --> 00:35:25,960
Speaker 2: percentage of the market of the higheld market that was

756
00:35:26,000 --> 00:35:28,879
Speaker 2: double b to all time highs. I think it topped

757
00:35:28,880 --> 00:35:31,520
Speaker 2: out at fifty two to fifty three percent. You know,

758
00:35:31,600 --> 00:35:34,279
Speaker 2: twenty twenty two, twenty twenty three, we saw the reversal, right,

759
00:35:34,440 --> 00:35:36,880
Speaker 2: a big of that because we saw so much rising

760
00:35:36,880 --> 00:35:41,359
Speaker 2: star activity, less in consumer but definitively in energy. We

761
00:35:41,400 --> 00:35:43,880
Speaker 2: also saw Forward obviously get upgraded. And then there was

762
00:35:43,920 --> 00:35:47,160
Speaker 2: sort of a long list of mid size credits out

763
00:35:47,160 --> 00:35:49,040
Speaker 2: there that a lot of which were not necessarily on

764
00:35:49,040 --> 00:35:52,080
Speaker 2: people's radars of going IG, but they got to IG.

765
00:35:53,960 --> 00:35:56,799
Speaker 2: It's been interesting also to see how these how these

766
00:35:56,920 --> 00:35:59,799
Speaker 2: issuers trade once they go to IG. You know, there's

767
00:35:59,800 --> 00:36:04,000
Speaker 2: a bit difference between a company like a lot of

768
00:36:04,000 --> 00:36:07,680
Speaker 2: the energy companies that had a lot of registered bonds

769
00:36:07,800 --> 00:36:13,000
Speaker 2: that were you know, Bloomberg AG eligible versus companies that

770
00:36:13,000 --> 00:36:15,279
Speaker 2: are just longtime high yealed issuers that it's all one

771
00:36:15,360 --> 00:36:18,800
Speaker 2: forty four A and it's all high yield style call protection.

772
00:36:18,880 --> 00:36:20,839
Speaker 2: And for those of the listeners that aren't familiar with this,

773
00:36:21,200 --> 00:36:24,399
Speaker 2: traditional IG bonds are typically non call life or non

774
00:36:24,440 --> 00:36:26,399
Speaker 2: call almost all the way to life. There'll be maybe

775
00:36:26,440 --> 00:36:29,320
Speaker 2: a clean up call at the end. Highald bonds or

776
00:36:29,360 --> 00:36:31,399
Speaker 2: typically if it's an eight year issue, it's probably non

777
00:36:31,440 --> 00:36:34,920
Speaker 2: callable for three years and then callable at a premium thereafter.

778
00:36:35,160 --> 00:36:37,520
Speaker 2: There's a difference in IG world and how those trade,

779
00:36:37,520 --> 00:36:39,840
Speaker 2: and so it has been interesting a a lot of

780
00:36:39,880 --> 00:36:43,560
Speaker 2: these names that have gotten upgraded, there were legacy high

781
00:36:43,600 --> 00:36:46,360
Speaker 2: yeld issuers have come out of our market, but it

782
00:36:46,360 --> 00:36:48,480
Speaker 2: also takes a long time for them to trade like

783
00:36:48,520 --> 00:36:50,879
Speaker 2: their IG and it gets takes a while for IG

784
00:36:51,120 --> 00:36:54,520
Speaker 2: investors to actually give a hoot about them. Many times

785
00:36:54,520 --> 00:36:57,640
Speaker 2: it takes them actually bringing a new IG benchmark deal

786
00:36:58,000 --> 00:37:00,400
Speaker 2: for people to get interested in the non and shmark

787
00:37:00,480 --> 00:37:01,840
Speaker 2: names that have already been upgraded.

788
00:37:02,280 --> 00:37:03,560
Speaker 1: On the flip side, you make it a ton of

789
00:37:03,600 --> 00:37:06,600
Speaker 1: fallen angels, which is some some of the IG guests

790
00:37:06,640 --> 00:37:09,479
Speaker 1: I've been talking about recently, which may alter the mix.

