1 00:00:17,840 --> 00:00:20,400 Speaker 1: Hello, Welcome to the Credit Edge of Weekly Markets Podcasts. 2 00:00:20,440 --> 00:00:23,560 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:23,160 --> 00:00:26,400 Speaker 2: And I'm Jody Lurry, senior credit analyst at Bloomberg Intelligence. 4 00:00:26,640 --> 00:00:29,640 Speaker 2: This week, we're very pleased to welcome John Faquett, head 5 00:00:29,680 --> 00:00:31,840 Speaker 2: of tradable Credit at Crescent Capitol Group. 6 00:00:31,880 --> 00:00:34,040 Speaker 3: How are you, John, I'm great, good to be with 7 00:00:34,080 --> 00:00:34,760 Speaker 3: you both today. 8 00:00:34,880 --> 00:00:36,880 Speaker 2: Yeah, it's fantastic to have you. It's such a treat 9 00:00:36,880 --> 00:00:39,320 Speaker 2: to have you on today. For those listeners who don't know, 10 00:00:39,400 --> 00:00:42,920 Speaker 2: Crescent Capital is a leading alternative credit firm with forty 11 00:00:42,920 --> 00:00:46,000 Speaker 2: eight billion in assets under management and invests in corporate 12 00:00:46,000 --> 00:00:50,159 Speaker 2: credit across the capital structure. John has been dedicating twenty 13 00:00:50,200 --> 00:00:52,640 Speaker 2: four years of his life to the firm and overseas 14 00:00:52,960 --> 00:00:56,440 Speaker 2: over eleven billion in assets under management in high yield bonds, 15 00:00:56,560 --> 00:01:00,760 Speaker 2: high income and syndicate credit solution strategies. Obviously, he worked 16 00:01:00,800 --> 00:01:04,200 Speaker 2: at Trient and Capital Partners in HI old research covering 17 00:01:04,440 --> 00:01:08,039 Speaker 2: and I'll focus on the most important to me, gaming 18 00:01:08,160 --> 00:01:11,480 Speaker 2: and lodging and then of course common cable. So I'm 19 00:01:11,480 --> 00:01:12,760 Speaker 2: going to send it over to James now. 20 00:01:13,280 --> 00:01:15,840 Speaker 1: Yeah, So, as we keep saying, Jody credit markets are 21 00:01:16,120 --> 00:01:18,440 Speaker 1: red hot, with bond spreads at the titus in almost 22 00:01:18,480 --> 00:01:21,760 Speaker 1: three decades, as demand keeps getting bigger and the net 23 00:01:21,800 --> 00:01:25,280 Speaker 1: new supply just isn't there. The largest leverage buyout ever 24 00:01:25,480 --> 00:01:29,000 Speaker 1: for electronic arts is dominating the headlines this week. At 25 00:01:29,040 --> 00:01:32,480 Speaker 1: the same time, though, we're seeing more distress defaults and bankruptcyes. 26 00:01:32,560 --> 00:01:35,080 Speaker 1: First brands, the Cleveland based auto Supply, which had been 27 00:01:35,080 --> 00:01:37,520 Speaker 1: trading close to par just a few weeks ago, went bust. 28 00:01:37,880 --> 00:01:41,400 Speaker 1: It followed Treacylare Holdings, the company that sold used cars 29 00:01:41,440 --> 00:01:44,600 Speaker 1: to low income and undocumented immigrants, which also went down 30 00:01:44,680 --> 00:01:47,400 Speaker 1: this month. For those who have been around for a while, 31 00:01:47,480 --> 00:01:52,080 Speaker 1: a fifty five billion dollar LBO triggers some troubling echoes 32 00:01:52,160 --> 00:01:54,800 Speaker 1: of two thousand and seven, just before the global financial 33 00:01:54,880 --> 00:01:58,880 Speaker 1: market's meltdown, and that nobody wants to see again. So, John, 34 00:01:58,920 --> 00:02:01,080 Speaker 1: you're close to the action on the ground in credit. 35 00:02:01,280 --> 00:02:03,480 Speaker 1: How worried should we be about all this? Is it 36 00:02:03,560 --> 00:02:05,480 Speaker 1: the GFC all over again? Or is it really that 37 00:02:05,600 --> 00:02:06,440 Speaker 1: different this time? 38 00:02:06,800 --> 00:02:09,600 Speaker 3: I never like to say it's different this time. I 39 00:02:09,639 --> 00:02:12,480 Speaker 3: am a student of history, so I try to learn 40 00:02:12,560 --> 00:02:15,400 Speaker 3: from the past. What I'll say is that there are 41 00:02:15,440 --> 00:02:19,400 Speaker 3: certainly pockets of vulnerability, James, and we're seeing you mentioned 42 00:02:19,440 --> 00:02:24,880 Speaker 3: a few recent anecdotes. Broadly speaking, what we see in 43 00:02:24,919 --> 00:02:28,840 Speaker 3: the marketplace is a sentiment that's somewhat gloomy, but when 44 00:02:28,880 --> 00:02:31,280 Speaker 3: you look at the data, the data is generally fine. 45 00:02:31,800 --> 00:02:33,400 Speaker 3: So what I mean by that is some of the 46 00:02:33,440 --> 00:02:35,880 Speaker 3: things that we tend to look at to try to 47 00:02:35,919 --> 00:02:39,080 Speaker 3: assess the health of levered bar wars to determine where 48 00:02:39,120 --> 00:02:43,280 Speaker 3: defaults are going. One thing would be leverage levels. So 49 00:02:43,560 --> 00:02:45,760 Speaker 3: I think this is kind of interesting. I saw statistic 50 00:02:45,840 --> 00:02:49,160 Speaker 3: recently from JP Morgan saying that leverage for highield barwers 51 00:02:49,200 --> 00:02:52,760 Speaker 3: today is sitting around four times and that's the lowest 52 00:02:52,960 --> 00:02:56,280 Speaker 3: level in about twenty years. I don't think most people 53 00:02:56,680 --> 00:02:58,760 Speaker 3: would know that. Most of your listeners or those that 54 00:02:58,880 --> 00:03:01,880 Speaker 3: just read the press would probably we assume, based on 55 00:03:01,919 --> 00:03:04,520 Speaker 3: some of the anecdotes you just gave, things might be 56 00:03:04,560 --> 00:03:09,160 Speaker 3: heading off off a cliff, and statistically speaking, that's that's 57 00:03:09,240 --> 00:03:11,919 Speaker 3: not true. Again, there are going to be some examples, 58 00:03:11,960 --> 00:03:14,480 Speaker 3: and we can talk about happy to talk about some 59 00:03:15,200 --> 00:03:18,800 Speaker 3: sectors maybe that are where there's pockets of vulnerability, But 60 00:03:18,880 --> 00:03:22,400 Speaker 3: broadly speaking, leverage is in good shape. And another thing 61 00:03:22,440 --> 00:03:24,480 Speaker 3: that we look at I like to look at is 62 00:03:25,200 --> 00:03:27,919 Speaker 3: the pending debt maturities. I think this is a good 63 00:03:28,000 --> 00:03:30,920 Speaker 3: way to try to get your arms around what's going 64 00:03:30,960 --> 00:03:34,519 Speaker 3: to happen one, two, three years from now. And when 65 00:03:34,520 --> 00:03:37,800 Speaker 3: we look at the amount of debt coming due and 66 00:03:37,880 --> 00:03:41,160 Speaker 3: high yield for example, over the next three years, it's 67 00:03:41,200 --> 00:03:44,760 Speaker 3: about two hundred billion, which is about twenty percent of 68 00:03:44,800 --> 00:03:49,440 Speaker 3: the market. To give perspective, a good year in the market, 69 00:03:49,480 --> 00:03:52,640 Speaker 3: you see about two hundred billion dollars of refinancing activity. 70 00:03:53,200 --> 00:03:57,960 Speaker 3: So put another way, one year of refinancing activity would 71 00:03:57,960 --> 00:04:00,320 Speaker 3: cover all the debt coming do and in the high 72 00:04:00,360 --> 00:04:03,040 Speaker 3: yield market over the next thirty six months. It's a 73 00:04:03,040 --> 00:04:06,640 Speaker 3: similar number. For leverage loans, it's actually smaller to about 74 00:04:06,640 --> 00:04:09,040 Speaker 3: one hundred and sixty billion. So when you look at 75 00:04:09,080 --> 00:04:13,560 Speaker 3: things like that, to me, it says that the market 76 00:04:13,880 --> 00:04:18,720 Speaker 3: is constructive, it's relatively healthy. Let's go to the default activity. 77 00:04:18,760 --> 00:04:22,200 Speaker 3: You mentioned. There is some credit stress, and it's in 78 00:04:22,440 --> 00:04:25,280 Speaker 3: what I would say a handful of sectors. Media is one, 79 00:04:26,839 --> 00:04:29,720 Speaker 3: retail is another sector. It seems like retail is always 80 00:04:30,160 --> 00:04:34,520 Speaker 3: a vulnerable stress sector. In the twenty plus year career 81 00:04:34,560 --> 00:04:38,000 Speaker 3: I've had. What's interesting is technology has been on that 82 00:04:38,080 --> 00:04:40,200 Speaker 3: list too, and I think a lot of folks might 83 00:04:40,240 --> 00:04:43,320 Speaker 3: be surprised to hear that. One of the reasons why 84 00:04:43,400 --> 00:04:47,080 Speaker 3: is because technology has a higher leverage level than any 85 00:04:47,080 --> 00:04:50,080 Speaker 3: other sector. People felt like, well, these are like low 86 00:04:50,120 --> 00:04:53,760 Speaker 3: capex companies, they're very high recurring revenue. We can put 87 00:04:53,800 --> 00:04:57,320 Speaker 3: more leverage on a tech company than on an industrial company. 88 00:04:57,440 --> 00:05:00,599 Speaker 3: And the reality is that when rates shot up in 89 00:05:00,640 --> 00:05:03,080 Speaker 3: twenty twenty two, it created a lot more stress. So 90 00:05:03,520 --> 00:05:07,359 Speaker 3: it's interesting for me to see technology on that list 91 00:05:07,360 --> 00:05:09,360 Speaker 3: of a handful of sectors where there is stress. 92 00:05:11,120 --> 00:05:13,280 Speaker 2: So, John, I want to dig in a little bit 93 00:05:13,360 --> 00:05:15,640 Speaker 2: into some of the points you said. So you said 94 00:05:15,680 --> 00:05:19,120 Speaker 2: four times leverage on average for high yields, and I'm 95 00:05:19,160 --> 00:05:21,560 Speaker 2: just curious when you think about the HILD market, you know, 96 00:05:21,680 --> 00:05:25,200 Speaker 2: post COVID and actually post GFC, but particularly post COVID, 97 00:05:25,520 --> 00:05:29,040 Speaker 2: we've seen it shrink over time with a preference to 98 00:05:30,480 --> 00:05:36,320 Speaker 2: private credit issuance. So I'm just curious if we're not 99 00:05:36,360 --> 00:05:37,800 Speaker 2: actually seeing the whole market. 