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

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

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Speaker 2: And I am at Wyner. I'm a credit analyst here

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Speaker 2: with Bloomberg Intelligence. This week, we're very pleased to welcome

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Speaker 2: Michael Chang, head of High Yield Corporate Credit at Vanguard,

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Speaker 2: the eleven trillion dollar money manager. Yes, I said, T

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Speaker 2: not b.

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Speaker 3: How are you, Michael, I'm doing well good.

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Speaker 2: Mike's been with Vanguard for close to a decade, with

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Speaker 2: stops at Goldman Winchester, Capitol, and Pimco along the way,

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Speaker 2: and he's the fund manager for Vanguard's bond funds, with

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Speaker 2: the largest fund with assets under manager being the High

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Speaker 2: Yield Corporate Fund, which you can actually find on terminal

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Speaker 2: under the ticker v w e h X. So with that,

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Speaker 2: do you want to kick us off here, James.

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Speaker 1: Yeah, We've got loads of questions for you, Michael, but

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Speaker 1: first I just wanted to kind of set the scene

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Speaker 1: a bit. We are seeing a bit of a risk

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Speaker 1: off move in markets as investors fret over froth in

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Speaker 1: the AI boom and the risk that the Federal Reserve

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Speaker 1: does not cut rates at the December meeting. There's also

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Speaker 1: a fair amount of anxiety over the economy as inflation

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Speaker 1: stays high and consumers, especially at the low income end,

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Speaker 1: start to buckle. HI yield bond issuance is coming back,

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Speaker 1: but risky issuers are paying up for access. In some cases,

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Speaker 1: Applied Digital sold two point three five billion dollars of

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Speaker 1: bonds at one of the steepest discounts of the year

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Speaker 1: as the deals struggled to generate demand. And in the

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Speaker 1: leveraged loan market there's also issuance, including a notable pickup

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Speaker 1: in deals to pay dividends to private equity owners. Markets

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Speaker 1: still seem under supplied, though given a lack of m

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Speaker 1: and a So, Michael, what's your take. Is this a

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Speaker 1: time to lean into risk, take advantage of yields that

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Speaker 1: are still pretty high, grab some year end bargains.

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Speaker 3: I think that what you just started with, James is

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Speaker 3: there's a lot of stuff going on in the world

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Speaker 3: right now, and a lot of the things that you

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Speaker 3: described I would characterize as kind of the macro environment.

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Speaker 3: When you think about certainly the AI boom, which has

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Speaker 3: some adjacencies to high yield, although a lot of that

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Speaker 3: is I would argue is stuff going on outside the

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Speaker 3: higher market. You did reference a deal that is and

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Speaker 3: I AI related deal that did come to market last week.

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Speaker 3: But the reality is there's a lot of uncertainty right

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Speaker 3: now in the markets. Certainly there's a lack of data

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Speaker 3: given the government shut down. There's a lot of uncertainty

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Speaker 3: around things like AI and what types of benefits and

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Speaker 3: you productivity and growth that could come out of that.

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Speaker 3: And the reality is that uncertainty is being met with

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Speaker 3: relatively tight valuations. And so when when I look at

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Speaker 3: the market today, and maybe this is specific to high yield,

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Speaker 3: spreads have certainly widened a little bit from the recent tights.

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Speaker 3: Yields I would say are generally okay, not great, But

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Speaker 3: the reality is where the market is today, it doesn't

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Speaker 3: weave a lot of room for negative surprises and or

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Speaker 3: room for elevated amounts of uncertainty. And so part of

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Speaker 3: what you've seen more recently, and maybe the specific to

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Speaker 3: the HYO market is a bit of widening just related

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Speaker 3: to more uncertainty, which has related which has translated maybe

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Speaker 3: less in terms of an increase in anticipated defaults, but

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Speaker 3: more just more premium that investors are asking for to

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Speaker 3: delve into some of the riskier parts of the credit markets.

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Speaker 2: Yeah, Mike, I guess I'll jump in here maybe before

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Speaker 2: we get into the views on the outlook ahead. I'm

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Speaker 2: interested in hearing your thoughts on kind of how we

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Speaker 2: got to where we are today. Right, So you just

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Speaker 2: mentioned spread. So the IG index is at eighty two

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Speaker 2: over the hyolndus is about two hundred and ninety one

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Speaker 2: basis points, both levels that are effectively flat with where

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Speaker 2: we had started the year. But obviously the path has

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Speaker 2: been extremely volatile in twenty five, right, So in the

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Speaker 2: case of high yield, I think uncertainty certainly breeds opportunity,

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Speaker 2: particularly when events such as you know, Liberation Day takes

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Speaker 2: place where we saw all the pieces on the board

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Speaker 2: of the World Trade you know, game go sort of

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Speaker 2: flying in April, everything got turned on our heads as

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Speaker 2: President Trump wields tariffs to sort of reset the global

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Speaker 2: trade with the United States. So I'm kind of interested

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Speaker 2: in hearing your thoughts on, you know, what are some

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Speaker 2: of the opportunities that you saw come out of that.

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Speaker 2: You know, what did you overweight or underweight, whether it

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Speaker 2: be an entire sector or sectors, and sort of which

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Speaker 2: issuers were you guys able to identify some outside returns

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Speaker 2: or maybe even sidesteps some outsized losses.

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Speaker 3: So there's a there's a bunch of stuff to unpack there, Matt.

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Speaker 3: So I'll try and take each one on their own.

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Speaker 3: You reference, current spreads ran around three hundred if you

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Speaker 3: exclude kind of that reached to the kind of very

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Speaker 3: brief peak of spreads that we saw post Liberation Day.

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Speaker 3: When you look on a twelve month basis, spreads have

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Speaker 3: been somewhat range bound, between two fifty to three point

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Speaker 3: fifty over and so all we're at right now is

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Speaker 3: somewhere in the middle of that range again if you

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Speaker 3: exclude kind of that April cell off where spreads went

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Speaker 3: out to four fifty for a second. And so you know,

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Speaker 3: when you look top down, things look pretty calm, kind

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Speaker 3: of in the middle of that kind of twelve month range.

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Speaker 3: I think, as you reference, when you get below the

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Speaker 3: surface is where things start to get a lot more interesting.

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Speaker 3: And so even in a market where spread has been

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Speaker 3: range bound, part of what we've seen over the past

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Speaker 3: six or twelve months is increasing amounts of dispersion, a

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Speaker 3: lot of disconnects within the market, a lot of differentiation

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Speaker 3: between kind of the haves and have nots. And so

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Speaker 3: when I look at the market today just at a

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Speaker 3: top level, while valuations aren't that attractive, there have been

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Speaker 3: and continue to be tremendous opportunities to add value. Actually

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Speaker 3: has an active manager really in terms of picking kind

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Speaker 3: of the right credits to invest in and and maybe

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Speaker 3: just if not more importantly, to avoid the wrong credits

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Speaker 3: to invest in. You asked about, you know, what are

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Speaker 3: the things that we've been doing over the course of

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Speaker 3: this year to take advantage of kind of the credit markets.

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Speaker 3: I would say it's definitely been a stock pickers market.

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Speaker 3: With this version comes opportunity if you are, you know,

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Speaker 3: if you've got the right team in place, if you

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Speaker 3: have the right process to really identify on a proactive

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Speaker 3: basis the right invest right issuers to invest in and

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Speaker 3: the right invest right issuers to avoid. And so that's

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Speaker 3: really what we've been focused on. Things like Liberation Day

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Speaker 3: can create some temporary dislocations. You know, part of the

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Speaker 3: benefit that we have here at Vanguard is just given

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Speaker 3: our structure, given our fee advantage, it does allow us

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Speaker 3: on balance to be a little bit more disciplined, to

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Speaker 3: be a little bit more patient around when and how

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Speaker 3: we take risk. And so when I think about the

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Speaker 3: beginning of this year, where spreads were tighter than they

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Speaker 3: were today, are about the same. Our feeling was we

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Speaker 3: weren't really being paid to take risk at a top level,

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Speaker 3: and so we were relatively defensive in our orientation, both

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Speaker 3: from a credit quality point of view as well as

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Speaker 3: staying a little bit closer to home in terms of

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Speaker 3: being a little bit more of a weight some of

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Speaker 3: the more defensive sectors that changed a little bit in April,

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Speaker 3: you know it with some of the kind of broad

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Speaker 3: market sell off, but also the disproportionate impact that we

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Speaker 3: saw on valuation repricing across different sectors. That kind of

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Speaker 3: brief period really gave us an opportunity to cover some

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Speaker 3: of the underweights in the some of the sectors that

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Speaker 3: we viewed as most sensitive in some cases to things

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Speaker 3: like tariffs, but where we thought valuations had repriced a

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Speaker 3: little bit too much. And so, you know, those types

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Speaker 3: of opportunities don't come around very often. You know, you

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Speaker 3: need to be willing and able to take advantage of

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Speaker 3: them when they do appear, and you know, in the

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Speaker 3: case of kind of Liberation Day that that sell off

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Speaker 3: was pretty brief.