791
00:37:09,680 --> 00:37:11,279
Speaker 2: Yeah, I've heard that for a while, and it just

792
00:37:11,320 --> 00:37:13,280
Speaker 2: never happened, right, I mean, it happened during the pandemic,

793
00:37:13,280 --> 00:37:16,040
Speaker 2: but that wasn't why people. You know, before the pandemic,

794
00:37:16,040 --> 00:37:19,400
Speaker 2: everyone talked all this time about the percentage of the

795
00:37:19,520 --> 00:37:23,160
Speaker 2: IG market that was triple B and how you know

796
00:37:23,200 --> 00:37:26,320
Speaker 2: what percentage that was it at risk of a downgrade,

797
00:37:26,360 --> 00:37:28,120
Speaker 2: and there were a lot of big numbers thrown out,

798
00:37:28,160 --> 00:37:30,080
Speaker 2: And then the pandemic happened and there was stuff that

799
00:37:30,160 --> 00:37:32,919
Speaker 2: was downgraded. Although a lot of this that has gone

800
00:37:33,000 --> 00:37:34,880
Speaker 2: back the other way. You know, it seems like in

801
00:37:34,920 --> 00:37:37,520
Speaker 2: the downgrade activity that we've seen over the past few years,

802
00:37:38,000 --> 00:37:39,960
Speaker 2: I mean, there's been some themes. You know, certainly just

803
00:37:39,960 --> 00:37:42,560
Speaker 2: been a number of stuff that's commercial real estate related reads.

804
00:37:44,400 --> 00:37:46,839
Speaker 2: You know, there's also a lot of idiosyncratic stuff, right

805
00:37:47,000 --> 00:37:49,680
Speaker 2: like that for one reason or another, just there's been

806
00:37:49,719 --> 00:37:52,319
Speaker 2: some sort of you know, Walgreens is kind of the

807
00:37:52,360 --> 00:37:54,840
Speaker 2: case in point, right, That's it's hard to point to

808
00:37:54,920 --> 00:37:58,719
Speaker 2: that is symptomatic of broader themes other than the fact

809
00:37:58,760 --> 00:38:02,680
Speaker 2: that you know, retail that has a high degree of

810
00:38:03,719 --> 00:38:06,399
Speaker 2: shrinkage it's not a good business model which we all

811
00:38:06,400 --> 00:38:09,279
Speaker 2: know about. It hasn't really been thematic though, I would

812
00:38:09,320 --> 00:38:10,839
Speaker 2: say we just we just haven't seen it.

813
00:38:10,880 --> 00:38:12,839
Speaker 1: But within high year, where is the value in terms

814
00:38:12,880 --> 00:38:15,920
Speaker 1: of ratings bucket? Because the W and single be very crowded,

815
00:38:16,280 --> 00:38:19,640
Speaker 1: it would seem. And meanwhile, everyone tells us they're avoiding

816
00:38:19,640 --> 00:38:22,200
Speaker 1: triple cs. So where do you position yourself and how

817
00:38:22,200 --> 00:38:23,839
Speaker 1: do you how do you not overpay for it?

818
00:38:23,920 --> 00:38:24,120
Speaker 3: Yeah?

819
00:38:24,160 --> 00:38:26,160
Speaker 2: Well, certainly, certainly over the past couple quarters it's been

820
00:38:26,160 --> 00:38:28,759
Speaker 2: in triple C and below. You know, I think the

821
00:38:28,880 --> 00:38:31,640
Speaker 2: C A ratings heer has performed really strongly this year.

822
00:38:31,719 --> 00:38:33,480
Speaker 2: Obviously it's only a handful of names.

823
00:38:34,160 --> 00:38:35,320
Speaker 3: Certainly, the theme.

824
00:38:35,239 --> 00:38:38,120
Speaker 2: Over the past couple of quarters has been almost a

825
00:38:38,320 --> 00:38:41,480
Speaker 2: I would say, a reinjury of real money managers into

826
00:38:41,520 --> 00:38:43,440
Speaker 2: a lot of these left for dead names, mainly in

827
00:38:43,520 --> 00:38:47,319
Speaker 2: media telecom, but not exclusively exclusively in media telecom. You know,

828
00:38:47,400 --> 00:38:50,480
Speaker 2: the the Lumens, the Dishes, the Balshes, the comscripts of

829
00:38:50,520 --> 00:38:52,279
Speaker 2: the world that I think a lot of people were

830
00:38:52,320 --> 00:38:54,680
Speaker 2: just kind of head left for dead in some ways,

831
00:38:54,719 --> 00:38:57,120
Speaker 2: assumed that they were going to need to restructure, and

832
00:38:57,400 --> 00:38:59,440
Speaker 2: they all for one reason or another seem to have

833
00:38:59,480 --> 00:39:02,160
Speaker 2: another lease on life for idiosyncratic reasons.