100 00:05:38,040 --> 00:05:42,839 Speaker 3: You're certainly true like your comment about the high market shrinking, Jody, 101 00:05:42,920 --> 00:05:47,120 Speaker 3: that's that's been something that we've seen and it's really 102 00:05:47,120 --> 00:05:50,320 Speaker 3: been offset. You mentioned private credit, but also leverage loans 103 00:05:50,320 --> 00:05:52,400 Speaker 3: as a whole. Leverage loans as a hole has been 104 00:05:52,920 --> 00:05:56,279 Speaker 3: a much faster growing market than let's say, high heal bonds. 105 00:05:56,880 --> 00:06:01,239 Speaker 3: Borrowers and their private equity sponsors have favored or leverage loan, 106 00:06:01,480 --> 00:06:05,360 Speaker 3: whether they be syndicated or private solutions in the last 107 00:06:05,560 --> 00:06:10,160 Speaker 3: few years, and that trend has been I think many 108 00:06:10,279 --> 00:06:13,040 Speaker 3: years in the making. Now. One of the side effects 109 00:06:13,040 --> 00:06:16,400 Speaker 3: of that on high yield has been an increase in 110 00:06:16,440 --> 00:06:19,000 Speaker 3: credit quality. So if you look at the average credit 111 00:06:19,080 --> 00:06:21,520 Speaker 3: rating and high yield, it's higher today than it's ever been. 112 00:06:22,040 --> 00:06:24,120 Speaker 3: It's one of the things I point to. People will 113 00:06:24,120 --> 00:06:26,599 Speaker 3: often ask me, hey, why is high yield so tight? 114 00:06:26,640 --> 00:06:31,760 Speaker 3: And James mentioned spreads are quite low, and they are, 115 00:06:32,040 --> 00:06:34,640 Speaker 3: but one of the reasons is that you've seen convergence 116 00:06:34,720 --> 00:06:38,719 Speaker 3: between high yield and investment grade. In fact, high yield 117 00:06:38,760 --> 00:06:41,719 Speaker 3: has a double B average rating investment grade as a 118 00:06:41,720 --> 00:06:45,080 Speaker 3: triple B average rating. They're the closest they've ever been 119 00:06:45,120 --> 00:06:48,000 Speaker 3: in terms of credit quality, and they're also the closest 120 00:06:48,000 --> 00:06:50,320 Speaker 3: they've ever been in terms of spread. So that tells 121 00:06:50,360 --> 00:06:53,560 Speaker 3: me the market is fairly efficient. Now, loans is a 122 00:06:53,560 --> 00:06:57,599 Speaker 3: different story. You've had a slow but steady degradation in 123 00:06:57,640 --> 00:07:03,040 Speaker 3: credit ratings in that particular market, single B is the average. 124 00:07:03,080 --> 00:07:06,160 Speaker 3: You know that colos are a big driver in that 125 00:07:06,200 --> 00:07:10,880 Speaker 3: market as well, which have their own technicals when something 126 00:07:10,880 --> 00:07:16,280 Speaker 3: gets downgraded to triple C, so oftentimes that's that's something 127 00:07:16,320 --> 00:07:19,760 Speaker 3: that investors, I think need to be aware of. Lme activity, 128 00:07:19,840 --> 00:07:24,160 Speaker 3: triple C downgrade, the technical that the clos's I think 129 00:07:24,160 --> 00:07:26,640 Speaker 3: it's a little more tricky today to invest in loans 130 00:07:26,640 --> 00:07:29,200 Speaker 3: than it is in high yield bonds. And that's crazy 131 00:07:29,240 --> 00:07:31,440 Speaker 3: for me to say, because when I started my career, 132 00:07:32,000 --> 00:07:35,440 Speaker 3: leverage loans were considered like a cash alternative and high 133 00:07:35,480 --> 00:07:38,080 Speaker 3: O bonds were considered to be the wild West. 134 00:07:39,040 --> 00:07:41,840 Speaker 2: Just thinking about the fact that there's such a tight 135 00:07:41,880 --> 00:07:44,360 Speaker 2: spread between triple B and double B and we're seeing 136 00:07:44,360 --> 00:07:45,600 Speaker 2: that on our end, I mean, I'm seeing that with 137 00:07:45,640 --> 00:07:48,640 Speaker 2: a lot of my companies who are working towards investment grade. 138 00:07:48,680 --> 00:07:51,960 Speaker 2: So there's that component of it where they're just barely 139 00:07:52,080 --> 00:07:56,120 Speaker 2: blow investment grade. But beyond that, I mean, does that 140 00:07:56,280 --> 00:07:59,280 Speaker 2: mean that a lot of companies don't necessarily see the 141 00:07:59,360 --> 00:08:02,680 Speaker 2: value of being investment grade, or does it mean that 142 00:08:03,360 --> 00:08:09,000 Speaker 2: investors are more willing to reach for riskier investments because 143 00:08:09,000 --> 00:08:12,720 Speaker 2: they're not necessarily getting rewarded at the higher level of 144 00:08:12,760 --> 00:08:13,280 Speaker 2: high yield. 145 00:08:14,960 --> 00:08:19,120 Speaker 3: That's a really interesting question, Jody, because with the way 146 00:08:19,160 --> 00:08:22,320 Speaker 3: you said it like our companies not maybe putting as 147 00:08:22,440 --> 00:08:28,240 Speaker 3: much value or priority on being investment grade. Again, I'm 148 00:08:28,280 --> 00:08:33,520 Speaker 3: going to sound like back in my day, but quite honestly, 149 00:08:33,600 --> 00:08:36,880 Speaker 3: you know, twenty years ago, every company in high yield, 150 00:08:37,160 --> 00:08:39,600 Speaker 3: even if they didn't their actions didn't show it, they 151 00:08:39,640 --> 00:08:44,040 Speaker 3: would pay homage to we want to be investment grade rated, right. 152 00:08:44,080 --> 00:08:47,520 Speaker 3: They would say that on their quarterly earnings calls. You 153 00:08:47,520 --> 00:08:50,080 Speaker 3: don't hear it as much today, and even with fallen Angels, 154 00:08:50,080 --> 00:08:52,040 Speaker 3: I find that to be quite interesting. You know, the 155 00:08:52,080 --> 00:08:55,760 Speaker 3: reason high yield is increased in quality is because we 156 00:08:55,880 --> 00:08:59,959 Speaker 3: had many former IG companies that were downgraded into our 157 00:09:00,040 --> 00:09:03,400 Speaker 3: h yield universe, and they did not prioritize going back 158 00:09:03,440 --> 00:09:05,760 Speaker 3: to investment grade. They were happy to borrow at six 159 00:09:05,880 --> 00:09:09,199 Speaker 3: percent instead of four percent. It's still worked for their 160 00:09:09,240 --> 00:09:12,440 Speaker 3: business model, and they're good double B companies and they're 161 00:09:12,520 --> 00:09:15,800 Speaker 3: large caps. So I think it's safe to say that 162 00:09:16,080 --> 00:09:19,680 Speaker 3: it maybe is not a priority for every company. You know, 163 00:09:19,760 --> 00:09:22,520 Speaker 3: some companies, if you're financial, for example, you don't see 164 00:09:22,559 --> 00:09:25,920 Speaker 3: a lot of junk bond rated banks. I hope that 165 00:09:25,960 --> 00:09:31,800 Speaker 3: we don't see a lot in the future party risk lore. Yeah, yeah, exactly. 166 00:09:31,880 --> 00:09:34,280 Speaker 3: So it's it's more sector bisector specific. 167 00:09:35,760 --> 00:09:38,200 Speaker 1: But John, to go back to what you were saying 168 00:09:38,240 --> 00:09:42,520 Speaker 1: about the risk pockets of risk and to Jody's point 169 00:09:42,520 --> 00:09:45,440 Speaker 1: that you know this spread kind of collapsing between the 170 00:09:45,480 --> 00:09:49,640 Speaker 1: different ratings buckets, to me, it suggests more complacency than 171 00:09:49,640 --> 00:09:52,559 Speaker 1: anything else. You know, if you if you're valuing a 172 00:09:52,559 --> 00:09:55,480 Speaker 1: triple C risk very close to single B and single 173 00:09:55,480 --> 00:09:58,280 Speaker 1: BE very close to double B and you're not really differentiating, 174 00:09:58,320 --> 00:10:01,160 Speaker 1: it's just speaks to me more about the excess cash 175 00:10:01,160 --> 00:10:03,880 Speaker 1: in the system and not enough supply. And to that point, 176 00:10:03,960 --> 00:10:06,839 Speaker 1: you know, the pockets of stress that you mentioned at 177 00:10:06,840 --> 00:10:10,000 Speaker 1: the beginning, how widespread are they and how do you 178 00:10:10,200 --> 00:10:10,800 Speaker 1: spot them? 179 00:10:11,080 --> 00:10:14,480 Speaker 3: It's been relatively modest thus far. If you look at 180 00:10:14,480 --> 00:10:17,360 Speaker 3: as a percentage of the market, it's still well within 181 00:10:17,640 --> 00:10:23,120 Speaker 3: historical norms, which you know, there's two sides to every trade, right, 182 00:10:23,240 --> 00:10:25,160 Speaker 3: One person could look at that and say, well, geez, 183 00:10:25,240 --> 00:10:27,520 Speaker 3: high yield default and bank lone default rates are at 184 00:10:27,640 --> 00:10:31,440 Speaker 3: historical levels or even elevated above that, and that could 185 00:10:31,480 --> 00:10:34,840 Speaker 3: be a cause for concern. Another person could look at 186 00:10:34,880 --> 00:10:37,640 Speaker 3: that and say, well, geez, we had this huge increase 187 00:10:37,640 --> 00:10:39,920 Speaker 3: in interest rates in twenty twenty two. Rates have been 188 00:10:40,040 --> 00:10:43,760 Speaker 3: higher for longer than most people expected, and yet still 189 00:10:43,840 --> 00:10:47,800 Speaker 3: three years into a rate hiking cycle, the historical default 190 00:10:47,880 --> 00:10:50,280 Speaker 3: rate is still only sort of in line with the 