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Speaker 1: You sound a bit cautious, So Michael, and most people

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Speaker 1: that when we have them on the show on the

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Speaker 1: high yield specifically, they sound relatively optimistic, relatively bullish. You know,

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Speaker 1: balance sheets are in good shape, quality is high, earnings

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Speaker 1: have come in pretty strong, and you know, unless the

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Speaker 1: economy and we're also in you know, an easing cycle.

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Speaker 1: But unless the economy slips into a recession, and I

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Speaker 1: think no one thinks that the government will allow that

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Speaker 1: to happen, you know that everything will be fine in

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Speaker 1: high yield and you should just lean into risk.

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Speaker 3: You should buy it.

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Speaker 1: And you know, I mean it hasn't done particuarly well

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Speaker 1: on the fripple c side, but most of the rest

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Speaker 1: of the market is done. Okay, What is your caution

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Speaker 1: based on it? Is it around the economy? Is it

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Speaker 1: is there something else? Is it around the cockroach? Is

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Speaker 1: it something that's just bigger and bigger concern.

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Speaker 3: I would say fundamentals don't concern us in terms of

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Speaker 3: the health of the high yeal market. Again, not not

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Speaker 3: to sound like a broken record, I'm sure many of

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Speaker 3: the guests that have come on your show have may

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Speaker 3: have referenced kind of the pretty strong balance sheets in

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Speaker 3: the higher market, the composition of the highal market today,

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Speaker 3: which is quite a bit different than than you know,

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Speaker 3: if you compare it to you know, fifteen years ago,

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Speaker 3: for example, it's it's a much higher quality market that

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Speaker 3: has and should translate into default rate activity that should

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Speaker 3: remain below historical averages. That's what we've seen over the

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Speaker 3: past couple of years. That's what we would anticipate, you know,

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Speaker 3: as we think about the next twelve months apps in

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Speaker 3: a recession. So fundamentals aren't really the issue, you know.

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Speaker 3: You know, if I think about reasons why we're somewhat

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Speaker 3: cautious on the hio market today, I would I would

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Speaker 3: highlight two things. One is, and I've already kind of

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Speaker 3: indirectly or directly, you know, talked about evaluations. Again, valuations are,

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Speaker 3: no matter how you look at it, pretty tight relative

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Speaker 3: to history. And so as I think about an economic

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Speaker 3: andvironment that is still pretty good, but it's probably on

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Speaker 3: balance getting a little bit weaker. As I think about

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Speaker 3: monetary policy that is still somewhat uncertain, and a lot

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Speaker 3: of the other kind of headwinds or potential issues that

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Speaker 3: are going on in the macro environment, it's really tough

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Speaker 3: to make a case from a valuation perspective that things

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Speaker 3: are great. So that's one thing, and then the second

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Speaker 3: thing is in you reference cochroactors, there's just a lot

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Speaker 3: of stuff going on, not necessarily in the highold market,

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Speaker 3: but around the higher market, right, And so as you

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Speaker 3: think about a lot of the headlines that have come

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Speaker 3: out more recently, whether it's on the private credit market,

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Speaker 3: or on the bank own market, or on things like AI,

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Speaker 3: these are things that I would argue are not things

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Speaker 3: that directly impact the higher market. A lot of the

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Speaker 3: headlines have noticeably not included the higher market, which is

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Speaker 3: kind of interesting because historically people would look at the

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Speaker 3: higher market it as a bit of a canary in

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Speaker 3: the coal mine for future problems that hasn't happened this

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Speaker 3: time around. I would not anticipate that will be the

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Speaker 3: case this time around. But this stuff matters, right. It

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Speaker 3: may not matter insofar as translating into higher anticipated default rates,

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Speaker 3: but when you think about what investors get paid in

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Speaker 3: investing in the HIGHO market, anticipated defaults and credit losses

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Speaker 3: is only part of what you get paid for. The

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Speaker 3: other part that you get paid for in investing in

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Speaker 3: risk your markets is some form of risk premium, and

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Speaker 3: part of what we've seen over the last couple of

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Speaker 3: years is that risk premium has been pretty compressed, and

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Speaker 3: so I would argue that the big risk to the

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Speaker 3: HYO market isn't so much a big pickup in default rates,

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Speaker 3: but a normalization in that risk premium that investors demand

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Speaker 3: to invest in risk year and in some cases more

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Speaker 3: illiquid parts of the financial markets.

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Speaker 1: We've been having that conversation for quite a long time,

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Speaker 1: you know, possibly years on this show, and it's become

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Speaker 1: pretty much like gospel for most people that you don't

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Speaker 1: care about the spread, just look at the yield. I'm

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Speaker 1: surprised but also delighted to hear you mentioned that spread

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Speaker 1: actually matters, because you know, I think it definitely does.

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Speaker 1: But in terms of like unpacking that there are you know,

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Speaker 1: you just could talk about the fundamentals not being so

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Speaker 1: much of an issue, but again, the technicals are just

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Speaker 1: so strong, So every time there is a set off,

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Speaker 1: every time how it widens out doesn't last very long

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Speaker 1: because it's just so much cash. So again, you know,

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Speaker 1: you can't really fight the technicals. I just don't know

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Speaker 1: how you position you know, based on that dynamic.

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Speaker 3: I would one hundred percent agree. And you know, just

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Speaker 3: like the old adage don't fight the fad, I think

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Speaker 3: you could easily apply it to what you just said,

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Speaker 3: don't fight the technicals, and we don't. I think the

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Speaker 3: best course of action. And you know how we're thinking

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Speaker 3: about managing our portfolios right now is we're not looking

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Speaker 3: to take too much in the way of directional bets

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Speaker 3: the markets, and we never really do. It's generally a

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Speaker 3: pretty poor information ratio strategy is to make back make

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Speaker 3: big macrobats in terms of overall direction of markets. So

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Speaker 3: we're staying pretty close to home in terms of overall

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Speaker 3: levels of risk. Where we're spending most of our time

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Speaker 3: and where we're allocating most of our risk budget and

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Speaker 3: where we hope to get most of our performance is

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Speaker 3: really in that bottoms up selection. Just given the amount

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Speaker 3: of dispersion, I think you use the word or I

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Speaker 3: would use the word decompression in terms of definitely one

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Speaker 3: of the themes that we've seen this year the underperformance

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Speaker 3: of the lowest quality part of the hyal market, in

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Speaker 3: addition to the increasing amount of dispersion that we're seeing

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Speaker 3: across sectors and across issuers. That's really where we're going

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Speaker 3: to get our performance and where we feel the most

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Speaker 3: confidence given the research team that we have given, in

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Speaker 3: the framework and the process that we've developed, that's really

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Speaker 3: where we have the most confidence and where we're going

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Speaker 3: to deliver performance our investors in the current environment. It's

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Speaker 3: not really in terms of taking directional bets. You know. Again,

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Speaker 3: you know, spreads are pretty tight, yields are I would

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Speaker 3: say about average, it's not the best time to be

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Speaker 3: investing in HYGYLID. I would argue, that's not the worst time.

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Speaker 3: You just need to know what you're getting into. You know,

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Speaker 3: what the higher market today offers is I would argue,

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Speaker 3: pretty attractive amounts of yield and income with probably a

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Speaker 3: tighter range in terms of the upside and downside, you know,

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Speaker 3: because of where valuations are and because of where duration is.

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Speaker 3: As part of we haven't talked about this, but the

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Speaker 3: higher market is a lower duration market today as well.

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Speaker 3: It does cap your upside a little bit, but because

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Speaker 3: it's lower duration and higher quality, it also capture downside.

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Speaker 3: So I would I would argue that the higher market

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Speaker 3: today is different than the higher market before.

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Speaker 2: Some of that's good.

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Speaker 3: Some of that's bad. It doesn't give you as much upside,

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Speaker 3: especially given where current valuations are. But I would argue

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Speaker 3: that the downside that people are usually fearful of in

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Speaker 3: the high yield is unlikely to materialize to the same

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Speaker 3: magnitude this this go around.

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Speaker 2: Yeah, I think that's to pick that up. I think

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Speaker 2: that's an interesting point. You know what, I've noticed that

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Speaker 2: I think we've seen a migration at least in terms

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Speaker 2: of credit quality as you sort of defined by ratings

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Speaker 2: being more heavily weighted towards the double btre today and

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Speaker 2: fewer guys in that basket with trible hooks, right, So

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Speaker 2: you know, with that being the case, how are your

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Speaker 2: funds positioned? Do you guys overweight double b's given the

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Speaker 2: economic angst you guys see with some select exposure and

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Speaker 2: that sort of deeply high yield ban and you know,

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Speaker 2: obviously you highlight it. The structure of the market is

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Speaker 2: naturally a shorter duration. But you know what type of

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Speaker 2: duration we're talking very short term or we're talking three

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Speaker 2: to five year bucket, five to seven or seven plus

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Speaker 2: plus years for you guys, where you guys comfortable at?

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Speaker 3: Yeah, so we don't take duration bets in our funds, Matt.

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Speaker 3: You know, the duration comment that I made earlier was

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Speaker 3: really around market composition, Like the duration of the entire

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Speaker 3: market is shortened, shortened by you know, depending on what

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Speaker 3: time payer you compared to, you know, a year, a

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Speaker 3: year and a half over the past ten to fifteen years,

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Speaker 3: and that does have some significant implications for the expected

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Speaker 3: return profile of the market. The market is just shorter.