834
00:39:02,360 --> 00:39:03,600
Speaker 3: That's been the theme recently.

835
00:39:03,719 --> 00:39:06,040
Speaker 2: There's definitely been i would say, a fomo grab for

836
00:39:06,160 --> 00:39:08,520
Speaker 2: risk in the triple C space over the past few quarters.

837
00:39:09,360 --> 00:39:11,000
Speaker 2: You know, you look at where you look at if

838
00:39:11,040 --> 00:39:12,880
Speaker 2: you look at your to date in the high yeald market,

839
00:39:12,920 --> 00:39:15,960
Speaker 2: you know, the index looks pretty good versus the versus

840
00:39:16,040 --> 00:39:18,040
Speaker 2: the peer group, you know, telling you that a lot

841
00:39:18,040 --> 00:39:20,920
Speaker 2: of this paper that's really outperformed. It's not owned by

842
00:39:20,960 --> 00:39:24,200
Speaker 2: regular way high yield managers. It's owned by distress funds,

843
00:39:24,239 --> 00:39:27,640
Speaker 2: it's owned by activists. Yeah, I think going forward, when

844
00:39:27,680 --> 00:39:30,319
Speaker 2: you look at things, look where spreads are now, it's

845
00:39:30,360 --> 00:39:32,560
Speaker 2: it's hard to really pound the table. Look, I think

846
00:39:32,600 --> 00:39:35,400
Speaker 2: you're supposed to remain invested in the high yield market.

847
00:39:35,760 --> 00:39:37,520
Speaker 2: It does not seem like the type of market where

848
00:39:37,560 --> 00:39:41,239
Speaker 2: you'll want to be over beta within your high heeled allocation, right,

849
00:39:41,280 --> 00:39:43,800
Speaker 2: And so when we look at things, I think looking

850
00:39:43,880 --> 00:39:47,000
Speaker 2: at you know, double B single B to me makes

851
00:39:47,040 --> 00:39:50,120
Speaker 2: more sense. I think, particularly given where triple C spreads

852
00:39:50,160 --> 00:39:52,000
Speaker 2: are now, it just seems like there's been a little

853
00:39:52,000 --> 00:39:53,480
Speaker 2: bit too much of a run up in some of

854
00:39:53,520 --> 00:39:54,040
Speaker 2: these names.

855
00:39:54,200 --> 00:39:56,239
Speaker 1: So Triple c's that run is over. I mean, do

856
00:39:56,239 --> 00:39:58,040
Speaker 1: you think they'll hit the wall in terms of when.

857
00:39:57,880 --> 00:39:59,440
Speaker 2: I say that, when I say that run is over,

858
00:39:59,640 --> 00:40:04,759
Speaker 2: triple there's always opportunities, right, There's always something there to do.

859
00:40:05,200 --> 00:40:07,760
Speaker 2: I think it's always an interesting question for acid owners,

860
00:40:08,160 --> 00:40:10,040
Speaker 2: you know, when you think about how you're allocating to

861
00:40:10,160 --> 00:40:13,400
Speaker 2: high yield, and if you do have a strategic allocation

862
00:40:13,480 --> 00:40:15,239
Speaker 2: to high yield, do you want triple C to be

863
00:40:15,239 --> 00:40:17,799
Speaker 2: strategic or tactical? And that a lot of that gets

864
00:40:17,840 --> 00:40:20,720
Speaker 2: to the differences in different investors in terms of index selection.

865
00:40:20,840 --> 00:40:22,720
Speaker 2: When do they want to go with a broad index?

866
00:40:22,760 --> 00:40:24,600
Speaker 2: Do they want to go with a BA B index?

867
00:40:24,920 --> 00:40:27,160
Speaker 2: But maybe give the manager some ability to go buy

868
00:40:27,200 --> 00:40:29,360
Speaker 2: triple C when they see value.

869
00:40:29,800 --> 00:40:31,239
Speaker 3: There's always something to do in triple C.

870
00:40:31,440 --> 00:40:34,359
Speaker 2: I we always when we always hear what people are

871
00:40:34,360 --> 00:40:36,200
Speaker 2: talking about, is it a good time to buy triple

872
00:40:36,239 --> 00:40:40,320
Speaker 2: C or not? That's a complicated answer, right, and really

873
00:40:40,400 --> 00:40:43,360
Speaker 2: just to buy it in bulk as a basket. We

874
00:40:43,400 --> 00:40:44,600
Speaker 2: always think there's a better way.