191 00:10:50,360 --> 00:10:54,160 Speaker 3: long term average. So it's not not a lot to 192 00:10:54,280 --> 00:10:57,559 Speaker 3: be terribly worried about. I do think there is some 193 00:10:57,640 --> 00:11:01,439 Speaker 3: complacency in the market. That's one way to look at it. 194 00:11:01,480 --> 00:11:04,440 Speaker 3: There's a lot of cash, as you said, James, that 195 00:11:04,760 --> 00:11:08,120 Speaker 3: is across asset classes, right, We're not just talking about 196 00:11:08,480 --> 00:11:11,520 Speaker 3: syndicated bonds and loans. Private credit has raised a lot 197 00:11:11,520 --> 00:11:16,000 Speaker 3: of capital. Flows into investment grade have been robust recently, 198 00:11:16,120 --> 00:11:19,080 Speaker 3: so there is a lot of capital. And when you 199 00:11:19,120 --> 00:11:22,600 Speaker 3: have a lot of capital, companies can get bailed out. 200 00:11:23,000 --> 00:11:27,880 Speaker 3: And we see that. We see more examples of lower 201 00:11:27,960 --> 00:11:31,079 Speaker 3: rated companies that look quite vulnerable and they are able 202 00:11:31,120 --> 00:11:35,080 Speaker 3: to secure financing solution, which could cause the price of 203 00:11:35,120 --> 00:11:37,400 Speaker 3: the bond or loan to jump by ten or fifteen 204 00:11:37,480 --> 00:11:42,480 Speaker 3: or twenty points. So it's both an opportunity because if 205 00:11:42,520 --> 00:11:48,080 Speaker 3: you can correctly identify those companies, you could do quite 206 00:11:48,120 --> 00:11:51,160 Speaker 3: well but it's also a risk. Those are the kinds 207 00:11:51,200 --> 00:11:55,920 Speaker 3: of companies that have been vulnerable. And why I say 208 00:11:55,920 --> 00:11:59,480 Speaker 3: there will be failures. If you're a levered company and 209 00:11:59,480 --> 00:12:01,560 Speaker 3: you have a very high level of leverage and we're 210 00:12:01,720 --> 00:12:06,040 Speaker 3: multi years out of the pandemic, I'd be worried about that. 211 00:12:06,120 --> 00:12:11,439 Speaker 3: So our team is really focusing more on looking at 212 00:12:11,480 --> 00:12:15,199 Speaker 3: cash flow, looking at what's going on in the capital structure, 213 00:12:16,000 --> 00:12:19,800 Speaker 3: a little bit more up in quality given the nuances 214 00:12:19,840 --> 00:12:23,360 Speaker 3: in the economic outlook. What I mean by that is 215 00:12:23,720 --> 00:12:26,400 Speaker 3: in the high yield and bank loan side, preferring more 216 00:12:26,440 --> 00:12:30,360 Speaker 3: of the higher single be rated credits and you can 217 00:12:30,400 --> 00:12:33,800 Speaker 3: still get a mid to high single digit return in 218 00:12:33,880 --> 00:12:36,920 Speaker 3: a good quality portfolio, which I think for modest level 219 00:12:36,960 --> 00:12:41,000 Speaker 3: of duration risk, that's not a bad outcome right now. 220 00:12:41,480 --> 00:12:43,600 Speaker 1: So the view on the risk then in terms of 221 00:12:43,640 --> 00:12:46,400 Speaker 1: you know, these pockets of stress, that's more idiosyncratic. It's 222 00:12:46,800 --> 00:12:50,839 Speaker 1: very specific to names and possibly certain industries. You don't 223 00:12:50,840 --> 00:12:53,719 Speaker 1: think it's a widespread credit issue. 224 00:12:53,480 --> 00:12:57,720 Speaker 3: Not yet. Again, being a student of history, usually these 225 00:12:58,200 --> 00:13:03,240 Speaker 3: default cycles begin with a few idiosyncratic examples, right, and 226 00:13:03,280 --> 00:13:09,400 Speaker 3: then it becomes more systemic. We're not seeing that today, 227 00:13:09,480 --> 00:13:12,160 Speaker 3: and that sort of brings I think to the point 228 00:13:12,200 --> 00:13:15,720 Speaker 3: about what is twenty twenty six going to look like? 229 00:13:15,920 --> 00:13:18,200 Speaker 3: Is twenty twenty six going to be a recession year? 230 00:13:18,800 --> 00:13:21,440 Speaker 3: Where's twenty twenty six going to be a rebound year? 231 00:13:21,760 --> 00:13:26,280 Speaker 3: And I think a crisp argument could be made for 232 00:13:26,480 --> 00:13:29,160 Speaker 3: either of those. So it's not quite clear that we're 233 00:13:29,200 --> 00:13:33,880 Speaker 3: about to see a default cycle increase. A lot of 234 00:13:33,880 --> 00:13:37,160 Speaker 3: folks think defaults are more likely to go down in 235 00:13:37,240 --> 00:13:41,400 Speaker 3: twenty six as the economy starts to reaccelerate. We'll have 236 00:13:41,440 --> 00:13:43,920 Speaker 3: to see which direction we take now. 237 00:13:43,960 --> 00:13:46,880 Speaker 2: Donnie mentioned a few sectors that you don't like, such 238 00:13:46,880 --> 00:13:51,839 Speaker 2: as retail, But what sectors are you leaning towards as 239 00:13:51,880 --> 00:13:56,559 Speaker 2: a result of retail? Sort of? I mean, I use 240 00:13:56,600 --> 00:13:58,920 Speaker 2: retail as an example, But the few sectors that you 241 00:13:58,960 --> 00:14:01,000 Speaker 2: don't like, which ones do you actually like? And which 242 00:14:01,040 --> 00:14:04,520 Speaker 2: ones are you seeing there being value going into this 243 00:14:04,600 --> 00:14:05,840 Speaker 2: uncertainty in twenty six. 244 00:14:07,320 --> 00:14:12,520 Speaker 3: Retail is interesting. I want to make sure I just 245 00:14:12,559 --> 00:14:15,120 Speaker 3: to set the record straight, not that I don't like it. 246 00:14:15,200 --> 00:14:18,760 Speaker 3: I mentioned it as one area where there is elevated 247 00:14:19,160 --> 00:14:24,040 Speaker 3: level of default risk. But interestingly enough, I think expectations 248 00:14:24,080 --> 00:14:29,200 Speaker 3: in retail were so incredibly low that we've actually seen 249 00:14:29,320 --> 00:14:33,160 Speaker 3: positive earning surprises in the most recent quarter. This was 250 00:14:33,360 --> 00:14:36,840 Speaker 3: across different types of retailers, so we saw department stores 251 00:14:37,280 --> 00:14:41,520 Speaker 3: put up better than expected numbers, apparel stores, even pet 252 00:14:41,720 --> 00:14:45,600 Speaker 3: retailers put up better than expected numbers. And there's been 253 00:14:45,640 --> 00:14:49,000 Speaker 3: some pressure on the pet space coming out of the 254 00:14:49,000 --> 00:14:52,720 Speaker 3: COVID pandemic. So it's interesting, Like it's a sector, I 255 00:14:52,720 --> 00:14:54,880 Speaker 3: bet a lot of people would say, I don't want 256 00:14:54,880 --> 00:14:57,560 Speaker 3: to touch it. But interestingly enough, when you start to 257 00:14:57,600 --> 00:15:01,240 Speaker 3: peel the onion, you see that expectations so low, there 258 00:15:01,280 --> 00:15:05,800 Speaker 3: may be some idiosyncratic opportunities there in that sector as well. 259 00:15:06,960 --> 00:15:09,880 Speaker 3: On the other side, you know, everybody will talk about 260 00:15:09,960 --> 00:15:14,400 Speaker 3: having exposure to healthcare business services, things that are CAPEX light, 261 00:15:15,040 --> 00:15:18,360 Speaker 3: high free cash flow conversion. Generally, these types of businesses, 262 00:15:18,680 --> 00:15:22,920 Speaker 3: these business models do pretty well. Healthcare, though, is one 263 00:15:22,960 --> 00:15:27,640 Speaker 3: area that is well. Has very little little tariff impact 264 00:15:27,680 --> 00:15:31,400 Speaker 3: other than maybe pharmaceuticals, a lot of regulatory risk, right 265 00:15:31,720 --> 00:15:34,440 Speaker 3: stroke of the pen risk, change of the budget, and 266 00:15:34,520 --> 00:15:38,680 Speaker 3: suddenly reimbursement rates for hospitals and providers is down. So 267 00:15:38,920 --> 00:15:42,400 Speaker 3: there are a lot of challenges to navigate in a 268 00:15:42,400 --> 00:15:45,080 Speaker 3: healthcare sector, even though that's one of the largest sectors 269 00:15:45,120 --> 00:15:48,320 Speaker 3: that most investors have in their high yield and bank 270 00:15:48,320 --> 00:15:49,280 Speaker 3: long portfolios. 271 00:15:49,480 --> 00:15:51,840 Speaker 2: I think for the healthcare space to are my colleague 272 00:15:52,200 --> 00:15:55,880 Speaker 2: Jy and Mike Colland write about this a lot in 273 00:15:56,000 --> 00:15:59,360 Speaker 2: terms of the tariff effects of that. Now a lot 274 00:15:59,360 --> 00:16:02,040 Speaker 2: of the companies I cover have more kind of indirect 275 00:16:02,160 --> 00:16:06,600 Speaker 2: terriff effects in the leisure gaming spaces, And drawing on 276 00:16:06,680 --> 00:16:09,960 Speaker 2: your background in gaming, you know, something that we've seen 277 00:16:10,040 --> 00:16:13,440 Speaker 2: recently is the weakness coming out of Las Vegas, a 278 00:16:13,480 --> 00:16:17,560 Speaker 2: little bit less exciting growth in Macau. And so I'm 279 00:16:17,640 --> 00:16:20,440 Speaker 2: just curious if you sort of see that as any 280 00:16:20,520 --> 00:16:24,040 Speaker 2: kind of canary, if you see that as just descriptive 281 00:16:24,240 --> 00:16:27,560 Speaker 2: of a lack of catalysts, or are we in fact 282 00:16:27,600 --> 00:16:30,840 Speaker 2: seeing the consumer get a little bit more concerned because 283 00:16:30,880 --> 00:16:33,640 Speaker 2: of tariffs. 