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Speaker 1: Hello, and welcome to a very special outlook edition of

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Speaker 1: the Credit Edge podcast. My name is James Crombie. I'm

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Speaker 1: a senior editor at Bloomberg. This is a star studed

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Speaker 1: episode packed full of great interviews with investors and analysts,

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Speaker 1: recorded during a recent Bloomberg Intelligence event in New York.

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Speaker 1: All of it is exclusive to the Credit Edge Podcast.

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Speaker 1: Our guests discuss everything from where bond spreads are going

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Speaker 1: and how much new debt US companies will raise in

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Speaker 1: twenty twenty five, to how large private debt markets will

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Speaker 1: actually get and the main things to worry about the

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Speaker 1: next year. This being Credit Edge, we also have a

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Speaker 1: little bit of fun. Check out our conversation with Matt

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Speaker 1: Brill at Invesco about his annual purchase of two hundred

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Speaker 1: bottles of bourbon that he's laps a credit themed label

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Speaker 1: on to inform the strategy ahead. Thanks very much to

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Speaker 1: everyone for listening. Let's get to it so, Matt Brill,

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Speaker 1: head of North America Investment Grade Credit at Invesco, Welcome

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Speaker 1: to the Credit Edge.

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Speaker 2: Thanks for having me.

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Speaker 1: You just gave a really interesting presentation at the event,

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Speaker 1: the BI event in New York. You know, lots of

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Speaker 1: really interesting stuff, lots of great numbers and all that.

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Speaker 1: I'm mostly interested though, in the bourbon, not just because

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Speaker 1: I've been here long enough to appreciate it. You know,

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Speaker 1: obviously in moderation, everything in moderation. But what's that all

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Speaker 1: about the bourbon?

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Speaker 2: Yeah, So at Invesco, we actually had a bunch of

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Speaker 2: the team was brought in from Louisville, Kentucky, about ten

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Speaker 2: years ago. So we have a bunch of bourbon experts

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Speaker 2: on the team, and one of them every year goes

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Speaker 2: and buys a barrel bourbon in Kentucky. You got to

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Speaker 2: go try it out.

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Speaker 3: You do all these things.

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Speaker 2: It's not easy. You can't just walk in there and

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Speaker 2: say you want to buy one, So you gotta have

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Speaker 2: some connections. You do that, and then you can get

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Speaker 2: anywhere between called one hundred and fifty and two twenty

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Speaker 2: five bottles of bourbon come out of each barrel, and

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Speaker 2: then we put a label on it, come up the

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Speaker 2: cool little ig bond market logo and name, and then

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Speaker 2: we then we then we consume it slowly.

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Speaker 1: How does it relate to credit?

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Speaker 2: Well, we've had names like by Triple B's, which was

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Speaker 2: buckled barrel Bourbon. We had curve flattener, which was around

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Speaker 2: credit curve and also around the time of the COD

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Speaker 2: with COVID and trying to flatten the COVID curve. What

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Speaker 2: else did we have we had I can't remember which one,

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Speaker 2: but they always it's something. It's it's usually a trade

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Speaker 2: related of what's happening in the market. We have not

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Speaker 2: had this year's yet, so I can't reveal what it's

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Speaker 2: going to be. But when it does, I'm sure you'll

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Speaker 2: like a taste. I'm happy to bring you one.

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Speaker 1: We definitely wants to taste. So the other big thing

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Speaker 1: that jumped out is fifty five basis points spread on

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Speaker 1: US investment great bonds. You know that's never been seen. Yeah,

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Speaker 1: why why? Why so tight?

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Speaker 4: Yeah?

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Speaker 2: So we've looked at this from multiple different ways. So

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Speaker 2: first off, dollar price as credit quality adjusted, duration adjusted.

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Speaker 2: You know, the spreads are tight, but they're probably not

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Speaker 2: as tight as you think that they are. But then

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Speaker 2: really the big wild car that we think people are

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Speaker 2: undervaluing is the liquidity that's in available in the market,

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Speaker 2: mainly due to portfolio trading. So technology, but mainly portfolio

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Speaker 2: trading has gone from like two percent to fifteen percent

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Speaker 2: and it's driving liquidity costs or liquidity premium of owning

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Speaker 2: a not a risk free bond, but a very low

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Speaker 2: risk bonds in the investment grade market, and we think

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Speaker 2: it's driving them lower. We think it's going to continue on.