875
00:40:44,480 --> 00:40:45,040
Speaker 3: To do it than that.

876
00:40:45,360 --> 00:40:47,800
Speaker 1: Those not these were the most exposed to the higher

877
00:40:47,840 --> 00:40:51,279
Speaker 1: for longer and also potentially some idiosyncratic risk from the

878
00:40:51,320 --> 00:40:54,279
Speaker 1: next administration or geopolitics or anything that that flips the market.

879
00:40:54,360 --> 00:40:56,560
Speaker 1: Risk off is does that not market? But that market

880
00:40:56,560 --> 00:40:59,240
Speaker 1: does not get hit really hard by this and reprice

881
00:40:59,440 --> 00:40:59,960
Speaker 1: very quickly.

882
00:41:00,040 --> 00:41:02,279
Speaker 2: The triple C market, you mean, well, there's certainly some

883
00:41:02,400 --> 00:41:03,960
Speaker 2: parts of it, and you know, I think one of

884
00:41:04,000 --> 00:41:06,879
Speaker 2: the themes that's a little underappreciated is, you know, there's

885
00:41:06,920 --> 00:41:10,239
Speaker 2: certainly parts you know, particularly in communications sector, there's parts

886
00:41:10,280 --> 00:41:12,040
Speaker 2: of it that are asked of life. But there's other

887
00:41:12,040 --> 00:41:14,520
Speaker 2: parts of it that are very acid intensive, right. I

888
00:41:14,520 --> 00:41:16,560
Speaker 2: think those have been really hit by interest rates, not

889
00:41:16,800 --> 00:41:20,520
Speaker 2: just from a capital structure perspective, but long term questions

890
00:41:20,560 --> 00:41:23,280
Speaker 2: about you know, how do you how do you finance

891
00:41:23,320 --> 00:41:26,839
Speaker 2: these businesses at single B triple C levels, particularly when

892
00:41:26,880 --> 00:41:30,920
Speaker 2: you're you're competing against companies that are either ig rated

893
00:41:31,120 --> 00:41:33,560
Speaker 2: or you know, think about in the satellite space, someone

894
00:41:33,600 --> 00:41:37,040
Speaker 2: like Starlink that has infinite resources at least theoretically right,

895
00:41:37,080 --> 00:41:37,960
Speaker 2: because it's got.

896
00:41:37,800 --> 00:41:38,839
Speaker 3: A big check behind it.

897
00:41:39,000 --> 00:41:40,800
Speaker 2: Those are tough questions and those are the type of

898
00:41:40,840 --> 00:41:45,200
Speaker 2: companies we're clearly a low rates environment made them competitive,

899
00:41:45,239 --> 00:41:47,120
Speaker 2: and now there's some long term questions about how do

900
00:41:47,160 --> 00:41:50,120
Speaker 2: they work in a higher rate environment and having to

901
00:41:50,160 --> 00:41:53,719
Speaker 2: think about that. I think it'll be the next year

902
00:41:53,800 --> 00:41:55,839
Speaker 2: is going to be interesting. We're sitting here at all

903
00:41:55,920 --> 00:41:58,680
Speaker 2: time tight spreads, and I think in many ways that

904
00:41:58,719 --> 00:42:01,840
Speaker 2: can seem boring. I do think we'll see some dispersion

905
00:42:01,880 --> 00:42:05,680
Speaker 2: this year. I think, you know, everyone's thinking about the

906
00:42:05,719 --> 00:42:09,080
Speaker 2: impact of tariffs and the impact of immigration policy on inflation.

907
00:42:09,320 --> 00:42:11,480
Speaker 2: You know, there's a lot of stuff below that. And

908
00:42:12,040 --> 00:42:16,520
Speaker 2: every time Trump nominates someone on true Social obviously because

909
00:42:16,520 --> 00:42:18,920
Speaker 2: that's where you would do that sort of thing, it

910
00:42:18,960 --> 00:42:21,000
Speaker 2: seems like everyone in our market is thinking about how

911
00:42:21,080 --> 00:42:25,600
Speaker 2: how that nominees priorities could impact this credit or that credit,

912
00:42:25,719 --> 00:42:28,719
Speaker 2: and thinking about are those priorities implementable?

913
00:42:28,800 --> 00:42:28,960
Speaker 3: Right?