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Speaker 3: Part of that is, you know, issuers have refinanced a

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Speaker 3: lot of debt, but on average, the tenors have probably

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Speaker 3: not been as long as they have historically. You know,

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Speaker 3: there's there's there's a lot of different reasons for why

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Speaker 3: the market is shorter today, so we're not really looking

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Speaker 3: to take on large rate bets within the funds. On

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Speaker 3: the credit quality side, we do have a structural bias

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Speaker 3: to be higher quality that the empirical analysis, and conceptually

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Speaker 3: it does make sense to be higher quality within high yield. Again,

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Speaker 3: risks are asymmetric in fixing income. In general, you don't

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Speaker 3: have a ton of upside. You have a lot of

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Speaker 3: downside that is accentuated in a market like high yield,

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Speaker 3: where you know your biggest risk is companies not paying

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Speaker 3: you back the money that you went to them, and

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Speaker 3: so the potential downside can be large, but you have

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Speaker 3: pretty limited upside, you know, if you're right. So conceptually

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Speaker 3: it makes sense to have an up and quality bias

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Speaker 3: in a market like high yield. We do have a

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Speaker 3: structural tilt towards being higher quality within high yield from

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Speaker 3: a portfolio perspective, but there can be and are really

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Speaker 3: really interesting opportunities down in quality. I view the triple

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Speaker 3: C part of the market as more of a id

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Speaker 3: iso syncratic stock picking type of environment liquidity, yeah, exactly,

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Speaker 3: as opposed to an allocation to a down in quality bit. Right.

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Speaker 3: If I think about some of the most interesting opportunities

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Speaker 3: that we see there, it's really in where characterized as

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Speaker 3: bottoms up kind of you know, it is 'cratic type

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Speaker 3: of opportunities where we have high conviction either in a

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Speaker 3: particular issuer and therefore we are happy to go down

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Speaker 3: in the capital structure happens to be triple C rated

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Speaker 3: in that in that issue and or you know issuers

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Speaker 3: that may be going through some period of stress and

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Speaker 3: that you know, we have some belief that you know,

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Speaker 3: they have the ability to repair their balance sheets and

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Speaker 3: turn things around, and so we're happy to invest in

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Speaker 3: some of the riskier issuers on that basis as well.

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Speaker 3: So you know, less of an allocation to down in quality,

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Speaker 3: more a reflection of this high dispersion environment where we

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Speaker 3: have C and D compression, and so there are certain

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Speaker 3: situations in the triple C portion of the market where

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Speaker 3: we feel like you are getting paid for the risk.

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Speaker 2: Yeah, I think you know when history shows it. The

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Speaker 2: FED obviously cutting rates is really because of a weakening

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Speaker 2: macro economic backdrop right or potential recession, which see would

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Speaker 2: seem to be a pretty large threat to high old

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Speaker 2: issuers in your portfolio in general. So if I look

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Speaker 2: at m ip R on the terminal for those of

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Speaker 2: you home, you can run it. You can see that

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Speaker 2: for the US at least, it looks like we're going

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Speaker 2: to get one hundred base points of cutting down to

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Speaker 2: about three percent over the next year. Is that van

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Speaker 2: Guard's house view? And if so, you know, how do

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Speaker 2: you see that sort of filtering out into the high

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Speaker 2: old issuers? Is that going to help? Is it a

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Speaker 2: rising tide lifts all boats or there's where's the sector

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Speaker 2: overweights or underweights for you guys.

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Speaker 3: Yeah, so I'm not a Ray guy. I would say

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Speaker 3: that in general, the markets have priced in, have consistently

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Speaker 3: priced in more cuts than have actually materialized. Well, we

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Speaker 3: are in a rate cut environment, right, We are in

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Speaker 3: an environment, at least for now, where the monetary policy

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Speaker 3: should remain somewhat supportive of credit markets, whether we get

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Speaker 3: one hundred based points of cuts or something more or

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Speaker 3: less than that. But you hit the nail on the head, Matt, right,

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Speaker 3: like you have to ask not so much how much

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Speaker 3: the rate cuts? How much are we going to get

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Speaker 3: in terms of rate cuts, but why? And you are

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Speaker 3: one hundred percent correct that a rate cutting cycle is

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Speaker 3: usually associated with a weaker economic environment. In any benefit

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Speaker 3: that whereverage issuers get from lower rates is usually more

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Speaker 3: than offset by the fact that the economic environment that

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Speaker 3: this rate cutting cycle is happening in is usually a

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Speaker 3: lot weaker, and that that tends to have much more

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Speaker 3: of an impact than any magnitude or rate cutting cycle itself.

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Speaker 3: And so to the extent we to the extent the

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Speaker 3: FED is cutting rates because they see a weaker econ

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Speaker 3: economy here in the US, that will not be good,

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Speaker 3: That will not be good for leverage credit in general

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Speaker 3: certainly won't be good for the kind of down and

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Speaker 3: quality issuers. That won't necessarily mean that they have easier

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Speaker 3: access to capital markets. In fact, usually the opposite occurs,

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Speaker 3: and so the why, which, as you reference, is usually

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Speaker 3: much more important than the what right, the what being

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Speaker 3: a rate cutting cycle, but the why being a weaker

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Speaker 3: economic environment is usually the much more important factor.

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Speaker 1: How nimble can you be in this market than Michael?

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Speaker 1: I mean, it's not mentioned to the you know, it's

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Speaker 1: a trillion dollar platform you have. It's not Matt goidtn

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Speaker 1: AT LLC sitting in New Jersey moving thousand dollar lots around.

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Speaker 1: You actually have to take pretty big positions. And so

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Speaker 1: how easy or difficult is that?

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Speaker 3: Well, it's never easy, James, you know, whether you're managing

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Speaker 3: you know, a billion or ten billion. One of the

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Speaker 3: realities of the highal market is the liquidity is there

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Speaker 3: when you don't need it, and it's not there when

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Speaker 3: you do. And so we need to always be mindful

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Speaker 3: of that when we are thinking about entering or thinking

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Speaker 3: about investing in particular situations. Right, I think one of

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Speaker 3: the things that investors tend to underestimate isn't so much

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Speaker 3: the cost of entry, but the cost of exit, and

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Speaker 3: that's something that we are very intentional about as we

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Speaker 3: think about building our portfolio. Right, Our portfolios in general

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Speaker 3: are built for the long term. Our time horizons for

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Speaker 3: investing tend to be very long term oriented. We're not

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Speaker 3: looking to generate out performance by trading the markets on

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Speaker 3: a daily basis. And so one of the nice things

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Speaker 3: for us, given the scale that we have is our

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Speaker 3: processes and our time horizons are built to scale, are

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Speaker 3: built to scale to be able to manage across large

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Speaker 3: sums of money, and also built so that most of

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Speaker 3: our our performance is driven more by long term views

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Speaker 3: as opposed to the kind of the daily very you know,

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Speaker 3: daily moves in the market. You know, that's not to

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Speaker 3: say that we can't and aren't opportunistic in terms of

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Speaker 3: trying to take advantage of opportunities as they pop up.

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Speaker 3: You know, but as you referenced, right, you know, liquidity

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Speaker 3: is is can be hard to come by, especially in

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Speaker 3: a market like high yield, and we do need to

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Speaker 3: be cognizant of that. And the good news is, you know, again,

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Speaker 3: the way we think about investing does tend to be

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Speaker 3: more long term oriented, and that does tend to lend

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Speaker 3: itself well to not being as reliant on needing liquidity

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Speaker 3: on a daily basis. We are you know, much better

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Speaker 3: positioned as providers of liquidity. You know, we have plenty

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Speaker 3: of dry powder in general to be able to deploy

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Speaker 3: when those dislocations do occur in the market, and so

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Speaker 3: we're I would argue, on the other side of that, right,

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Speaker 3: we can take advantage of the relative illiquidity of the

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Speaker 3: market because in general, you know, we're a little bit

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Speaker 3: more patient and disciplined around how and when we deploy

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Speaker 3: our risk and capital.

434
00:23:27,600 --> 00:23:30,240
Speaker 1: So that implies you have fairly large cash balance right now.

435
00:23:30,320 --> 00:23:31,560
Speaker 1: How does it compare to history?

436
00:23:31,840 --> 00:23:33,719
Speaker 2: Yeah, I was gonna ask the same question. I'd be curious.