284 00:16:33,440 --> 00:16:37,600 Speaker 3: That's a great observation, Jody, and one that I've seen 285 00:16:37,680 --> 00:16:40,120 Speaker 3: throughout my career in gaming. And this is you know, 286 00:16:40,160 --> 00:16:43,400 Speaker 3: a little bit of inside baseball for gaming. But since 287 00:16:43,440 --> 00:16:47,080 Speaker 3: you have expertise there and I covered it, I think 288 00:16:47,120 --> 00:16:50,480 Speaker 3: it's something that is a repeatable pattern for the listeners, 289 00:16:50,560 --> 00:16:55,040 Speaker 3: which is that when consumers start feeling a little bit pinched, 290 00:16:55,600 --> 00:16:57,960 Speaker 3: the first place you see it in gaming leisure and 291 00:16:58,000 --> 00:17:00,960 Speaker 3: lodging is usually in the loss of Vegas strip data, 292 00:17:01,400 --> 00:17:03,880 Speaker 3: you start to see visitation come down. You start to 293 00:17:03,880 --> 00:17:08,760 Speaker 3: see people spending a little bit less on shows and 294 00:17:08,840 --> 00:17:13,600 Speaker 3: dinners and gaming, and instead you see them reallocate those 295 00:17:13,680 --> 00:17:17,199 Speaker 3: dollars to local or what we call regional casinos. So 296 00:17:17,320 --> 00:17:20,560 Speaker 3: if you're in southern California like I am, maybe you're 297 00:17:20,600 --> 00:17:23,560 Speaker 3: going to the tribal casinos that are an hour away. 298 00:17:23,840 --> 00:17:26,880 Speaker 3: Or if you're living in Philadelphia, you've got a lot 299 00:17:26,880 --> 00:17:29,919 Speaker 3: of casinos there. You don't necessarily need to fly to 300 00:17:30,040 --> 00:17:33,680 Speaker 3: Las Vegas and have a monumental weekend trip. You can 301 00:17:33,840 --> 00:17:38,359 Speaker 3: have a fun time for a few hours in your region. 302 00:17:38,400 --> 00:17:42,159 Speaker 3: And regional gaming is also so prevalent today. You know. 303 00:17:42,480 --> 00:17:45,560 Speaker 3: I remember having a map up in my office when 304 00:17:45,560 --> 00:17:48,280 Speaker 3: I first started as a gaming analyst, and I actually 305 00:17:48,280 --> 00:17:51,560 Speaker 3: could put like a few pins where there were casinos 306 00:17:51,640 --> 00:17:54,199 Speaker 3: legal casinos in the US, and it was like just 307 00:17:54,240 --> 00:17:56,080 Speaker 3: a few pins. You know, if I did that today, 308 00:17:56,680 --> 00:17:58,800 Speaker 3: the map would you know, would be punctured, tod probably 309 00:17:58,800 --> 00:18:02,639 Speaker 3: fall off the wall. Because gaming is legalized in I 310 00:18:02,680 --> 00:18:05,640 Speaker 3: think forty eight out of the fifty states, so there's 311 00:18:05,680 --> 00:18:10,400 Speaker 3: a lot more opportunity for consumers who maybe are reallocating 312 00:18:10,640 --> 00:18:13,720 Speaker 3: their dollars and thinking about how they're spending it. So 313 00:18:13,800 --> 00:18:16,600 Speaker 3: if I started to see the regional data turned down, 314 00:18:16,680 --> 00:18:18,600 Speaker 3: then I think that would be a sign of a 315 00:18:18,640 --> 00:18:20,200 Speaker 3: more pervasive downturn. 316 00:18:20,520 --> 00:18:22,400 Speaker 2: One thing I've struggled with, and not to get too 317 00:18:22,520 --> 00:18:24,200 Speaker 2: deep in the weeds about gaming, but I do think 318 00:18:24,240 --> 00:18:27,960 Speaker 2: that it's analogous to other sectors is we now have 319 00:18:28,080 --> 00:18:31,800 Speaker 2: online gaming and sports betting legal in fourteen states, right, 320 00:18:32,080 --> 00:18:35,880 Speaker 2: and so we have some component of not this time 321 00:18:35,880 --> 00:18:38,200 Speaker 2: as different, but we do have this time as different. Right, 322 00:18:38,320 --> 00:18:42,119 Speaker 2: people might not even be as willing to go to 323 00:18:43,280 --> 00:18:46,679 Speaker 2: regional casinos now if they could do it from their phone. Similarly, 324 00:18:47,359 --> 00:18:50,280 Speaker 2: we've had that argument in retail right where why am 325 00:18:50,320 --> 00:18:51,719 Speaker 2: I going to go to the store when I can 326 00:18:51,920 --> 00:18:53,520 Speaker 2: do it on my phone? But we are still seeing 327 00:18:53,520 --> 00:18:56,239 Speaker 2: people go to the store. How are you kind of 328 00:18:56,320 --> 00:18:58,919 Speaker 2: thinking about that? Because so many of the companies in 329 00:18:58,960 --> 00:19:03,280 Speaker 2: the hy old space have this component of tech replacing 330 00:19:03,560 --> 00:19:08,760 Speaker 2: traditional operations, and how do you then say, Okay, this 331 00:19:08,800 --> 00:19:11,400 Speaker 2: is happening, but we're still seeing the cash flows there, 332 00:19:11,440 --> 00:19:13,320 Speaker 2: We're still seeing these companies as beneficial. 333 00:19:13,560 --> 00:19:17,080 Speaker 3: A lot of that is driven by demographics, right, So 334 00:19:17,359 --> 00:19:19,520 Speaker 3: I think about go back to casinos for a second, 335 00:19:19,680 --> 00:19:21,840 Speaker 3: since that's kind of a fun sector to talk about. 336 00:19:22,320 --> 00:19:26,760 Speaker 3: I always think so part of it. It's not just 337 00:19:26,840 --> 00:19:29,280 Speaker 3: the bet, right, It's not just the This is why 338 00:19:29,359 --> 00:19:31,840 Speaker 3: when you look at the revenue that a casino has, 339 00:19:31,880 --> 00:19:35,879 Speaker 3: and I'm generalizing, it varies depending upon whether it's a 340 00:19:35,920 --> 00:19:41,600 Speaker 3: casino in Macao, Las Vegas, or Indiana, but generally speaking, 341 00:19:41,840 --> 00:19:45,400 Speaker 3: the revenue from the gambling is half or less than 342 00:19:45,400 --> 00:19:48,560 Speaker 3: half of the total revenue a casino makes. Because so 343 00:19:48,640 --> 00:19:50,919 Speaker 3: many people put a great deal of value on the 344 00:19:51,040 --> 00:19:55,000 Speaker 3: experience of having a nice meal with your family, or 345 00:19:55,040 --> 00:19:58,040 Speaker 3: going to a really cool show at the Sphere in 346 00:19:58,400 --> 00:20:01,560 Speaker 3: Las Vegas and seeing something amazing that you can't see 347 00:20:02,160 --> 00:20:05,520 Speaker 3: anywhere else, or going shopping and treating yourself. Right. So 348 00:20:06,080 --> 00:20:09,199 Speaker 3: even though yes, technically, if if all you care about 349 00:20:09,440 --> 00:20:12,960 Speaker 3: is making a bet, you could bet online, it's a 350 00:20:13,080 --> 00:20:17,879 Speaker 3: very very different experience than going to do all these 351 00:20:18,000 --> 00:20:20,440 Speaker 3: all these things that we're talking about. So I think 352 00:20:20,440 --> 00:20:24,199 Speaker 3: it's important to understand the motivation, like what's driving the 353 00:20:24,200 --> 00:20:29,040 Speaker 3: consumer and the behavior and is it, you know, just 354 00:20:29,040 --> 00:20:31,560 Speaker 3: just that bet that's going to eat into some casino 355 00:20:31,600 --> 00:20:34,760 Speaker 3: business for sure, But for a lot of people, it's 356 00:20:34,880 --> 00:20:38,399 Speaker 3: just a way to you know, maybe have have a 357 00:20:38,440 --> 00:20:40,280 Speaker 3: good time for a few days and get and get 358 00:20:40,280 --> 00:20:43,200 Speaker 3: away from get away from home. So it's I think 359 00:20:43,240 --> 00:20:44,560 Speaker 3: there's demand for both for. 360 00:20:44,520 --> 00:20:46,480 Speaker 1: Sure, or is it the fact that we're also worried 361 00:20:46,480 --> 00:20:48,960 Speaker 1: about recession coming out that we just need to distract ourselves. 362 00:20:49,720 --> 00:20:54,359 Speaker 3: Like you'd be a great fixed income investor, James, because 363 00:20:54,359 --> 00:20:57,880 Speaker 3: you're glass to have empty you'd be you'd be perfect. 364 00:20:57,920 --> 00:21:03,080 Speaker 3: That's exactly the kind of culture we cultivate on our team. 365 00:21:03,160 --> 00:21:06,280 Speaker 3: We're always we're always looking at, you know, what could 366 00:21:06,320 --> 00:21:10,000 Speaker 3: go wrong because it's an asymmetric asset class. Best case 367 00:21:10,000 --> 00:21:12,080 Speaker 3: we get our money back. Worst cases, you know, we 368 00:21:12,160 --> 00:21:13,879 Speaker 3: get twenty or thirty cents on the dollar. 369 00:21:17,119 --> 00:21:19,959 Speaker 1: But just switching gears a little bit. Clos have been 370 00:21:20,000 --> 00:21:24,320 Speaker 1: a big feature on this show for many months, including 371 00:21:24,359 --> 00:21:27,359 Speaker 1: some of the biggest asset managers in the world talking 372 00:21:27,359 --> 00:21:29,440 Speaker 1: about that as a as a huge opportunity. You know, 373 00:21:29,480 --> 00:21:32,720 Speaker 1: there's a pickup to playing vanilla credit, which is trading 374 00:21:32,840 --> 00:21:36,720 Speaker 1: very tight. One large portfolio manager described them as bulletproof. 375 00:21:37,480 --> 00:21:39,400 Speaker 1: But at the same time, there are concerns, as we've 376 00:21:39,440 --> 00:21:41,720 Speaker 1: already discussed about the economy about the ability of the 377 00:21:41,800 --> 00:21:44,840 Speaker 1: highly indebted companies to keep up with debt payments, especially 378 00:21:44,840 --> 00:21:47,520 Speaker 1: on leverage loans, which are floating at a time, you know, 379 00:21:47,560 --> 00:21:50,320 Speaker 1: when underlying rates have come down a tiny bit, but 380 00:21:50,359 --> 00:21:53,359 Speaker 1: they're still much higher than we had expected them to be. 381 00:21:53,560 --> 00:21:56,040 Speaker 1: So how does this all shake out? John? Is this 382 00:21:56,119 --> 00:21:58,760 Speaker 1: great opportunity or is it another potential troublespot. 