914
00:42:29,280 --> 00:42:31,360
Speaker 2: Is it actually something that could could be a negative

915
00:42:31,440 --> 00:42:33,719
Speaker 2: or a positive for a company's results. That to me

916
00:42:33,880 --> 00:42:35,560
Speaker 2: is the interesting, the thing that's going to be interesting

917
00:42:35,560 --> 00:42:36,640
Speaker 2: over the next few months.

918
00:42:37,040 --> 00:42:39,600
Speaker 1: So what's the biggest opportunity for you next year? Jeremy,

919
00:42:39,840 --> 00:42:41,120
Speaker 1: where's the best relative value?

920
00:42:41,480 --> 00:42:41,680
Speaker 4: Ooh?

921
00:42:41,760 --> 00:42:44,200
Speaker 2: Best relative value? I think the best relative value out

922
00:42:44,239 --> 00:42:46,640
Speaker 2: there is. I would think about it in a couple

923
00:42:46,680 --> 00:42:49,880
Speaker 2: of different ways. I think a continuing to find, you know,

924
00:42:49,960 --> 00:42:52,920
Speaker 2: good credits that have a good credit outlook over the

925
00:42:52,920 --> 00:42:55,960
Speaker 2: next two to three quarters. And you know, so it's

926
00:42:55,760 --> 00:42:58,320
Speaker 2: a situations where a they have the ability to improve

927
00:42:58,360 --> 00:43:00,360
Speaker 2: their credit A profile, but be the also have the

928
00:43:00,400 --> 00:43:03,239
Speaker 2: willingness to improve their credit profile, right, because it takes both.

929
00:43:03,320 --> 00:43:03,920
Speaker 3: It doesn't.

930
00:43:04,160 --> 00:43:06,520
Speaker 2: Ability is one thing, but if you want to remain leverage,

931
00:43:06,560 --> 00:43:08,080
Speaker 2: it doesn't really matter if you're going to go buy

932
00:43:08,120 --> 00:43:10,879
Speaker 2: back shares with the extra free cash flow, right, it's

933
00:43:10,880 --> 00:43:13,719
Speaker 2: sort of who cared. I think those are opportunities. I

934
00:43:13,719 --> 00:43:16,239
Speaker 2: also think with the return of M and A activity,

935
00:43:16,440 --> 00:43:17,840
Speaker 2: you know, particularly in hig yield, that's going to be

936
00:43:17,880 --> 00:43:20,960
Speaker 2: an opportunity to extent that companies are getting bought out

937
00:43:20,960 --> 00:43:24,200
Speaker 2: by IG rated companies. Thinking about situations like that, who

938
00:43:24,280 --> 00:43:27,239
Speaker 2: is who are strategic targets you know those when you

939
00:43:27,280 --> 00:43:30,840
Speaker 2: think about individual security selection opportunities in high yield, the

940
00:43:31,120 --> 00:43:33,200
Speaker 2: double B company that is trading in line with the

941
00:43:33,239 --> 00:43:36,240
Speaker 2: double B index that has some call protection gets bought

942
00:43:36,239 --> 00:43:38,640
Speaker 2: out by an IG company that is the best risk

943
00:43:38,680 --> 00:43:40,640
Speaker 2: adjusted total return opportunity.

944
00:43:40,160 --> 00:43:42,799
Speaker 3: In the highield market. Right. And so I do think

945
00:43:42,840 --> 00:43:45,000
Speaker 3: we'll see we'll see some of those, you know.

946
00:43:45,080 --> 00:43:47,160
Speaker 2: I think as we get an increase in corporate M

947
00:43:47,239 --> 00:43:48,440
Speaker 2: and A activity.

948
00:43:48,080 --> 00:43:49,680
Speaker 1: And you think it's more on the bond side the

949
00:43:49,680 --> 00:43:52,759
Speaker 1: opportunity than the leverage loan side, which I mean it

950
00:43:52,800 --> 00:43:56,200
Speaker 1: would seem that higher for longer would benefit floating rate assets.