437
00:23:34,280 --> 00:23:38,040
Speaker 3: Yeah, so it depends on the fund I would say,

438
00:23:38,400 --> 00:23:40,680
Speaker 3: you know, within within the high O dedicated strategies, we

439
00:23:40,760 --> 00:23:43,800
Speaker 3: probably are reserving a little bit of extra cash. Just

440
00:23:43,840 --> 00:23:46,920
Speaker 3: given where valuations are, the opportunity cost right now of

441
00:23:47,280 --> 00:23:49,280
Speaker 3: holding a little bit of extra cash our view is

442
00:23:49,520 --> 00:23:52,960
Speaker 3: pretty low. You know, evaluations were to reprice wider, I

443
00:23:53,000 --> 00:23:55,760
Speaker 3: would say that the cost of holding that liquidity extra

444
00:23:55,840 --> 00:23:58,320
Speaker 3: equidity would be higher. But you know, just given where

445
00:23:58,359 --> 00:24:01,280
Speaker 3: valuations are, I guess that's the flip side. One of

446
00:24:01,320 --> 00:24:05,520
Speaker 3: the positives is holding extra cash isn't costing us that much,

447
00:24:06,520 --> 00:24:09,439
Speaker 3: and so you know, we are reserving a little bit

448
00:24:09,440 --> 00:24:13,200
Speaker 3: of extra liquidity right now because we do think that

449
00:24:13,320 --> 00:24:17,159
Speaker 3: there can and will be additional opportunities that pop up

450
00:24:17,200 --> 00:24:19,280
Speaker 3: in the near future. You know, we're kind of going

451
00:24:19,320 --> 00:24:21,879
Speaker 3: through earning season right now in the high yield market,

452
00:24:22,640 --> 00:24:24,920
Speaker 3: and you know, part of what we're seeing is is

453
00:24:25,520 --> 00:24:29,080
Speaker 3: an earning season of haves and have nots, right and

454
00:24:29,200 --> 00:24:30,960
Speaker 3: in the case of have nots or in the case

455
00:24:31,040 --> 00:24:35,280
Speaker 3: of companies or issuers that are you know, disappointing relative

456
00:24:35,320 --> 00:24:39,520
Speaker 3: to expectations, we're seeing some pretty outsize price moves as

457
00:24:39,600 --> 00:24:42,840
Speaker 3: investors have you know, relatively little patients right now for

458
00:24:43,000 --> 00:24:47,200
Speaker 3: for disappointment, and you know, we are again opportunistically using

459
00:24:47,320 --> 00:24:49,560
Speaker 3: our extra cash to take advantage of some of those

460
00:24:50,240 --> 00:24:52,159
Speaker 3: opportunities on an issuer basis.

461
00:24:52,359 --> 00:24:54,840
Speaker 1: So when we talk to a lot of portfolio managers

462
00:24:54,880 --> 00:24:58,320
Speaker 1: who can invest across asset classes, they do flag opportunities.

463
00:24:58,359 --> 00:25:00,960
Speaker 1: Instruction finance, you know it he is safe. There are

464
00:25:01,000 --> 00:25:03,760
Speaker 1: triple A rated trunches, it's you know, pooled, so you're

465
00:25:04,160 --> 00:25:08,679
Speaker 1: diversifying your risk but how do you see that? I mean,

466
00:25:08,960 --> 00:25:11,200
Speaker 1: you know, we we've been around long enough to know

467
00:25:11,320 --> 00:25:13,879
Speaker 1: what happened last time there was a big boom instructured finance.

468
00:25:13,960 --> 00:25:15,879
Speaker 1: What what what signals are you getting from that?

469
00:25:16,320 --> 00:25:19,840
Speaker 3: So I'm a big believer James and the fact that

470
00:25:19,960 --> 00:25:24,160
Speaker 3: there's no free lunch, and certainly that should applied all

471
00:25:24,200 --> 00:25:26,880
Speaker 3: financial markets. And anybody that tells you that that there's

472
00:25:27,560 --> 00:25:31,640
Speaker 3: you know, excess return to be had, relativity and a risk,

473
00:25:31,760 --> 00:25:35,960
Speaker 3: I would say is there's probably something else going on. Again,

474
00:25:36,000 --> 00:25:38,680
Speaker 3: I can't speak specifically to structor finance. I'm you know,

475
00:25:39,080 --> 00:25:43,240
Speaker 3: focused on the higo market. But as you think about

476
00:25:43,280 --> 00:25:45,000
Speaker 3: what you're supposed to get paid, you know, what do

477
00:25:45,040 --> 00:25:46,879
Speaker 3: you what do you get paid when when you're buying

478
00:25:46,920 --> 00:25:49,320
Speaker 3: a bond, whether it's a higher bond or a structure

479
00:25:49,320 --> 00:25:54,440
Speaker 3: of finance bond, private credit mode is some element of

480
00:25:55,240 --> 00:26:01,200
Speaker 3: anticipated future credit losses and risk premium on top of that.

481
00:26:02,200 --> 00:26:04,520
Speaker 3: And part of that risk premium in some of these

482
00:26:04,600 --> 00:26:09,680
Speaker 3: markets may be some component of mark to market premium

483
00:26:11,040 --> 00:26:13,800
Speaker 3: and some of it may be liquidity premium. And I

484
00:26:13,840 --> 00:26:16,040
Speaker 3: would I would say that you know, as you go

485
00:26:16,160 --> 00:26:19,120
Speaker 3: into some of the more esoteric parts of the financial markets,

486
00:26:19,880 --> 00:26:21,920
Speaker 3: you know, the lines get a little blurry in terms

487
00:26:22,000 --> 00:26:24,080
Speaker 3: of are you getting paid for? You know, what are

488
00:26:24,119 --> 00:26:27,360
Speaker 3: you getting paid in terms of the yields and spreads

489
00:26:28,400 --> 00:26:31,600
Speaker 3: and so you know, structure finance is, you know, probably

490
00:26:31,600 --> 00:26:34,680
Speaker 3: a pretty attractive market. We we do and it can

491
00:26:34,840 --> 00:26:39,160
Speaker 3: invest in instructor finance across many of our credit funds. Again,

492
00:26:39,200 --> 00:26:41,920
Speaker 3: you just need to know what you're getting yourself into, right,

493
00:26:42,160 --> 00:26:45,399
Speaker 3: and you know what you're getting paid for, and you know,

494
00:26:45,560 --> 00:26:49,040
Speaker 3: oftentimes it can make sense to invest in structure finance

495
00:26:49,080 --> 00:26:53,800
Speaker 3: bonds or higher bonds. You know, the transparency, the information

496
00:26:53,960 --> 00:26:58,480
Speaker 3: that you get, the level of granularity does vary across

497
00:26:59,000 --> 00:27:01,520
Speaker 3: different types of assets, different types of asset classes. You

498
00:27:01,600 --> 00:27:06,920
Speaker 3: should and you demand more compensation for that. The liquidity

499
00:27:07,000 --> 00:27:10,400
Speaker 3: or lack thereof can vary across asset classes. You can

500
00:27:10,520 --> 00:27:13,960
Speaker 3: and should demand different types of compensation for that. Again,

501
00:27:14,040 --> 00:27:16,399
Speaker 3: it's all risk return. I would say that, you know,

502
00:27:17,240 --> 00:27:19,520
Speaker 3: I would guess that structure finance is no different than

503
00:27:19,560 --> 00:27:21,720
Speaker 3: the high market in terms of it being essential to

504
00:27:21,760 --> 00:27:23,840
Speaker 3: do that bottoms up analysis and to kind of know

505
00:27:23,920 --> 00:27:24,400
Speaker 3: what you own.

506
00:27:24,520 --> 00:27:25,959
Speaker 2: So what are some of those sectors where you are

507
00:27:26,119 --> 00:27:28,280
Speaker 2: where you do see your margetting paid that that sort

508
00:27:28,280 --> 00:27:31,040
Speaker 2: of risk prome. Like, obviously it seems like you're the

509
00:27:31,119 --> 00:27:35,560
Speaker 2: theme is defensive, so is that healthcare? Is it staples

510
00:27:35,840 --> 00:27:39,480
Speaker 2: or utilities, guys or A and D like where you

511
00:27:39,560 --> 00:27:40,199
Speaker 2: see that right now?

512
00:27:40,440 --> 00:27:43,280
Speaker 3: Yeah, I got to be honest, Matt. Right now, when

513
00:27:43,320 --> 00:27:47,400
Speaker 3: I think about kind of sector valuations, nothing is standing

514
00:27:47,480 --> 00:27:53,280
Speaker 3: out in terms of things that look really cheap. And

515
00:27:53,440 --> 00:27:56,159
Speaker 3: actually that's part of the reason why, at least at

516
00:27:56,200 --> 00:28:00,000
Speaker 3: a sector level or at an industry level, we'll gravitating

517
00:28:00,200 --> 00:28:03,159
Speaker 3: a little bit more towards more of the defensive industries,

518
00:28:03,240 --> 00:28:08,280
Speaker 3: things like utilities or consumer products, food and beverage, because

519
00:28:09,400 --> 00:28:12,040
Speaker 3: our view right now is, given where those sectors trade,

520
00:28:12,119 --> 00:28:15,200
Speaker 3: or some of those sectors trade, you're not getting paid

521
00:28:15,240 --> 00:28:17,679
Speaker 3: that much more to go into some of the more

522
00:28:17,760 --> 00:28:22,719
Speaker 3: cyclical or riskier sectors at a top level. Right That's

523
00:28:22,800 --> 00:28:25,359
Speaker 3: not to say that there aren't interesting situations in some

524
00:28:25,480 --> 00:28:27,760
Speaker 3: of these other sectors at the issuer level, but just

525
00:28:27,840 --> 00:28:31,320
Speaker 3: at a sector level, the dispersion level across most sectors

526
00:28:31,400 --> 00:28:34,400
Speaker 3: not that high. Again, the uncertainty level, given what's going

527
00:28:34,440 --> 00:28:36,560
Speaker 3: on in the macro, I would say, is above average.