383 00:21:58,960 --> 00:22:05,080 Speaker 3: Generally, we've been constructive on clos I still think in 384 00:22:05,119 --> 00:22:07,680 Speaker 3: this day and age, even though they've been around for 385 00:22:07,680 --> 00:22:12,440 Speaker 3: for a long time, they've had quite an evolution. Practitioners 386 00:22:12,560 --> 00:22:15,560 Speaker 3: investors in the COLO space, we'll talk about CLO one 387 00:22:15,600 --> 00:22:18,960 Speaker 3: point zero versus two point zero and and they're referring 388 00:22:19,000 --> 00:22:22,920 Speaker 3: to structures before the Great Financial Crisis and after. And 389 00:22:22,960 --> 00:22:26,440 Speaker 3: there were a lot of I think important needed and 390 00:22:26,680 --> 00:22:30,560 Speaker 3: valuable changes that were made after the GFC to strengthen 391 00:22:30,640 --> 00:22:35,359 Speaker 3: these structures, make them more bulletproof. You know, nothing is 392 00:22:35,400 --> 00:22:39,720 Speaker 3: ever bulletproof, per se. That's why you're getting you know, 393 00:22:39,800 --> 00:22:44,159 Speaker 3: relatively high mid high single digit yields. But there is 394 00:22:44,240 --> 00:22:47,679 Speaker 3: a misunderstanding. I cannot tell you if I had a 395 00:22:48,040 --> 00:22:51,280 Speaker 3: if I had a dollar, every time I asked an investor, 396 00:22:51,480 --> 00:22:54,359 Speaker 3: you know, what their perception is a clos The most 397 00:22:54,359 --> 00:22:57,280 Speaker 3: common answer is, oh, it caused the twenty oh eight 398 00:22:57,320 --> 00:23:00,879 Speaker 3: financial crisis, And I would say, well, actually that was 399 00:23:00,960 --> 00:23:04,439 Speaker 3: the housing market and our mbs and CMBs and it 400 00:23:04,480 --> 00:23:06,879 Speaker 3: wasn't corporate debt. And people are like, what are you 401 00:23:06,920 --> 00:23:09,760 Speaker 3: talking about? You know, these are all the same acronyms 402 00:23:09,840 --> 00:23:10,600 Speaker 3: and CDOs. 403 00:23:10,640 --> 00:23:11,960 Speaker 1: People have come back with. 404 00:23:12,119 --> 00:23:14,199 Speaker 3: That is a four letter word. Yeah, we're not going 405 00:23:14,280 --> 00:23:18,880 Speaker 3: to talk about let's stick to the CLO. But there 406 00:23:18,920 --> 00:23:22,480 Speaker 3: is a misunderstanding, and you know, we're kind of laughing 407 00:23:22,520 --> 00:23:26,320 Speaker 3: about it. But that's what drives an opportunity oftentimes, is 408 00:23:26,760 --> 00:23:29,080 Speaker 3: when you have things that are misunderstood and you have 409 00:23:29,200 --> 00:23:33,200 Speaker 3: to educate yourself a bit about it. There are opportunities 410 00:23:33,240 --> 00:23:36,639 Speaker 3: and I've and I've heard some of your guests in 411 00:23:36,680 --> 00:23:40,960 Speaker 3: the past talking about the opportunity there. Historically it was 412 00:23:41,000 --> 00:23:45,840 Speaker 3: an institutional opportunity only meeting only institutional investors had access 413 00:23:45,840 --> 00:23:52,400 Speaker 3: to it. More recently, explosive growth in clos ETFs ETFs 414 00:23:52,400 --> 00:23:54,199 Speaker 3: that had COLO debt in it. So this is a 415 00:23:54,200 --> 00:23:59,160 Speaker 3: way that retail investors can access the market which previously 416 00:23:59,200 --> 00:24:02,200 Speaker 3: they had never been able to do. One of the 417 00:24:02,280 --> 00:24:05,400 Speaker 3: interesting areas that I think is you're going to hear 418 00:24:05,440 --> 00:24:09,640 Speaker 3: more about, and this is related to clos going forward, 419 00:24:10,280 --> 00:24:13,479 Speaker 3: is something called middle market COLO or private credit COLO. 420 00:24:14,680 --> 00:24:19,080 Speaker 3: It's a relatively small part of the total COLO universe today, 421 00:24:19,080 --> 00:24:22,520 Speaker 3: but I think it's a very interesting area of focus 422 00:24:22,640 --> 00:24:26,720 Speaker 3: because it's one of the few places where there's strong 423 00:24:26,840 --> 00:24:30,640 Speaker 3: convergence of liquid and private credit. And what I mean 424 00:24:30,680 --> 00:24:34,880 Speaker 3: by that is we know colos and structure credit. It's seasoned, 425 00:24:34,920 --> 00:24:38,040 Speaker 3: it's been around for thirty years, it's time tested in 426 00:24:38,080 --> 00:24:42,000 Speaker 3: the liquid credit market. But instead of buying large cap loans, 427 00:24:42,720 --> 00:24:48,000 Speaker 3: these structures can also buy originated, directly originated private credit 428 00:24:48,800 --> 00:24:51,760 Speaker 3: loans in them and that's what the middle market COLO 429 00:24:52,200 --> 00:24:56,040 Speaker 3: industry is, and it's quite interesting. It has recently been 430 00:24:56,040 --> 00:24:59,240 Speaker 3: about twenty percent of total new issuance in recent years. 431 00:25:00,040 --> 00:25:02,760 Speaker 3: One out of every five dollars that's raised in the 432 00:25:02,800 --> 00:25:07,240 Speaker 3: COLO market is going into these middle market clos. I 433 00:25:07,280 --> 00:25:10,399 Speaker 3: would say that a few years ago that was close 434 00:25:10,480 --> 00:25:13,639 Speaker 3: to zero, like at the beginning of the decade. So 435 00:25:13,680 --> 00:25:18,040 Speaker 3: it's a relatively new phenomenon, even though the structure has 436 00:25:18,080 --> 00:25:21,680 Speaker 3: been around a long time and private credit loans themselves 437 00:25:21,760 --> 00:25:24,080 Speaker 3: as an asset class have been around a long time. 438 00:25:24,119 --> 00:25:27,960 Speaker 3: As well. This is something new. It's interesting for investors 439 00:25:27,960 --> 00:25:32,439 Speaker 3: because there's an opportunity to get a relatively high incremental 440 00:25:32,520 --> 00:25:37,400 Speaker 3: spread anywhere from twenty five to fifty basis points above 441 00:25:37,560 --> 00:25:41,679 Speaker 3: what you would get in a BSL type CLO. So today, 442 00:25:41,720 --> 00:25:45,320 Speaker 3: if you look at a triple A probably like five 443 00:25:45,359 --> 00:25:48,800 Speaker 3: and a half percent yield in a triple B rated 444 00:25:48,840 --> 00:25:52,240 Speaker 3: middle market COLO seven and a half percent. Know, as 445 00:25:52,280 --> 00:25:56,199 Speaker 3: we know, that's a very big incremental spread over an 446 00:25:56,200 --> 00:26:00,600 Speaker 3: investment grade rated corporate bond. So there is something there 447 00:26:00,680 --> 00:26:04,960 Speaker 3: potentially for rating sensitive investors as well as another way 448 00:26:05,040 --> 00:26:08,880 Speaker 3: for any investor to access private credit. But in a 449 00:26:08,920 --> 00:26:10,760 Speaker 3: credit rating friendly wrapper. 450 00:26:10,840 --> 00:26:12,480 Speaker 1: Does it continue to grow at the same pace? Do 451 00:26:12,520 --> 00:26:13,080 Speaker 1: you think from here? 452 00:26:13,359 --> 00:26:16,440 Speaker 3: We do think so. We see we see allocators as 453 00:26:16,480 --> 00:26:20,560 Speaker 3: being under index to this particular asset class. So I 454 00:26:20,560 --> 00:26:23,480 Speaker 3: think for investors, this is going to be a growing 455 00:26:23,920 --> 00:26:26,440 Speaker 3: part of the CLO set. It'll be a larger and 456 00:26:26,520 --> 00:26:29,520 Speaker 3: larger percentage of COLO issuance going into the middle market 457 00:26:29,560 --> 00:26:30,800 Speaker 3: type structures. 458 00:26:30,880 --> 00:26:32,840 Speaker 1: Does it end up being half the market for example? 459 00:26:32,880 --> 00:26:34,720 Speaker 1: I mean at some point in the future, you think. 460 00:26:34,920 --> 00:26:37,600 Speaker 3: I don't see any reason why I couldn't. I haven't 461 00:26:37,640 --> 00:26:40,800 Speaker 3: really tried to quantify what I think the cap would be, 462 00:26:40,840 --> 00:26:42,800 Speaker 3: So I don't I don't want to say it'll be 463 00:26:42,920 --> 00:26:46,959 Speaker 3: half the market in a few years. But the growth 464 00:26:47,320 --> 00:26:51,760 Speaker 3: and the value proposition, I think it certainly will continue 465 00:26:51,760 --> 00:26:54,360 Speaker 3: to grow it and it bears watching. 466 00:26:54,800 --> 00:26:57,640 Speaker 1: But again back to the risks, because these are structures 467 00:26:57,440 --> 00:27:00,920 Speaker 1: that repackage leverage loans. You know, they're their loans out 468 00:27:00,960 --> 00:27:04,960 Speaker 1: to companies that are subinvestment grade. They are also being 469 00:27:05,000 --> 00:27:08,480 Speaker 1: repriced very very rapidly at a much lower margin. So 470 00:27:09,160 --> 00:27:12,040 Speaker 1: the underlying is getting more expensive. You're trying to make 471 00:27:12,080 --> 00:27:13,760 Speaker 1: some kind of arbitrage. How do you do that just 472 00:27:13,800 --> 00:27:16,800 Speaker 1: adding more leverage and what problems come from that something? 473 00:27:16,880 --> 00:27:19,760 Speaker 3: Certainly to be mindful of the manager. The structure is 474 00:27:19,800 --> 00:27:22,760 Speaker 3: critically important. How much leverage they're putting in the structure. 