951
00:43:55,880 --> 00:43:58,399
Speaker 2: Right, Yeah, Well on the M and A front, look,

952
00:43:58,440 --> 00:44:00,560
Speaker 2: I mean, I if a loan is your gets bought

953
00:44:00,560 --> 00:44:03,640
Speaker 2: out by an IG corporate, unless it's trading at stressed levels,

954
00:44:03,640 --> 00:44:05,920
Speaker 2: it doesn't really matter. You're just going to get repaid,

955
00:44:06,040 --> 00:44:09,240
Speaker 2: right because most of those loans will already be trading

956
00:44:09,360 --> 00:44:12,000
Speaker 2: at least at par, potentially higher. In some cases sometimes

957
00:44:12,000 --> 00:44:14,520
Speaker 2: they can trade down, right because you're going to get

958
00:44:14,560 --> 00:44:17,480
Speaker 2: repaid as opposed to you know, having having an asset

959
00:44:17,520 --> 00:44:20,880
Speaker 2: that's going to keep paying a spread. I think on

960
00:44:20,920 --> 00:44:23,040
Speaker 2: the loan market, look, the good news is higher rates

961
00:44:23,080 --> 00:44:26,400
Speaker 2: for longer means more coupon for longer, and there's a

962
00:44:26,440 --> 00:44:29,799
Speaker 2: material carry advantage to loans over high yield as it

963
00:44:29,880 --> 00:44:32,520
Speaker 2: is to the extent that you know, maybe we stay

964
00:44:32,600 --> 00:44:34,320
Speaker 2: in the four and a quarter to four and a half,

965
00:44:34,400 --> 00:44:37,080
Speaker 2: you know, fed funds area. That's going to continue even

966
00:44:37,160 --> 00:44:40,200
Speaker 2: more when you think about the scenarios, when you think

967
00:44:40,239 --> 00:44:43,600
Speaker 2: about the scenario where high yield outperforms loans over the

968
00:44:43,600 --> 00:44:45,719
Speaker 2: next twelve months, you know, right, staying in the four

969
00:44:45,800 --> 00:44:47,560
Speaker 2: and quarter to four and a half area on the

970
00:44:47,600 --> 00:44:50,040
Speaker 2: front end, that's not one of those scenarios, right. That

971
00:44:50,040 --> 00:44:52,879
Speaker 2: probably means the carry advantage for loans is just too

972
00:44:52,920 --> 00:44:56,680
Speaker 2: much versus whatever whatever could potentially happen on the high

973
00:44:56,760 --> 00:44:59,760
Speaker 2: yield side. On the other hand, you know, higher for longer.

974
00:45:00,120 --> 00:45:01,520
Speaker 2: Is it going to mean a little bit more stress

975
00:45:01,520 --> 00:45:04,279
Speaker 2: in the low market? Yeah, on the margin, But I

976
00:45:04,280 --> 00:45:06,560
Speaker 2: don't think it's something that I think most of those

977
00:45:06,560 --> 00:45:09,480
Speaker 2: situations are already identified. I don't think there's a lot

978
00:45:09,480 --> 00:45:12,000
Speaker 2: of situations out there that are trading at par right

979
00:45:12,040 --> 00:45:15,120
Speaker 2: now where the fact that rates are not going to

980
00:45:15,160 --> 00:45:16,680
Speaker 2: three and a half and they're staying at four and

981
00:45:16,719 --> 00:45:19,360
Speaker 2: a half is going to put them into in distress.

982
00:45:19,640 --> 00:45:23,160
Speaker 2: Those situations are probably already trading well below par, not

983
00:45:23,239 --> 00:45:26,320
Speaker 2: because of raids, but because ebades off right or something

984
00:45:26,400 --> 00:45:27,760
Speaker 2: is not gone according to plan.

985
00:45:27,760 --> 00:45:30,000
Speaker 1: And it's private credit more of a help or hindrance

986
00:45:30,160 --> 00:45:30,919
Speaker 1: to what you're doing.

987
00:45:31,480 --> 00:45:33,640
Speaker 2: Yeah, I think look the private credit market, and when

988
00:45:33,680 --> 00:45:35,520
Speaker 2: I say private credit, I mean direct you know, direct

989
00:45:35,600 --> 00:45:38,640
Speaker 2: lending to sponsor you know, to sponsor backed companies and

990
00:45:38,680 --> 00:45:39,760
Speaker 2: the BSL market.

991
00:45:39,960 --> 00:45:43,480
Speaker 3: I think they both play roles in the market. I

992
00:45:43,520 --> 00:45:44,520
Speaker 3: think clearly so.