528
00:28:37,640 --> 00:28:41,440
Speaker 3: So why not be a little bit more defensive from

529
00:28:41,480 --> 00:28:44,040
Speaker 3: a sector perspective right now, and take more of your

530
00:28:44,120 --> 00:28:46,400
Speaker 3: risk at the kind of the bottoms of a single

531
00:28:46,480 --> 00:28:50,680
Speaker 3: name level, so you know, sector level, staying a little

532
00:28:50,720 --> 00:28:53,680
Speaker 3: bit more defensive and taking our shots really more on

533
00:28:53,760 --> 00:28:57,520
Speaker 3: the bottoms up atosymocratic issuers where you know, based on

534
00:28:57,640 --> 00:29:00,680
Speaker 3: the deep fundamental analysis that are researched are doing. We

535
00:29:00,720 --> 00:29:02,600
Speaker 3: feel really good about the risks that we're taking.

536
00:29:02,480 --> 00:29:05,520
Speaker 1: On utility, so they always sound safe, but that being

537
00:29:05,600 --> 00:29:08,360
Speaker 1: kind of dragged into this whole AI boom. They will

538
00:29:08,440 --> 00:29:10,520
Speaker 1: be used to power all that stuff. So is that

539
00:29:10,560 --> 00:29:12,440
Speaker 1: going to be risk of much more issuance or other

540
00:29:12,560 --> 00:29:13,440
Speaker 1: associated risk.

541
00:29:13,600 --> 00:29:15,440
Speaker 3: Yeah, we have seen a bit of a tick up,

542
00:29:15,760 --> 00:29:19,560
Speaker 3: James in some of the issuance on utilities. Would I

543
00:29:19,600 --> 00:29:21,920
Speaker 3: would say, we haven't seen that much so far in

544
00:29:22,040 --> 00:29:26,920
Speaker 3: terms of supply related to you know, some of the

545
00:29:27,040 --> 00:29:29,360
Speaker 3: AI power demands. We've seen a little bit, but not

546
00:29:29,480 --> 00:29:33,320
Speaker 3: that much. I would expect to see more. You know.

547
00:29:33,360 --> 00:29:36,520
Speaker 3: The the utility sector in high yield is one of

548
00:29:36,560 --> 00:29:39,200
Speaker 3: those sectors that is I would say emblematic of the

549
00:29:39,280 --> 00:29:42,880
Speaker 3: higher market overall. It used to be a riskier part

550
00:29:42,880 --> 00:29:44,800
Speaker 3: of the market. There used to be a lot more

551
00:29:45,120 --> 00:29:47,720
Speaker 3: issuers that that were you know, I would say taking

552
00:29:47,800 --> 00:29:51,920
Speaker 3: more bets on underlying commodity prices and using kind of

553
00:29:52,000 --> 00:29:54,560
Speaker 3: leverage balance sheets to do so, and that combination doesn't

554
00:29:54,600 --> 00:29:58,720
Speaker 3: work super well. What we see right now within utilities

555
00:29:59,040 --> 00:30:02,960
Speaker 3: by and large companies that have de risked their both

556
00:30:03,000 --> 00:30:06,360
Speaker 3: their business profiles as well as their balance sheets. And

557
00:30:06,480 --> 00:30:08,880
Speaker 3: so even if they do come to market with more issuance,

558
00:30:09,000 --> 00:30:13,080
Speaker 3: they have plenty of kind of financial capacity to do so.

559
00:30:14,280 --> 00:30:15,800
Speaker 3: And so we haven't. We haven't seen a ton of

560
00:30:15,880 --> 00:30:19,800
Speaker 3: frath so far or elevated amounts of issuance in utilities,

561
00:30:19,880 --> 00:30:24,880
Speaker 3: yet that could change. Obviously, we have seen more AI

562
00:30:25,320 --> 00:30:28,440
Speaker 3: adjacent issuance in the high yeld market and so you know,

563
00:30:28,520 --> 00:30:31,240
Speaker 3: again as of now, we haven't seen it that much,

564
00:30:32,360 --> 00:30:34,360
Speaker 3: but that could change over the next six to twelve months.

565
00:30:34,440 --> 00:30:36,880
Speaker 1: Which is that to see you noted earlier how different

566
00:30:36,960 --> 00:30:39,080
Speaker 1: the highield market is now compared to let's say ten

567
00:30:39,120 --> 00:30:41,240
Speaker 1: years ago. A lot of it seems to be to

568
00:30:41,320 --> 00:30:43,400
Speaker 1: do with private credit and how much have the suppli

569
00:30:43,400 --> 00:30:46,240
Speaker 1: has possibly gone there and how that makes maybe the

570
00:30:46,920 --> 00:30:50,560
Speaker 1: the supply demand imbalance worse and keep spreads tights. But

571
00:30:50,680 --> 00:30:53,200
Speaker 1: also you know, we have seen a lot more so

572
00:30:53,360 --> 00:30:57,880
Speaker 1: called liability management exercises, which they look like defaults, but

573
00:30:58,120 --> 00:31:01,280
Speaker 1: they are maybe not counted by some agency. So I'm

574
00:31:01,320 --> 00:31:04,920
Speaker 1: wondering how you fat that into your your investment process

575
00:31:05,240 --> 00:31:07,200
Speaker 1: sitting on the leverage loan side, which is where they

576
00:31:07,240 --> 00:31:08,240
Speaker 1: seem to be most prevalent.

577
00:31:08,520 --> 00:31:11,760
Speaker 3: Yeah, I mean, liability management exercises or lemies are are

578
00:31:11,800 --> 00:31:15,920
Speaker 3: relevant to both high yield as well as loans. You

579
00:31:16,000 --> 00:31:18,720
Speaker 3: know where we are this year is it's been happening

580
00:31:18,760 --> 00:31:21,080
Speaker 3: a little bit more on the loan side, but that

581
00:31:21,680 --> 00:31:23,680
Speaker 3: in part because we saw so much of it happen

582
00:31:23,760 --> 00:31:25,600
Speaker 3: in the high old side and in twenty twenty four,

583
00:31:26,440 --> 00:31:29,880
Speaker 3: and so you know, I would say liability management exercises

584
00:31:29,960 --> 00:31:35,240
Speaker 3: remained somewhat elevated across leverage finance today relative to history,

585
00:31:35,440 --> 00:31:37,640
Speaker 3: but have come down a little bit in the highal

586
00:31:37,720 --> 00:31:41,240
Speaker 3: market relative to off relative to like historic highs in

587
00:31:41,360 --> 00:31:45,280
Speaker 3: twenty twenty four. So I would say peak lmy activity

588
00:31:45,320 --> 00:31:49,600
Speaker 3: in high yield for this cycle is most likely to

589
00:31:49,680 --> 00:31:52,920
Speaker 3: have occurred in twenty twenty four. And you know, what

590
00:31:52,960 --> 00:31:54,880
Speaker 3: we're seeing in the loan market is a bit of

591
00:31:54,960 --> 00:31:59,240
Speaker 3: a you know, catch up to that. Lmes are are

592
00:31:59,280 --> 00:32:02,040
Speaker 3: a big deal. It's a big way for us to

593
00:32:02,120 --> 00:32:04,880
Speaker 3: actually add value for our investors. It's it's a different

594
00:32:04,960 --> 00:32:07,680
Speaker 3: type of process that we need to manage through above

595
00:32:07,720 --> 00:32:12,440
Speaker 3: and beyond traditional credit underwriting, different skill set, different type

596
00:32:12,440 --> 00:32:16,560
Speaker 3: of experience required, but has the potential to add a

597
00:32:16,600 --> 00:32:19,720
Speaker 3: tremendous amount of value. To be clear, we we we

598
00:32:19,800 --> 00:32:23,920
Speaker 3: would include lemis as defaults. We treat them as defaults

599
00:32:24,480 --> 00:32:28,040
Speaker 3: even if they aren't actual defaults. So any default you

600
00:32:28,160 --> 00:32:30,800
Speaker 3: know statistics that that we you know, look at and

601
00:32:31,080 --> 00:32:33,000
Speaker 3: or you know expect default rate that we that we

602
00:32:33,040 --> 00:32:35,280
Speaker 3: think about on a go forward basis, we will always

603
00:32:35,400 --> 00:32:38,360
Speaker 3: think about and include l activity as part of those

604
00:32:39,320 --> 00:32:43,440
Speaker 3: as part of those statistics. You Lems in and of

605
00:32:43,520 --> 00:32:47,680
Speaker 3: themselves not not a good or bad thing. They do

606
00:32:47,880 --> 00:32:50,640
Speaker 3: have the potential to be a bit of a win

607
00:32:50,800 --> 00:32:56,560
Speaker 3: win relative to more traditional defaults. Part of the biggest

608
00:32:56,600 --> 00:32:59,800
Speaker 3: win as it saves a lot in terms of legal fees,

609
00:33:00,400 --> 00:33:04,920
Speaker 3: and that actually is not insignificant. The danger of lemies,

610
00:33:05,000 --> 00:33:08,280
Speaker 3: at least historically has been you know, a bit of

611
00:33:08,360 --> 00:33:09,840
Speaker 3: a free for all or a bit of a wild

612
00:33:09,920 --> 00:33:13,880
Speaker 3: wild west is because they're not going through traditional bankruptcies. Uh,

613
00:33:14,000 --> 00:33:17,600
Speaker 3: there's a lot more, there's a lot bigger range in

614
00:33:17,720 --> 00:33:21,520
Speaker 3: terms of potential outcomes, and so you know, part of

615
00:33:21,600 --> 00:33:24,239
Speaker 3: what we've learned, part of what investors have learned over

616
00:33:24,280 --> 00:33:28,560
Speaker 3: the past couple of years is in order to maximize

617
00:33:28,680 --> 00:33:31,840
Speaker 3: value in general, it's a lot better to work together

618
00:33:33,280 --> 00:33:36,400
Speaker 3: than to fight amongst ourselves, uh, in terms of how

619
00:33:36,440 --> 00:33:39,240
Speaker 3: to maximize value for for for each investor. And so

620
00:33:39,760 --> 00:33:41,280
Speaker 3: you know, I think the market has learned over the

621
00:33:41,360 --> 00:33:46,200
Speaker 3: last couple of years to manage lemes better in order

622
00:33:46,320 --> 00:33:49,840
Speaker 3: to uh, not just to further market interest, but also

623
00:33:50,400 --> 00:33:53,200
Speaker 3: you know, from an individual investor as well.