475 00:27:22,800 --> 00:27:25,560 Speaker 3: As you said, there's an element of leverage on leverage, right, 476 00:27:25,680 --> 00:27:27,840 Speaker 3: So you want to make sure that you have a 477 00:27:27,880 --> 00:27:32,160 Speaker 3: manager who's seasoned, who's been through various cycles. You want 478 00:27:32,200 --> 00:27:35,480 Speaker 3: to make sure that you understand the loans that are 479 00:27:35,520 --> 00:27:39,480 Speaker 3: being underwritten, particularly in these middle market structures, because there's 480 00:27:39,520 --> 00:27:43,920 Speaker 3: not as much information available about it publicly, right. These 481 00:27:43,920 --> 00:27:49,240 Speaker 3: are not large cap syndicated loans. These are privately originated 482 00:27:49,800 --> 00:27:53,240 Speaker 3: or small small clubs, so you really want to make 483 00:27:53,240 --> 00:27:57,040 Speaker 3: sure that the managers that you're backing are managers that 484 00:27:57,200 --> 00:28:02,639 Speaker 3: have performed well throughout credit cycles. They're not trying to, 485 00:28:03,080 --> 00:28:06,240 Speaker 3: you know, put every dollar of leverage that they can 486 00:28:06,480 --> 00:28:11,879 Speaker 3: in there. So manager selection and the structure is critically important. 487 00:28:13,200 --> 00:28:15,119 Speaker 3: It's pretty rare though I know it's come up in 488 00:28:15,160 --> 00:28:18,800 Speaker 3: your other podcasts. It's pretty rare for these structures to fail, 489 00:28:18,960 --> 00:28:22,879 Speaker 3: and almost unheard of in the investment grade rated portion. 490 00:28:23,160 --> 00:28:26,880 Speaker 3: So really the most vulnerable part is the equity. There's 491 00:28:26,920 --> 00:28:29,359 Speaker 3: the potential for a very high risk, but also the 492 00:28:29,400 --> 00:28:33,359 Speaker 3: potential for you know, a very high reward in the 493 00:28:33,400 --> 00:28:37,199 Speaker 3: equity moving up in the capital stack. Triple B, single A, 494 00:28:37,359 --> 00:28:42,120 Speaker 3: double A. There it tends to have historically, you have 495 00:28:42,160 --> 00:28:45,080 Speaker 3: to work really hard to blow those structures up. 496 00:28:45,440 --> 00:28:48,880 Speaker 2: And how do you view the risk related to the 497 00:28:48,960 --> 00:28:51,080 Speaker 2: concentration on the buy side. By that, I mean is 498 00:28:51,080 --> 00:28:54,840 Speaker 2: that we've seen certain buy side managers just get so large, 499 00:28:54,880 --> 00:28:58,840 Speaker 2: and they're participants in different parts of the deal right there, 500 00:28:58,840 --> 00:29:02,160 Speaker 2: the underwriter, they're the manager, they're also the ones buying 501 00:29:02,440 --> 00:29:05,240 Speaker 2: the clos How do you sort of think about that 502 00:29:05,320 --> 00:29:07,880 Speaker 2: when when you think of the I guess, flow of 503 00:29:07,960 --> 00:29:11,800 Speaker 2: funds and the health of the pipeline of the market, 504 00:29:12,240 --> 00:29:14,520 Speaker 2: how are you sort of wrapping your head around that 505 00:29:14,520 --> 00:29:17,000 Speaker 2: that we have just a few very very large managers 506 00:29:17,080 --> 00:29:20,920 Speaker 2: or a few very very large you know, by side participants. 507 00:29:22,160 --> 00:29:26,600 Speaker 3: There certainly are large managers that are getting larger and 508 00:29:28,760 --> 00:29:31,280 Speaker 3: they have an issue with deployment. Right. You know, we 509 00:29:32,120 --> 00:29:36,160 Speaker 3: as a firm, Crescent forty eight billion dollars. Now that's 510 00:29:37,080 --> 00:29:40,480 Speaker 3: six times larger than it was when I started my 511 00:29:40,600 --> 00:29:44,120 Speaker 3: career at Crescent. But relative to some of the big 512 00:29:44,320 --> 00:29:47,640 Speaker 3: guys that you're referring to, you know, we're still quite 513 00:29:48,040 --> 00:29:51,840 Speaker 3: quite small. And that means we don't have to worry 514 00:29:51,920 --> 00:29:54,720 Speaker 3: about doing every deal. We're not taking in hundreds of 515 00:29:54,720 --> 00:29:58,600 Speaker 3: millions of dollars a month in capital where if we 516 00:29:58,640 --> 00:30:01,080 Speaker 3: don't deploy it, we don't get a management fee. Right. 517 00:30:01,160 --> 00:30:04,200 Speaker 3: So I always like to think about the incentive you know, 518 00:30:04,320 --> 00:30:07,760 Speaker 3: I have as a manager or in my retirement account, 519 00:30:07,800 --> 00:30:10,880 Speaker 3: that the funds and vehicles that I invest in, you know, 520 00:30:10,880 --> 00:30:14,880 Speaker 3: as the manager making decisions based on fundamental credit, or 521 00:30:14,880 --> 00:30:16,840 Speaker 3: are they making decisions because they got to push this 522 00:30:16,920 --> 00:30:20,959 Speaker 3: dollar out another dollars coming in tomorrow. And that is 523 00:30:21,080 --> 00:30:25,840 Speaker 3: a growing dichotomy in credit, not just private credit, but 524 00:30:25,920 --> 00:30:29,120 Speaker 3: in liquid credit as well, which is are you an 525 00:30:29,160 --> 00:30:34,320 Speaker 3: asset aggregator or are you really an investor? And you know, 526 00:30:34,600 --> 00:30:38,480 Speaker 3: I think there's a value to being with a more 527 00:30:38,560 --> 00:30:41,840 Speaker 3: mid sized manager that is not under the pressure to 528 00:30:41,920 --> 00:30:44,000 Speaker 3: have to buy every deal, because that's when you really 529 00:30:44,040 --> 00:30:48,120 Speaker 3: run into problems and you don't have differentiation in your portfolio. 530 00:30:48,160 --> 00:30:50,480 Speaker 3: I think that's really interesting in private credit. While I'm 531 00:30:50,480 --> 00:30:54,200 Speaker 3: not a private credit guy per se, one of the 532 00:30:54,320 --> 00:30:57,440 Speaker 3: value adds that were alpha generators in private credit was 533 00:30:57,480 --> 00:31:01,120 Speaker 3: having proprietary sourcing. But if all the law large managers 534 00:31:01,160 --> 00:31:03,360 Speaker 3: are out there doing the same thing and their portfolios 535 00:31:03,400 --> 00:31:07,360 Speaker 3: all look the same over time, that alpha dissipates, right, 536 00:31:07,400 --> 00:31:10,200 Speaker 3: and then it's just you're just a beta play. We've 537 00:31:10,280 --> 00:31:12,640 Speaker 3: seen it in high yield, We've seen it in BSL, 538 00:31:12,840 --> 00:31:15,200 Speaker 3: and I think that's what you're going to see, a 539 00:31:15,280 --> 00:31:18,920 Speaker 3: split between those who are truly delivering alpha and those 540 00:31:18,960 --> 00:31:21,880 Speaker 3: who are just delivering a beta experience in private credit. 541 00:31:22,800 --> 00:31:24,719 Speaker 2: And do you think it gets to a point where 542 00:31:26,280 --> 00:31:31,440 Speaker 2: the size gets so large that they need to separate 543 00:31:31,560 --> 00:31:34,200 Speaker 2: or they need know in order to be efficient sometimes. 544 00:31:34,240 --> 00:31:36,320 Speaker 2: I mean, you see it with companies all the time 545 00:31:36,800 --> 00:31:38,240 Speaker 2: that they say, you know what we have to we 546 00:31:38,280 --> 00:31:40,600 Speaker 2: have to split the baby because it's not efficient. And 547 00:31:41,480 --> 00:31:43,320 Speaker 2: is there a point where we reach that? I mean, 548 00:31:43,320 --> 00:31:47,520 Speaker 2: we saw not to harken back to James's intro related 549 00:31:47,560 --> 00:31:51,400 Speaker 2: to comparisons to two thousand and seven, but you know, 550 00:31:51,440 --> 00:31:54,760 Speaker 2: when you think about the risk to the markets in 551 00:31:55,240 --> 00:31:57,840 Speaker 2: O seven, it was we had two big to fail banks, right, 552 00:31:58,280 --> 00:32:02,320 Speaker 2: and we had these massive struct and thankholding companies and 553 00:32:02,400 --> 00:32:05,600 Speaker 2: insurance companies that probably shouldn't have gotten into areas that 554 00:32:05,600 --> 00:32:10,160 Speaker 2: they got into the market, right. And here now we're 555 00:32:10,200 --> 00:32:13,360 Speaker 2: sitting and you know, you mentioned your firm and it's larger, 556 00:32:13,360 --> 00:32:15,240 Speaker 2: but it's nowhere near the size of some of these 557 00:32:15,280 --> 00:32:17,960 Speaker 2: other ones. At what point does it get to be 558 00:32:18,000 --> 00:32:21,520 Speaker 2: problematic that they're just such a large mass amount and 559 00:32:21,560 --> 00:32:23,760 Speaker 2: to your point, they're not. Actually, you know, they might 560 00:32:23,760 --> 00:32:26,000 Speaker 2: not create as much value as they could because they're 561 00:32:26,040 --> 00:32:26,800 Speaker 2: just so large. 562 00:32:28,600 --> 00:32:32,520 Speaker 3: I know, speaking from experience in the liquid tradable credit side, 563 00:32:32,680 --> 00:32:37,200 Speaker 3: there's pretty much a well regarded established pattern whereas managers 564 00:32:37,240 --> 00:32:41,520 Speaker 3: get larger and larger, their relative ability to relatively outperform 565 00:32:41,560 --> 00:32:45,800 Speaker 3: a benchmark diminishes. There's just too much capital they own 566 00:32:46,200 --> 00:32:47,920 Speaker 3: portfolio as you look at you can look at them 567 00:32:47,960 --> 00:32:51,360 Speaker 3: online because these mutual funds are online. And you see 568 00:32:51,400 --> 00:32:54,760 Speaker 3: four hundred five hundred positions in a high yield fund 569 00:32:54,760 --> 00:32:57,520 Speaker 3: and you say, well, there's two thousand issuers. If you 570 00:32:57,600 --> 00:33:00,600 Speaker 3: own one out of four, I mean, aren't you sort 571 00:33:00,600 --> 00:33:04,120 Speaker 3: of a proxy for the market? And and then you know, 572 00:33:04,200 --> 00:33:06,959 Speaker 3: you sort of like an ETF right, You're you're not really, 573 00:33:07,080 --> 00:33:10,480 Speaker 3: it's not an active thing. I don't know what that 574 00:33:10,600 --> 00:33:15,560 Speaker 3: number will be. On the private credit side, that's that's 575 00:33:16,200 --> 00:33:19,040 Speaker 3: you know, somebody else closer to private credit could perhaps 576 00:33:19,120 --> 00:33:21,720 Speaker 3: answer that, but but I do. I do know. We've 577 00:33:21,800 --> 00:33:24,280 Speaker 3: seen it in the tradable credit side, which is again, 578 00:33:25,160 --> 00:33:27,280 Speaker 3: if you want to be liquid, you want to be nimble. 