993
00:45:44,600 --> 00:45:46,520
Speaker 2: On the on the one hand, there's there are a

994
00:45:46,560 --> 00:45:48,640
Speaker 2: lot of deals in the middle that they are both

995
00:45:48,719 --> 00:45:52,359
Speaker 2: potential solutions to over a full cycle. There's always some

996
00:45:52,400 --> 00:45:55,360
Speaker 2: stuff that's higher quality that other than in situations like

997
00:45:55,400 --> 00:45:58,840
Speaker 2: twenty twenty two where the syndicate business is just really

998
00:45:58,840 --> 00:46:01,160
Speaker 2: screwed up for a period of time, that are almost

999
00:46:01,200 --> 00:46:03,520
Speaker 2: always going to be BSL solutions. You know, stuff that

1000
00:46:03,640 --> 00:46:07,200
Speaker 2: has a double B first line rating or something like that.

1001
00:46:07,280 --> 00:46:10,400
Speaker 2: It's hard like that almost always is going to get

1002
00:46:10,440 --> 00:46:12,520
Speaker 2: better pricing in the BSL market. It's going to be

1003
00:46:12,640 --> 00:46:15,320
Speaker 2: very few scenarios on the other end of the spectrum,

1004
00:46:15,400 --> 00:46:17,560
Speaker 2: right there's all sorts of stuff that structurally just doesn't

1005
00:46:17,560 --> 00:46:21,280
Speaker 2: work for BSL. The biggest category is stuff that cannot

1006
00:46:21,320 --> 00:46:24,200
Speaker 2: get B minus ratings, you know on a first line

1007
00:46:24,239 --> 00:46:27,520
Speaker 2: and a corporate basis, stuff that for whatever reason is

1008
00:46:27,800 --> 00:46:29,960
Speaker 2: maybe still in a gross stage. And we've probably seen

1009
00:46:30,000 --> 00:46:32,080
Speaker 2: more of this in software than in other sectors, where

1010
00:46:32,360 --> 00:46:33,960
Speaker 2: you know, we've seen a lot of sponsors that are

1011
00:46:33,960 --> 00:46:35,759
Speaker 2: not just interesting. I think you know, historically in the

1012
00:46:35,760 --> 00:46:38,680
Speaker 2: software space, most sponsor interests on the LBO side was

1013
00:46:38,719 --> 00:46:41,640
Speaker 2: more mature software companies that are cash flowing. We've seen

1014
00:46:41,680 --> 00:46:44,800
Speaker 2: a lot more interest in more growth stage companies. BSL

1015
00:46:44,800 --> 00:46:48,240
Speaker 2: doesn't necessarily work for those, right because they need pick component,

1016
00:46:48,400 --> 00:46:51,040
Speaker 2: or at least pick the pick option built into it.

1017
00:46:51,360 --> 00:46:53,680
Speaker 2: That also doesn't really work for the COLO market. So

1018
00:46:53,920 --> 00:46:56,799
Speaker 2: there's places where they where they have different roles. Then

1019
00:46:56,840 --> 00:46:59,840
Speaker 2: there's the stuff in the middle that there's this competition

1020
00:47:00,160 --> 00:47:02,719
Speaker 2: goes on. Clearly right now, a lot more of that

1021
00:47:02,840 --> 00:47:05,640
Speaker 2: is going to the BSL market, not necessarily for great reasons.

1022
00:47:05,640 --> 00:47:08,160
Speaker 2: It's just because there's a supply demand and balance in

1023
00:47:08,200 --> 00:47:10,960
Speaker 2: the BSL market and that stuff's coming really really tight.

1024
00:47:11,000 --> 00:47:13,160
Speaker 2: Now there's also been another, you know a number of

1025
00:47:13,239 --> 00:47:17,279
Speaker 2: situations that were BSL deals where private equity has sort

1026
00:47:17,280 --> 00:47:19,520
Speaker 2: of come to the rescue where for whatever one reason

1027
00:47:19,600 --> 00:47:22,360
Speaker 2: or another, the cap structure no longer works for BSL.