624
00:33:53,840 --> 00:33:55,960
Speaker 1: But to be clear, how do you actually make the

625
00:33:56,080 --> 00:33:58,840
Speaker 1: value is it? Is it you buy the asset when

626
00:33:59,000 --> 00:34:01,160
Speaker 1: people are selling and the full of a critical mess

627
00:34:01,360 --> 00:34:05,120
Speaker 1: to litigate otherwise pressure to get much more back on

628
00:34:05,200 --> 00:34:05,960
Speaker 1: your investment.

629
00:34:06,560 --> 00:34:09,960
Speaker 3: Yeah, so we're we're not in distressed investors, James. So

630
00:34:10,080 --> 00:34:13,120
Speaker 3: that's not really part of our playbook. You know. What

631
00:34:13,280 --> 00:34:17,000
Speaker 3: we do within companies that are going through some element

632
00:34:17,080 --> 00:34:20,640
Speaker 3: of distress or stress is really thinking about how do

633
00:34:20,719 --> 00:34:24,759
Speaker 3: we maximize value for investors? And oftentimes that is not

634
00:34:25,000 --> 00:34:28,640
Speaker 3: selling when things go bad, but actually rolling up our

635
00:34:28,719 --> 00:34:33,440
Speaker 3: sleeves and being willing and able to hold on to

636
00:34:34,000 --> 00:34:37,680
Speaker 3: bonds and loans even in the face of you know,

637
00:34:38,880 --> 00:34:46,120
Speaker 3: you know, a pretty challenging fundamental situation, especially in situations

638
00:34:46,160 --> 00:34:50,080
Speaker 3: where we believe that the problems are temporary and that

639
00:34:50,200 --> 00:34:52,239
Speaker 3: if we hold on, that's the way to maximize value

640
00:34:52,280 --> 00:34:55,600
Speaker 3: for our investors. And you know, how we have been

641
00:34:55,600 --> 00:35:00,600
Speaker 3: able to maximize value oftentimes has been through work together

642
00:35:00,800 --> 00:35:05,360
Speaker 3: with other like minded creditors in order to negotiate or

643
00:35:06,920 --> 00:35:11,160
Speaker 3: you know, come to mutually beneficial outcomes with you know,

644
00:35:11,400 --> 00:35:14,200
Speaker 3: creditors and at time or or debtors and at times

645
00:35:15,040 --> 00:35:18,480
Speaker 3: private equity sponsors. And so it's not so much you know,

646
00:35:19,560 --> 00:35:23,080
Speaker 3: building a sizeable position, although given our scale, you know,

647
00:35:23,280 --> 00:35:26,160
Speaker 3: we have sizable positions in pretty much everything that we own.

648
00:35:27,000 --> 00:35:30,919
Speaker 3: And how we maximize value for us isn't necessarily buying more,

649
00:35:31,160 --> 00:35:36,640
Speaker 3: but really managing through those situations oftentimes in you know,

650
00:35:36,760 --> 00:35:38,360
Speaker 3: with other like minded investors.

651
00:35:38,920 --> 00:35:40,439
Speaker 1: That's the sense of that they've kind of gone away

652
00:35:40,480 --> 00:35:42,120
Speaker 1: a bit in the US. Do you is that does

653
00:35:42,160 --> 00:35:44,400
Speaker 1: the temporary height heights is are they coming back in

654
00:35:44,680 --> 00:35:47,759
Speaker 1: in you know, large quantity? Do you think, lemies, I

655
00:35:47,800 --> 00:35:51,400
Speaker 1: think they're here to stay. I think that again, investors

656
00:35:51,440 --> 00:35:56,680
Speaker 1: have learned a lot about how to navigate through the

657
00:35:57,200 --> 00:36:01,680
Speaker 1: lem situations that, on the one hand, is good because

658
00:36:02,000 --> 00:36:06,840
Speaker 1: it you know, again maximizes returns for dead investors. On

659
00:36:07,000 --> 00:36:14,400
Speaker 1: the other hand, it could potentially reduce or depress the

660
00:36:14,480 --> 00:36:18,879
Speaker 1: number of future lemy exercises. You know, part of why

661
00:36:19,000 --> 00:36:21,840
Speaker 1: lemis became so popular over the last few years is

662
00:36:21,920 --> 00:36:27,120
Speaker 1: it allowed issuers or debitors sometimes private equity sponsors to

663
00:36:28,440 --> 00:36:32,200
Speaker 1: use the greater flexibility of outer court processes to their

664
00:36:32,239 --> 00:36:37,640
Speaker 1: own advantage, oftentimes by playing creditors against themselves, right, And

665
00:36:37,760 --> 00:36:40,320
Speaker 1: so part of the reason why lemies became so popular

666
00:36:40,400 --> 00:36:44,160
Speaker 1: over the last couple of years is because, you know, issuers,

667
00:36:44,280 --> 00:36:48,480
Speaker 1: private responsors were able to maximize more of their value

668
00:36:48,560 --> 00:36:51,960
Speaker 1: at the expensive creditors by taking advantage of out of

669
00:36:52,040 --> 00:36:54,440
Speaker 1: court processes that they could simply couldn't do in a

670
00:36:54,480 --> 00:36:58,160
Speaker 1: more traditional bankruptcy. As investors have gotten a little bit

671
00:36:58,239 --> 00:37:01,719
Speaker 1: smarter and worked a little bit closer together, part of

672
00:37:01,760 --> 00:37:05,959
Speaker 1: that value what's called reallocation to issuers or private acty

673
00:37:05,960 --> 00:37:09,120
Speaker 1: sponsors has gone away, and so it's not nearly as

674
00:37:09,200 --> 00:37:13,160
Speaker 1: beneficial again in general for an issuer to go through

675
00:37:13,200 --> 00:37:15,480
Speaker 1: an lemy as it used to be. And so that

676
00:37:15,600 --> 00:37:18,759
Speaker 1: does have the potential to put a bit of a

677
00:37:18,920 --> 00:37:22,560
Speaker 1: cap on a go forward basis for future lemy activity. Okay, okay,

678
00:37:23,239 --> 00:37:26,120
Speaker 1: that's a leverage finance invested. Do you prefer leverage loans

679
00:37:26,160 --> 00:37:28,080
Speaker 1: right now or hild bones It depends.

680
00:37:28,640 --> 00:37:31,000
Speaker 3: We do like loans right now. You know, if you

681
00:37:31,040 --> 00:37:34,560
Speaker 3: think about tight valuations where most of your return is

682
00:37:34,600 --> 00:37:37,200
Speaker 3: going to come from let's call it carry an interest,

683
00:37:38,760 --> 00:37:42,040
Speaker 3: loans are pretty attractive from an asset class perspective because

684
00:37:42,080 --> 00:37:45,799
Speaker 3: that's what they provide, pretty attractive levels of income. Being

685
00:37:45,840 --> 00:37:49,480
Speaker 3: floating rate, you're not taken on any duration risk. So

686
00:37:50,000 --> 00:37:52,080
Speaker 3: there is a case to be made for why loans

687
00:37:52,120 --> 00:37:56,040
Speaker 3: look pretty good. On the other hand, the loan market

688
00:37:56,160 --> 00:37:59,400
Speaker 3: is a lower quality market than the higher market. Some

689
00:37:59,600 --> 00:38:03,040
Speaker 3: of the improvement in the higho market in terms of

690
00:38:03,120 --> 00:38:07,360
Speaker 3: credit quality has somewhat common at the expense of some

691
00:38:07,560 --> 00:38:10,800
Speaker 3: of the lower quality trends that we've seen in the

692
00:38:10,880 --> 00:38:12,600
Speaker 3: loan market. So you need to be a little bit

693
00:38:12,680 --> 00:38:16,200
Speaker 3: careful in terms of looking at loan market valuations compared

694
00:38:16,200 --> 00:38:19,719
Speaker 3: to high yield because they're not apples to apples. And

695
00:38:19,840 --> 00:38:22,359
Speaker 3: that's why I mean, you know, it's what I meant

696
00:38:22,400 --> 00:38:24,200
Speaker 3: when I said it's kind of case by case, and

697
00:38:24,320 --> 00:38:27,160
Speaker 3: so there are definitely parts of the loan market that

698
00:38:27,280 --> 00:38:30,080
Speaker 3: we view as pretty attractive apples to apples versus the

699
00:38:30,160 --> 00:38:33,920
Speaker 3: HIGHO market where we can pick up pretty decent income

700
00:38:34,080 --> 00:38:37,160
Speaker 3: and not take on extra risk. But you just need

701
00:38:37,200 --> 00:38:39,759
Speaker 3: to be careful not to compare the loan market to

702
00:38:39,880 --> 00:38:42,160
Speaker 3: the HIGHO market at a top level, because there are

703
00:38:42,320 --> 00:38:46,200
Speaker 3: some pretty material differences in terms of the underlying composition.