579 00:33:28,160 --> 00:33:30,120 Speaker 3: You know, we didn't talk about lms today, but one 580 00:33:30,160 --> 00:33:32,720 Speaker 3: of the best way to avoid getting caught up in 581 00:33:32,920 --> 00:33:36,480 Speaker 3: LME is to have a position size that you can 582 00:33:36,600 --> 00:33:38,920 Speaker 3: actually trade if you want to get out of something. 583 00:33:38,960 --> 00:33:41,440 Speaker 3: And that's a big difference. You know, if I have 584 00:33:41,520 --> 00:33:44,520 Speaker 3: a ten million dollar position and my competitor has one 585 00:33:44,560 --> 00:33:47,440 Speaker 3: hundred million dollar position and we both come to the 586 00:33:47,480 --> 00:33:50,200 Speaker 3: same credit decision, like, oh my gosh, we got to 587 00:33:50,200 --> 00:33:51,960 Speaker 3: get out of this. This thing is headed to an lme. 588 00:33:52,800 --> 00:33:54,760 Speaker 3: Guess who's going to be more likely to reduce their 589 00:33:54,800 --> 00:33:56,560 Speaker 3: position the guy who has ten million or the guy 590 00:33:56,560 --> 00:33:59,040 Speaker 3: who's got one hundred million of that of that leverage 591 00:33:59,080 --> 00:34:02,280 Speaker 3: loan or that high yield bond. It's just, you know, 592 00:34:02,520 --> 00:34:04,920 Speaker 3: it's just the way it goes. So there is a 593 00:34:05,040 --> 00:34:08,719 Speaker 3: value to being kind of mid size and being able 594 00:34:08,760 --> 00:34:09,400 Speaker 3: to be nimble. 595 00:34:09,960 --> 00:34:13,120 Speaker 1: How much leemy is affecting your ability to operate in 596 00:34:13,160 --> 00:34:15,080 Speaker 1: the CLO world at the moment, John. 597 00:34:16,719 --> 00:34:20,239 Speaker 3: It's It's definitely a factor that I believe is here 598 00:34:20,280 --> 00:34:23,439 Speaker 3: to stay. Some of it has been somewhat mitigated by 599 00:34:23,800 --> 00:34:28,680 Speaker 3: the development of these cooperative agreements, but I never underestimate 600 00:34:28,960 --> 00:34:33,600 Speaker 3: uh smart attorney's ability to find loopholes or or create 601 00:34:33,719 --> 00:34:37,799 Speaker 3: other you know, other other structures are other ways to 602 00:34:37,800 --> 00:34:40,839 Speaker 3: get around this. Our view, Accrescent, is this is here 603 00:34:40,880 --> 00:34:42,879 Speaker 3: to stay. You've got to think about this when you're 604 00:34:42,960 --> 00:34:48,120 Speaker 3: underwriting a credit. We've actually brought resources to bear internally, 605 00:34:48,640 --> 00:34:53,200 Speaker 3: like workout resources that are embedded in our performing credit team, 606 00:34:53,400 --> 00:34:56,680 Speaker 3: because it's become prevalent more on the loan side. You 607 00:34:57,000 --> 00:35:00,239 Speaker 3: typically don't see this on the high yield side. Now, 608 00:35:00,239 --> 00:35:02,840 Speaker 3: I know you've talked about this in the past, so 609 00:35:02,880 --> 00:35:05,400 Speaker 3: I'm just going to touch on it. But not every 610 00:35:05,600 --> 00:35:10,520 Speaker 3: LME has a terrible impact, right, Sometimes the recovery in 611 00:35:10,560 --> 00:35:12,640 Speaker 3: your l ME is much uch higher than it would 612 00:35:12,640 --> 00:35:16,920 Speaker 3: be in a traditional bankruptcy. So it's it's not necessarily 613 00:35:17,680 --> 00:35:19,920 Speaker 3: a bad thing on its own, although we do see 614 00:35:19,960 --> 00:35:22,840 Speaker 3: a lot of companies that once they go through an LME, they, 615 00:35:23,080 --> 00:35:25,120 Speaker 3: you know, more than half tend to have to go 616 00:35:25,200 --> 00:35:28,160 Speaker 3: through another one or end up filing bankruptcy anyway. So 617 00:35:28,200 --> 00:35:31,359 Speaker 3: it's it's a warning sign and it's just one more 618 00:35:31,400 --> 00:35:35,800 Speaker 3: thing that a skilled credit team has to has to manage. 619 00:35:36,040 --> 00:35:38,280 Speaker 1: So you've had a bunch of lawyers basically to protect 620 00:35:38,320 --> 00:35:42,480 Speaker 1: you in these how have you expanded your operations to accommodate. 621 00:35:44,840 --> 00:35:48,360 Speaker 3: You need people that have workout experience, You need people 622 00:35:49,040 --> 00:35:51,799 Speaker 3: that have legal experience. You need people who know who 623 00:35:51,840 --> 00:35:54,920 Speaker 3: the right advisors are. You know that that was something 624 00:35:55,040 --> 00:35:58,440 Speaker 3: earlier in my career. If a credit went into like 625 00:35:58,480 --> 00:36:01,080 Speaker 3: a watch list and then one to restart structuring, you 626 00:36:01,080 --> 00:36:05,960 Speaker 3: would bring someone alongside to assist you. And now we 627 00:36:06,000 --> 00:36:10,239 Speaker 3: want those that expertise that that knowledge embedded in the 628 00:36:10,320 --> 00:36:13,120 Speaker 3: front end before we make a decision, you know, what 629 00:36:13,200 --> 00:36:16,160 Speaker 3: have we seen with this kind of company? What should 630 00:36:16,160 --> 00:36:19,440 Speaker 3: we look for in the documentation? How many lenders are 631 00:36:19,480 --> 00:36:22,840 Speaker 3: in it? Are there bad actors that we need to 632 00:36:22,880 --> 00:36:25,760 Speaker 3: be worried about. Maybe we've had a bad experience before, 633 00:36:25,800 --> 00:36:27,920 Speaker 3: so we say, look, we're gonna We're not going to 634 00:36:27,960 --> 00:36:32,560 Speaker 3: underwrite this credit. It's manageable, but it just adds, you know, 635 00:36:32,600 --> 00:36:34,720 Speaker 3: more items to your checklist for sure. 636 00:36:35,920 --> 00:36:37,360 Speaker 2: I mean even you know, when I look at some 637 00:36:37,400 --> 00:36:40,120 Speaker 2: of my companies and I look at the cap structure 638 00:36:40,160 --> 00:36:42,160 Speaker 2: and I sort of see, you know, the secured and 639 00:36:43,200 --> 00:36:46,200 Speaker 2: how complicated it's started to get for some of the companies. 640 00:36:46,200 --> 00:36:50,160 Speaker 2: Some of my companies are trying to avoid Chapter twenty two, 641 00:36:50,400 --> 00:36:53,640 Speaker 2: let's just say, and it is something that I think about. 642 00:36:53,680 --> 00:36:56,400 Speaker 2: I say, okay, does security even have some value here? 643 00:36:56,440 --> 00:36:59,160 Speaker 2: But I wanted to actually switch a little bit to 644 00:37:00,360 --> 00:37:04,720 Speaker 2: a question I had around the recent rate cut thinking 645 00:37:04,800 --> 00:37:08,080 Speaker 2: about loans and thinking about exposure. So you know a 646 00:37:08,080 --> 00:37:11,320 Speaker 2: lot of loans are floating rate security there further short duration, 647 00:37:11,520 --> 00:37:15,280 Speaker 2: and so when you are heavily invested in the loan space, 648 00:37:15,360 --> 00:37:20,040 Speaker 2: how are you balancing that out to ensure that you know, 649 00:37:20,160 --> 00:37:23,000 Speaker 2: you're not quote unquote losing out in the environment, or 650 00:37:23,000 --> 00:37:25,360 Speaker 2: you're not over exposed to one side over another. 651 00:37:27,560 --> 00:37:32,040 Speaker 3: Yeah, very topical. Right. The expectation that rates base rates 652 00:37:32,080 --> 00:37:35,320 Speaker 3: will start to come down, at least on the slow 653 00:37:35,360 --> 00:37:38,520 Speaker 3: and sustained basis, that's going to result in lower coupons 654 00:37:38,600 --> 00:37:42,000 Speaker 3: for all floating rate assets, whether they be large gap 655 00:37:42,040 --> 00:37:47,000 Speaker 3: syndicated loans, private credit loans, clos, they're all going to 656 00:37:47,040 --> 00:37:50,640 Speaker 3: be They're all going to expect to have a reduction 657 00:37:50,719 --> 00:37:54,480 Speaker 3: in their coupon. The offset to that, though, is less 658 00:37:54,920 --> 00:38:00,080 Speaker 3: interest expense for our borrowers. Right, So it's important for 659 00:38:00,080 --> 00:38:04,680 Speaker 3: for everyone to remember that perhaps the worst is behind us. 660 00:38:04,680 --> 00:38:07,440 Speaker 3: If you believe that we are going to see a 661 00:38:07,880 --> 00:38:10,920 Speaker 3: sustained pace of rate reductions, maybe not as quickly as 662 00:38:10,920 --> 00:38:17,360 Speaker 3: some would like, but that should result in lower interest expense, 663 00:38:17,360 --> 00:38:21,319 Speaker 3: which means better interest coverage ratios, which likely means less 664 00:38:21,360 --> 00:38:26,680 Speaker 3: credit stress in twenty twenty six. So from an investor's perspective, 665 00:38:26,880 --> 00:38:29,680 Speaker 3: am I okay getting maybe a half point lower coupon 666 00:38:30,120 --> 00:38:34,080 Speaker 3: or point lower coupon, but it also likely means there's 667 00:38:34,200 --> 00:38:38,600 Speaker 3: less credit stress. My sense is there's a fair amount 668 00:38:38,640 --> 00:38:41,040 Speaker 