1028
00:47:22,719 --> 00:47:25,120
Speaker 2: This is not stuff that is trading at seventy or eighty,

1029
00:47:25,120 --> 00:47:27,360
Speaker 2: but this is stuff that's trading probably at ninety to

1030
00:47:27,440 --> 00:47:31,000
Speaker 2: ninety five where you know, sponsors are sitting here saying,

1031
00:47:31,880 --> 00:47:34,879
Speaker 2: you know, look, I like this business. The earnings are off,

1032
00:47:34,920 --> 00:47:37,000
Speaker 2: but I have plans for the business. I need capital

1033
00:47:37,000 --> 00:47:39,759
Speaker 2: for the business. For one reason or another, BSL is

1034
00:47:39,800 --> 00:47:41,839
Speaker 2: no longer a solution, and it might be because it's

1035
00:47:41,880 --> 00:47:44,560
Speaker 2: B three negative outlook or something like that, and where

1036
00:47:44,600 --> 00:47:47,160
Speaker 2: they're sitting here and saying, you know, private credit for

1037
00:47:47,200 --> 00:47:48,880
Speaker 2: what I want to accomplish with this. It's just a

1038
00:47:48,880 --> 00:47:51,560
Speaker 2: better solution. Those situations are great for us because you're

1039
00:47:51,600 --> 00:47:53,239
Speaker 2: only the things that are not trading at par and

1040
00:47:53,280 --> 00:47:54,200
Speaker 2: they get repaid at par.

1041
00:47:54,880 --> 00:47:57,200
Speaker 1: Last question for you, where are you most contrarian for

1042
00:47:57,280 --> 00:47:58,040
Speaker 1: twenty twenty five?

1043
00:47:58,440 --> 00:48:01,880
Speaker 2: Oh, contrarian everything I've talked about. You know, I do

1044
00:48:02,560 --> 00:48:04,160
Speaker 2: agree with the comment earlier there is quite a bit

1045
00:48:04,160 --> 00:48:06,560
Speaker 2: of group think girl going on right now. I think

1046
00:48:06,560 --> 00:48:09,000
Speaker 2: that's in line with the animal spirits that in journal

1047
00:48:09,080 --> 00:48:13,880
Speaker 2: we've seen since the election. Animal spirits. Animal spirits generally

1048
00:48:14,120 --> 00:48:16,439
Speaker 2: lead to group think. That's that sort of goes hand

1049
00:48:16,480 --> 00:48:20,160
Speaker 2: in hand with it. I do think my biggest point

1050
00:48:20,160 --> 00:48:22,200
Speaker 2: of concern, and I'm hearing it from some investors but

1051
00:48:22,280 --> 00:48:25,440
Speaker 2: not all right now, is just this supply demand imbalance

1052
00:48:25,520 --> 00:48:28,520
Speaker 2: issue and the risk that it will lead to bad

1053
00:48:28,680 --> 00:48:32,000
Speaker 2: underwriting decisions in our.

1054
00:48:31,840 --> 00:48:33,560
Speaker 3: Space, and we're going to try to avoid those.

1055
00:48:33,600 --> 00:48:35,560
Speaker 2: But you know, the market is what the market is.

1056
00:48:35,600 --> 00:48:36,680
Speaker 2: People want to stay invested.

1057
00:48:36,920 --> 00:48:39,040
Speaker 1: Gray stuff. Jeremy Burton from Prime Bridge. It's been a

1058
00:48:39,080 --> 00:48:41,560
Speaker 1: pleasure having you on the Credit Edge. Thanks James, and

1059
00:48:41,600 --> 00:48:43,759
Speaker 1: to Jody Lurie with Bloomberg Intelligence, thank you so much

1060
00:48:43,760 --> 00:48:46,439
Speaker 1: for joining us today. Thank you James for even more

1061
00:48:46,480 --> 00:48:49,440
Speaker 1: great analysis. Read all of Jody's work on the Bloomberg Terminal.

1062
00:48:49,520 --> 00:48:53,320
Speaker 1: Check it out, especially the cruise Line research. Bloomberg Intelligence

1063
00:48:53,440 --> 00:48:55,880
Speaker 1: is part of our research department, with five hundred analysts

1064
00:48:55,880 --> 00:48:58,880
Speaker 1: and strategies working across all markets. Coverage includes over two

1065
00:48:58,920 --> 00:49:01,600
Speaker 1: thousand equities and credits and outlooks on more than ninety

1066
00:49:01,800 --> 00:49:06,160
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1067
00:49:06,200 --> 00:49:08,960
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1068
00:49:09,160 --> 00:49:12,160
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1069
00:49:12,200 --> 00:49:15,440
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1070
00:49:15,760 --> 00:49:18,920
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1071
00:49:18,960 --> 00:49:22,400
Speaker 1: Bloomberg dot net. I'm James Crombie. It's been a pleasure

1072
00:49:22,440 --> 00:49:41,520
Speaker 1: having you join us again next week on the Credit Edge.