704
00:38:46,960 --> 00:38:50,040
Speaker 1: Do you expect supply to increase substantially next year in

705
00:38:50,160 --> 00:38:51,640
Speaker 1: terms of high yield bonds and loans?

706
00:38:52,239 --> 00:38:54,600
Speaker 3: I would say it all depends on the M and

707
00:38:54,680 --> 00:38:59,360
Speaker 3: A environment twenty twenty five. As I think back to

708
00:39:00,160 --> 00:39:03,399
Speaker 3: what everybody was saying, certainly the cell side going into

709
00:39:03,640 --> 00:39:06,880
Speaker 3: the beginning of this year, twenty twenty five was supposed

710
00:39:06,880 --> 00:39:09,480
Speaker 3: to be the year of M and A. This was

711
00:39:09,520 --> 00:39:11,279
Speaker 3: supposed to be the year where we saw a big

712
00:39:11,360 --> 00:39:14,040
Speaker 3: pickup in both M and A and LB activity, and

713
00:39:14,120 --> 00:39:16,719
Speaker 3: that was supposed to drive a big resurgence in primary

714
00:39:17,040 --> 00:39:21,800
Speaker 3: market activity. We have seen some we've seen in the

715
00:39:21,880 --> 00:39:24,440
Speaker 3: HIAL market. There's been about three hundred billion of issuance

716
00:39:24,640 --> 00:39:28,560
Speaker 3: year today plus or minus. We're already ahead of the

717
00:39:28,760 --> 00:39:31,600
Speaker 3: total amount of issuance that we saw in twenty twenty four,

718
00:39:32,040 --> 00:39:33,560
Speaker 3: So we have seen a bit of a pickup in

719
00:39:33,960 --> 00:39:38,440
Speaker 3: primary market activity in high yield, but most of that

720
00:39:39,160 --> 00:39:43,000
Speaker 3: has been and continues to be for refinancing. And so

721
00:39:43,120 --> 00:39:46,120
Speaker 3: as we look forward to twenty twenty six, in order

722
00:39:46,320 --> 00:39:49,960
Speaker 3: for issuance to take another like higher from current levels,

723
00:39:51,280 --> 00:39:55,200
Speaker 3: part of what you need to see is that recovery

724
00:39:56,320 --> 00:39:59,480
Speaker 3: potentially in both M and A and LBO activity. Yeah.

725
00:39:59,480 --> 00:40:01,839
Speaker 2: I think for industrials it's like seventy to seventy five

726
00:40:01,880 --> 00:40:04,719
Speaker 2: percent has been refi And if you look at at

727
00:40:04,800 --> 00:40:07,640
Speaker 2: least for the industrials, it's like one hundred billion right

728
00:40:07,680 --> 00:40:10,120
Speaker 2: now that is callable over the next couple of years,

729
00:40:10,200 --> 00:40:13,359
Speaker 2: and a third of that is trading at or above

730
00:40:13,400 --> 00:40:15,960
Speaker 2: the call price right now. And if you just go

731
00:40:16,120 --> 00:40:19,279
Speaker 2: within one point, you're looking at close to fifty five

732
00:40:19,280 --> 00:40:21,920
Speaker 2: percent of the entire industrial sector that is not going

733
00:40:21,960 --> 00:40:24,160
Speaker 2: to be trading at or above the call prices. So,

734
00:40:24,840 --> 00:40:27,839
Speaker 2: like that's that's a spot on observation. There's definitely I'm

735
00:40:27,840 --> 00:40:29,480
Speaker 2: going to is what's going to need to pick up

736
00:40:29,480 --> 00:40:33,120
Speaker 2: to get that net that net benefit for issuance.

737
00:40:34,239 --> 00:40:36,520
Speaker 3: Yeah, I mean a couple other factors that could drive

738
00:40:36,560 --> 00:40:40,880
Speaker 3: additional issuance, you know, AI adjacent issuance. We've seen a

739
00:40:40,920 --> 00:40:44,560
Speaker 3: few deals, one of which you mentioned earlier, come hit

740
00:40:44,600 --> 00:40:46,880
Speaker 3: the highal market, certainly nowhere near to the extent that

741
00:40:46,960 --> 00:40:50,640
Speaker 3: we've seen in the investment grade market, but you know

742
00:40:51,400 --> 00:40:55,960
Speaker 3: that that could certainly be a marginal driver of additional

743
00:40:56,000 --> 00:40:59,040
Speaker 3: issuance in twenty twenty six, which I have to see.

744
00:40:59,080 --> 00:41:01,480
Speaker 3: On that side. The other thing that could move the

745
00:41:01,560 --> 00:41:05,680
Speaker 3: needle is we have also seen over the course of

746
00:41:05,760 --> 00:41:10,000
Speaker 3: this year a bit of you know, a return of

747
00:41:10,080 --> 00:41:14,880
Speaker 3: issuance from the private credit market into the public is

748
00:41:15,000 --> 00:41:18,240
Speaker 3: syndicated leverage finance market, both the loan and the HIGHO market.

749
00:41:18,920 --> 00:41:20,960
Speaker 3: You know, we saw a lot of deals in the

750
00:41:21,000 --> 00:41:24,919
Speaker 3: private credit market that we're refinancing deals in the loan market,

751
00:41:24,920 --> 00:41:26,680
Speaker 3: in the higher market in the last few years, and

752
00:41:26,760 --> 00:41:28,600
Speaker 3: part we've seen this year is a bit of a

753
00:41:28,680 --> 00:41:31,960
Speaker 3: reversal to that. Again, not trying to predict that that

754
00:41:32,000 --> 00:41:34,240
Speaker 3: could happen, but you know, to the extent we continue

755
00:41:34,280 --> 00:41:37,719
Speaker 3: to see, you know, a bit of additional reversal in

756
00:41:37,880 --> 00:41:41,600
Speaker 3: terms of more private credit, existing private credit deals being

757
00:41:41,680 --> 00:41:46,200
Speaker 3: refinanced into either the you know, the syndicated loan market

758
00:41:46,280 --> 00:41:48,680
Speaker 3: or the higher market. That could also provide some additional

759
00:41:49,200 --> 00:41:51,560
Speaker 3: incremental issuance as well in twenty twenty.

760
00:41:51,320 --> 00:41:53,560
Speaker 1: Six, But it sounds like it's a lot and in

761
00:41:53,640 --> 00:41:55,680
Speaker 1: which case we're kind of left under supplies still and

762
00:41:55,800 --> 00:41:59,560
Speaker 1: you know, spreads remain tight and you know, nothing really changes,

763
00:41:59,600 --> 00:42:01,239
Speaker 1: so you'll be get a lot more cash next year.

764
00:42:02,280 --> 00:42:04,759
Speaker 3: Well, our hope, our hope is again there's there's a

765
00:42:04,840 --> 00:42:09,879
Speaker 3: lot of different things going on in the world, you know, again,

766
00:42:10,080 --> 00:42:13,399
Speaker 3: most of which have really no direct impact on high yield,

767
00:42:13,440 --> 00:42:16,640
Speaker 3: although certainly the economic environment is a big deal. There's

768
00:42:16,640 --> 00:42:19,279
Speaker 3: any number of things, given more valuations are that could

769
00:42:19,600 --> 00:42:22,480
Speaker 3: cause a repricing in the market. You know, our hope

770
00:42:22,520 --> 00:42:26,000
Speaker 3: and expectation is that, you know, right now the opportunity

771
00:42:26,080 --> 00:42:30,319
Speaker 3: cost of steeing relatively neutral on credit is pretty low.

772
00:42:31,400 --> 00:42:34,799
Speaker 3: We are ready willing and able to use the dry

773
00:42:34,880 --> 00:42:39,600
Speaker 3: powder that we have and deploy that as opportunities come up. Again,

774
00:42:39,760 --> 00:42:41,520
Speaker 3: you know, we're not short at the market. You know,

775
00:42:41,719 --> 00:42:44,040
Speaker 3: it's it's you know, being short hig yield or being

776
00:42:44,040 --> 00:42:46,160
Speaker 3: short the credit markets over the long term is not

777
00:42:46,280 --> 00:42:49,160
Speaker 3: really a winning strategy. So again, our goal right now

778
00:42:49,280 --> 00:42:50,800
Speaker 3: is not to be short at the market, is to

779
00:42:50,840 --> 00:42:53,560
Speaker 3: stay pretty close to home, take most of our risk

780
00:42:53,600 --> 00:42:56,440
Speaker 3: and in the bottoms up opportunities that we see and

781
00:42:56,680 --> 00:43:00,160
Speaker 3: and wait for a better entry point to deploy and

782
00:43:00,239 --> 00:43:05,360
Speaker 3: more capital when overall market valuations offer better compensation for us.