3: of that that's being priced into the market today, which 669 00:38:41,080 --> 00:38:44,680 Speaker 3: is why investors are comfortable with spreads where they are, 670 00:38:44,760 --> 00:38:48,160 Speaker 3: because they expect that. I don't ever want to say 671 00:38:48,160 --> 00:38:51,960 Speaker 3: smooth sailing. It's never smooth sailing in leverage finance. But 672 00:38:54,040 --> 00:38:56,120 Speaker 3: I'll go back to that phrase. The worst may be 673 00:38:56,120 --> 00:38:59,840 Speaker 3: behind us in terms of the impact of higher coupon 674 00:39:00,760 --> 00:39:05,160 Speaker 3: on borrowers, and that's where, you know, just to kind 675 00:39:05,160 --> 00:39:08,000 Speaker 3: of close this thought off, one of the things that 676 00:39:08,040 --> 00:39:12,960 Speaker 3: I'm monitoring very closely is are these rate cuts coming 677 00:39:13,040 --> 00:39:16,080 Speaker 3: in time or are they too late? And that, to me, 678 00:39:16,200 --> 00:39:18,320 Speaker 3: is one of the biggest things that I worry about, 679 00:39:18,480 --> 00:39:23,000 Speaker 3: is the possibility that we're going to see rate cuts. 680 00:39:23,040 --> 00:39:25,720 Speaker 3: It seems clear. I mean, the FED said we're getting 681 00:39:25,760 --> 00:39:29,520 Speaker 3: more neutral but not neutral. That to me means more 682 00:39:29,560 --> 00:39:34,640 Speaker 3: cuts are coming. But has the impact already gone through 683 00:39:34,680 --> 00:39:38,800 Speaker 3: the economy right or can they pivot and be nimble 684 00:39:38,920 --> 00:39:43,640 Speaker 3: enough to allow the GDP to accelerate like a lot 685 00:39:43,680 --> 00:39:47,799 Speaker 3: of people think it will next year generally speaking, if 686 00:39:47,840 --> 00:39:49,920 Speaker 3: they can control that. I mean, if the way I 687 00:39:49,920 --> 00:39:52,040 Speaker 3: think about it is if you have an environment of 688 00:39:53,239 --> 00:39:56,719 Speaker 3: call it one to two percent GDP and inflation is 689 00:39:56,719 --> 00:40:00,480 Speaker 3: two to three percent, that's usually pretty constructive for the 690 00:40:00,560 --> 00:40:03,560 Speaker 3: kind of assets that that we manage. I think that's 691 00:40:03,600 --> 00:40:07,360 Speaker 3: a fine environment, and most of our borrowers would do 692 00:40:07,480 --> 00:40:08,880 Speaker 3: fine in that environment. 693 00:40:09,920 --> 00:40:11,960 Speaker 1: So all that said, John, if you look ahead, let's 694 00:40:11,960 --> 00:40:14,840 Speaker 1: say twelve eighteen months or so, where's the best relative 695 00:40:14,880 --> 00:40:15,960 Speaker 1: value in the credit market. 696 00:40:16,160 --> 00:40:19,040 Speaker 3: I like syndicated loans. They've fallen a little bit out 697 00:40:19,040 --> 00:40:21,600 Speaker 3: of favor relative to high yield. As we mentioned, there's 698 00:40:21,600 --> 00:40:27,399 Speaker 3: been a fairly significant dispersion in performance. I like higher rate, 699 00:40:27,600 --> 00:40:33,120 Speaker 3: single B type loans. I think there's interesting opportunities there. 700 00:40:34,280 --> 00:40:40,000 Speaker 3: Companies that are not at risk of downgrade have spreads compressed, sure, 701 00:40:40,480 --> 00:40:43,120 Speaker 3: and our base rates coming down. Yes, But even when 702 00:40:43,200 --> 00:40:46,759 Speaker 3: you factor in what is expected. You can look at 703 00:40:46,800 --> 00:40:49,520 Speaker 3: one year forward sofa right, you know, everybody can look 704 00:40:49,560 --> 00:40:51,560 Speaker 3: at this and say, I think that's reasonable, or I 705 00:40:51,600 --> 00:40:54,560 Speaker 3: would make it a little higher or lower. Even when 706 00:40:54,600 --> 00:40:57,960 Speaker 3: you factor in the forward SOFA curve, the carry that 707 00:40:58,000 --> 00:41:00,719 Speaker 3: you can get on a single B rated loan is 708 00:41:00,840 --> 00:41:03,920 Speaker 3: much much higher than on a high yield bond. So 709 00:41:04,400 --> 00:41:07,080 Speaker 3: you could have you know, four rate cuts in the 710 00:41:07,120 --> 00:41:09,920 Speaker 3: next twelve months and loans will still have a higher 711 00:41:09,920 --> 00:41:14,360 Speaker 3: coupon than bonds. I think that's an opportunity you just 712 00:41:14,440 --> 00:41:16,440 Speaker 3: have to make sure that you know you're doing your 713 00:41:16,440 --> 00:41:20,240 Speaker 3: homework on the individual loans and that there's are performing 714 00:41:20,320 --> 00:41:26,200 Speaker 3: companies and they have have no near term maturities, they're 715 00:41:26,200 --> 00:41:30,560 Speaker 3: not on watch for downgrade. So yes, to me, that 716 00:41:30,600 --> 00:41:34,799 Speaker 3: looks like an interesting area of the marketplace today that's 717 00:41:34,840 --> 00:41:38,440 Speaker 3: a little bit out of favor and clos. I think 718 00:41:38,480 --> 00:41:41,880 Speaker 3: colo middle market clos are going to be something to 719 00:41:41,920 --> 00:41:45,759 Speaker 3: watch in the future. Perhaps dare I say even investors 720 00:41:45,760 --> 00:41:49,719 Speaker 3: someday may make a strategic allocation to it. Today it's 721 00:41:49,719 --> 00:41:53,600 Speaker 3: still relatively nascent, but I think that there'll be great 722 00:41:53,640 --> 00:41:55,839 Speaker 3: opportunities to monitor there as well. 723 00:41:56,120 --> 00:41:58,640 Speaker 1: But on the loan side, John, the higher default rate 724 00:41:58,680 --> 00:42:02,320 Speaker 1: than bonds, low recover rees, and situations like First Brands 725 00:42:02,320 --> 00:42:04,239 Speaker 1: where they were trading at par and then suddenly went 726 00:42:04,280 --> 00:42:12,280 Speaker 1: to the teams that those things don't give you pause overall. 727 00:42:10,480 --> 00:42:14,160 Speaker 3: Not if you're asking the right questions. You know, I 728 00:42:14,160 --> 00:42:16,360 Speaker 3: don't want to get too deep into that credit, but 729 00:42:16,400 --> 00:42:19,360 Speaker 3: there had been some, you know, questions around that credit, 730 00:42:19,440 --> 00:42:21,879 Speaker 3: notwithstanding it was trading at par. I think there were 731 00:42:23,680 --> 00:42:28,000 Speaker 3: questions about the supply chain, financing and things that some 732 00:42:28,440 --> 00:42:33,440 Speaker 3: people clearly were aware of. Right, So you do you know, 733 00:42:33,520 --> 00:42:36,520 Speaker 3: you do have to have a robust This is why 734 00:42:36,560 --> 00:42:38,880 Speaker 3: this is one of the one of the few areas 735 00:42:38,920 --> 00:42:44,640 Speaker 3: where active management still outperforms passive. I know folks like 736 00:42:44,680 --> 00:42:48,600 Speaker 3: to look at ETFs and large cap equities. Maybe the 737 00:42:48,600 --> 00:42:50,920 Speaker 3: way to go is just buy an ETF lo FI. 738 00:42:51,719 --> 00:42:56,240 Speaker 3: Active management doesn't create alpha in credit. There's so many 739 00:42:56,360 --> 00:42:58,239 Speaker 3: of these things we've talked about in the last forty 740 00:42:58,280 --> 00:43:05,000 Speaker 3: five minutes, right faults, documentation, co op agreements, lmes. There's 741 00:43:05,040 --> 00:43:10,480 Speaker 3: still a room for active management to add value, fewer defaults, 742 00:43:10,560 --> 00:43:15,920 Speaker 3: higher recoveries. So I do think that it's an essential 743 00:43:15,960 --> 00:43:18,279 Speaker 3: part of investing. So it doesn't give me pause to 744 00:43:18,320 --> 00:43:21,600 Speaker 3: the asset class, but it just confirms for me how 745 00:43:21,600 --> 00:43:23,360 Speaker 3: important it is to do your homework. 746 00:43:23,719 --> 00:43:26,680 Speaker 1: Great stuff, John Fiquett at crescent A Capital Group, many 747 00:43:26,680 --> 00:43:28,600 Speaker 1: thanks for joining us on the credit edge. Thank you, 748 00:43:28,680 --> 00:43:31,760 Speaker 1: and of course very grateful to Jody Lurie from Bloomberg Intelligence. 749 00:43:31,760 --> 00:43:32,759 Speaker 1: Thanks for joining us today. 750 00:43:32,880 --> 00:43:34,080 Speaker 2: Happy to be here for. 751 00:43:34,000 --> 00:43:36,920 Speaker 1: More credit market analysis and insight. Read all of Jody's 752 00:43:36,960 --> 00:43:40,359 Speaker 1: great work on the Bloomberg terminal. Bloomberg Intelligence is part 753 00:43:40,400 --> 00:43:43,279 Speaker 1: of our research department with five hundred analysts and strategists 754 00:43:43,320 --> 00:43:46,840 Speaker 1: working across all markets. Coverage includes over two thousand equities 755 00:43:46,840 --> 00:43:49,680 Speaker 1: and credits, plus outlooks on more than ninety industries and 756 00:43:49,760 --> 00:43:54,920 Speaker 1: one hundred market industries, currencies and commodities. Please do subscribe 757 00:43:54,920 --> 00:43:57,480 Speaker 1: to The Credit Edge wherever you get your podcasts. We're 758 00:43:57,480 --> 00:44:00,239 Speaker 1: on Apple, Spotify, and all other good podcasts provide is, 759 00:44:00,280 --> 00:44:04,600 Speaker 1: including the Bloomberg terminal at bpod Go. Give us a review, 760 00:44:04,960 --> 00:44:08,080 Speaker 1: tell your friends, or email me directly at jcrombieight at 761 00:44:08,120 --> 00:44:12,000 Speaker 1: Bloomberg dot net. I'm James Crombie. It's been a pleasure 762 00:44:12,040 --> 00:44:15,240 Speaker 1: having you join us again next week on the Credit 763 00:44:15,480 --> 00:44:15,680 Speaker 1: Edge