783
00:43:06,160 --> 00:43:09,520
Speaker 1: And so, Michael, based on your long term strategy for

784
00:43:09,600 --> 00:43:13,239
Speaker 1: investment and how you look at things, where is the

785
00:43:13,320 --> 00:43:14,839
Speaker 1: best relative value right now?

786
00:43:16,040 --> 00:43:19,000
Speaker 3: So that's that's the million dollar question. I would say,

787
00:43:19,120 --> 00:43:22,920
Speaker 3: right now, I love and trillion really yeah, the trillion

788
00:43:22,960 --> 00:43:26,080
Speaker 3: dollar question. I would say, right now, it's really hard

789
00:43:26,160 --> 00:43:31,320
Speaker 3: to find value in credit, and so in the absence

790
00:43:31,360 --> 00:43:36,319
Speaker 3: of value, it doesn't cost you much to be up

791
00:43:36,360 --> 00:43:40,600
Speaker 3: in quality our general preference. So I helped to run

792
00:43:40,719 --> 00:43:43,239
Speaker 3: multi sactor fonds in addition to our high old portfolios,

793
00:43:43,320 --> 00:43:47,800
Speaker 3: so that that really runs the gamut between you know,

794
00:43:47,840 --> 00:43:50,800
Speaker 3: how yould investment great credit, emerging markets, and structure products.

795
00:43:52,440 --> 00:43:56,320
Speaker 3: I would say, when I look across kind of the

796
00:43:56,800 --> 00:44:00,239
Speaker 3: spread sectors within credit, we see most value in some

797
00:44:00,360 --> 00:44:03,760
Speaker 3: of the higher quality parts in the market. Our preference

798
00:44:03,880 --> 00:44:07,760
Speaker 3: right now is on balance investment grade credit over high yield.

799
00:44:08,000 --> 00:44:10,160
Speaker 3: We've got a bit of a tilt for higher quality

800
00:44:10,239 --> 00:44:15,960
Speaker 3: within high yield relative to lower quality. And so you know,

801
00:44:16,040 --> 00:44:19,239
Speaker 3: again the opportunity cost of being up in quality right now,

802
00:44:19,400 --> 00:44:22,759
Speaker 3: given where valuations are is pretty small. That again, that

803
00:44:22,840 --> 00:44:25,799
Speaker 3: could change, and so I would say the biggest opportunity

804
00:44:25,920 --> 00:44:29,880
Speaker 3: right now that I see in corporate credit is to

805
00:44:30,160 --> 00:44:34,279
Speaker 3: stay up in quality because you're not really being penalized

806
00:44:34,560 --> 00:44:38,480
Speaker 3: right now, and to reserve that dry powder in capital

807
00:44:38,600 --> 00:44:42,120
Speaker 3: for hopefully better opportunities ahead. It's really tough to make

808
00:44:42,160 --> 00:44:44,600
Speaker 3: a case, at least within publicly traded credit that there

809
00:44:44,640 --> 00:44:49,080
Speaker 3: are tremendous opportunities to make tremendous outsize returns just given

810
00:44:49,080 --> 00:44:51,120
Speaker 3: where valuations are right now, and.

811
00:44:51,160 --> 00:44:53,080
Speaker 1: The trigger for you to jump back in really is

812
00:44:53,120 --> 00:44:55,600
Speaker 1: just valuation. Then it's not anything you know, material in

813
00:44:55,840 --> 00:44:57,719
Speaker 1: the macro sets up all the rates or anything like that.

814
00:44:58,800 --> 00:45:01,640
Speaker 3: You know, our macro you know view right now is

815
00:45:01,840 --> 00:45:04,280
Speaker 3: is someone benign. We're not calling for a recession. Certainly,

816
00:45:04,360 --> 00:45:06,600
Speaker 3: there's there's a lot of uncertainty around. We're going to

817
00:45:06,640 --> 00:45:09,719
Speaker 3: get more data, you know who. Everyone's waiting for more data,

818
00:45:09,840 --> 00:45:12,960
Speaker 3: so maybe our our view you know, potentially changes. I

819
00:45:13,040 --> 00:45:15,560
Speaker 3: think we'll be on the lookouts as many investors are

820
00:45:16,360 --> 00:45:18,440
Speaker 3: on what some of the data suggests in terms of

821
00:45:18,640 --> 00:45:22,160
Speaker 3: the future path of the economy as well as monetary policy.

822
00:45:22,840 --> 00:45:24,759
Speaker 3: I would say, in the absence of a change in

823
00:45:24,840 --> 00:45:27,759
Speaker 3: our macro view, which is somewhat benign here in the US,

824
00:45:28,680 --> 00:45:32,759
Speaker 3: fundamentals should stay pretty strong, technical should remain somewhat supportive,

825
00:45:33,520 --> 00:45:35,560
Speaker 3: And so it really just comes down to valuations.

826
00:45:36,120 --> 00:45:39,000
Speaker 1: What level of high yield spread would jump you back

827
00:45:39,320 --> 00:45:41,600
Speaker 1: into the market, though, what's the what's the what's the

828
00:45:41,680 --> 00:45:42,360
Speaker 1: turning point for you?

829
00:45:43,000 --> 00:45:45,719
Speaker 3: Well, I would say it all depends, right, just like rates,

830
00:45:45,960 --> 00:45:48,719
Speaker 3: it all it'll right, you know, spread spreads usually move

831
00:45:48,760 --> 00:45:51,920
Speaker 3: for a reason, right, I would say, in the absence

832
00:45:52,040 --> 00:45:56,759
Speaker 3: of any change in the economic environment, you know, it

833
00:45:56,880 --> 00:45:59,720
Speaker 3: probably won't take that much more in terms of spread

834
00:45:59,800 --> 00:46:04,640
Speaker 3: white before we see valuations that look a little bit

835
00:46:04,719 --> 00:46:07,919
Speaker 3: more compelling and or where our view is it's being

836
00:46:08,000 --> 00:46:11,359
Speaker 3: expensive not to be longer risk than we are. Right,

837
00:46:13,400 --> 00:46:16,680
Speaker 3: My belief is that it is unlikely that spreads are

838
00:46:16,760 --> 00:46:21,920
Speaker 3: going to widen significantly without something having happened, and so

839
00:46:22,080 --> 00:46:24,000
Speaker 3: we just need to figure out, you know, when that

840
00:46:24,120 --> 00:46:28,640
Speaker 3: something happens, how impactful that is, If at all it

841
00:46:28,840 --> 00:46:32,279
Speaker 3: is too kind of high yield fundamentals and or technicals

842
00:46:33,280 --> 00:46:35,719
Speaker 3: to the extent it's simply a repricing of that risk

843
00:46:35,800 --> 00:46:39,120
Speaker 3: premium back to more normal levels. I would view that

844
00:46:39,400 --> 00:46:42,640
Speaker 3: as more of a buying opportunity than an event that

845
00:46:42,719 --> 00:46:46,520
Speaker 3: would cause us to reconsider our macro view and or

846
00:46:46,600 --> 00:46:48,200
Speaker 3: our view on future default rates.

847
00:46:48,520 --> 00:46:51,640
Speaker 1: Great stuff, Michael Chang, head of High Yield Corporate Credit

848
00:46:51,719 --> 00:46:53,440
Speaker 1: at van God many thanks for joining us today on

849
00:46:53,480 --> 00:46:54,080
Speaker 1: the Credit Edge.

850
00:46:54,320 --> 00:46:56,880
Speaker 3: Great Thank you guys, and thanks thanks for having me.

851
00:46:57,000 --> 00:46:58,880
Speaker 1: And of course I'm very grateful to joint up from

852
00:46:58,880 --> 00:47:00,600
Speaker 1: Bloombag Intelligence. Thanks for joining us today.

853
00:47:00,840 --> 00:47:03,239
Speaker 2: Thanks jeving to be back. Thanks Mike, much appreciated for.

854
00:47:03,320 --> 00:47:05,840
Speaker 1: More credit market analysis and insight. Read all of Matt's

855
00:47:05,840 --> 00:47:08,799
Speaker 1: great work on the Bloomberg Terminal. Bloomberg Intelligence is part

856
00:47:08,800 --> 00:47:11,360
Speaker 1: of our research department with five hundred analysts and strategists

857
00:47:11,360 --> 00:47:14,360
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858
00:47:14,440 --> 00:47:16,800
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00:47:17,120 --> 00:47:20,840
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860
00:47:20,920 --> 00:47:24,000
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861
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862
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863
00:47:30,320 --> 00:47:33,040
Speaker 1: a review, tell your friends, or email me directly at

864
00:47:33,200 --> 00:47:35,400
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865
00:47:36,360 --> 00:47:37,080
Speaker 2: I'm James Cromby.

866
00:47:37,160 --> 00:47:38,919
Speaker 1: It's been a pleasure having you join us again next

867
00:47:38,960 --> 00:47:40,279
Speaker 1: week on the Credit Edge