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Speaker 1: And there are other things that right, there's better credit quality,

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Speaker 1: there's what else did you say you have?

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Speaker 2: Well, fundamentally, so companies, I think companies prepared for the worst.

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Speaker 2: They were expecting a recession. So we were told so

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Speaker 2: many times the last three years we were about to

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Speaker 2: go in recession that CFOs, treasurers, CEOs, et cetera all said,

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Speaker 2: I need to have a really good balance sheet for

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Speaker 2: when we go into this procession. Well, guess what we're

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Speaker 2: not in recession. The economy is still good, they have

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Speaker 2: great balance sheets, and then yields overall are very very attractive.

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Speaker 2: So yields are what are driving we think the demand

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Speaker 2: for fixed in particularly investment grade, and we don't see

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Speaker 2: any signs of that letting up. And so unless there's

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Speaker 2: some sort of fundamental change of the economy or particularly

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Speaker 2: with IG corporate credit or large corporations, we think you're

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Speaker 2: going tighter and you we think you're gonna hit fifty

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Speaker 2: five on the credit indicies when well, I think the

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Speaker 2: timing and as I stated in the in the in

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Speaker 2: the speech there is it's not really if, but when.

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Speaker 2: So to me, the first quarter, you know, is always

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Speaker 2: always a good or almost always a good period of

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Speaker 2: time for corporate credit. So I think as you get

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Speaker 2: through the first quarter, people are going to think, Okay,

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Speaker 2: maybe that was the wave, but it's going to continue on.

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Speaker 2: So for me, I think before before the summer, you'll

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Speaker 2: you'll hit fifty five.

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Speaker 1: And the other thing you pulled out in terms of opportunity,

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Speaker 1: that's utility hybrids. Can you talk a bit about that?

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Speaker 1: What's that all?

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Speaker 2: Yeah, So utility hybrids are are really a booming supply standpoint,

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Speaker 2: you know, type of opportunity. So there's there's about fifteen

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Speaker 2: billion issued this year, there's probably gonna be twenty to

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Speaker 2: twenty five billion issued next year. Well with AI, and

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Speaker 2: everybody's all excited about AI, Well, how do we invest

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Speaker 2: in that in the fixed income world? So AI is

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Speaker 2: driving power demand, data centers and the like, and you

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Speaker 2: need more power generation from utilities in order to support that.

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Speaker 2: And so there's going to be a lot of cap

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Speaker 2: X for utilities over the course of the next several years,

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Speaker 2: and they need to pay for that, and can they

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Speaker 2: do it out of by issuing equity or do they

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Speaker 2: want to issue debt? And if they issue too much debt,

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Speaker 2: they're going to get downgraded. So what they are choosing

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Speaker 2: to do is what's called a hybrid. It gives them

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Speaker 2: fifty percent equity treatment at the radio agencies for ten years,

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Speaker 2: and it's fifty percent debt treated. So they kind of

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Speaker 2: getting right in the middle there, and they're generally around

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Speaker 2: six and a half, some even as much as seven percent.

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Speaker 2: They're usually investment grade rated, they're regulated utilities. They are

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Speaker 2: all the ones that you already know they're subordinate, So

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Speaker 2: there's some risk involved there, but overall, because the demand

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Speaker 2: is based on this AI growth, it's not really economically sensitive.

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Speaker 2: I don't really feel like so the demand is going

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Speaker 2: to be there, the generation needs to be done, and

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Speaker 2: we think it's a great upportunity to get six and

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Speaker 2: a half plus percent yields.

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Speaker 1: Going back to the spreads point, does that record low

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Speaker 1: spread not attract every issue? You know, given that they

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Speaker 1: also be wanting to fund extra m and a next

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Speaker 1: year potenty, does that blot the monkey with supply.

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Speaker 2: Yeah, so that is a concern of mine, for sure.

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Speaker 2: I would be very concerned. I'd start getting concerned as

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Speaker 2: soon as we start seeing large m and A that

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Speaker 2: is debt funded, We're going to see more MNA. It's

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Speaker 2: gonna be less regulation, more deregulation.

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Speaker 1: Next year.

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Speaker 2: If we start seeing large m and A deals that

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Speaker 2: are debt funded rather than equity, at least a mix

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Speaker 2: of equity being in there, that'll concern me. But to

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Speaker 2: date we haven't seen it. But you got to remember

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Speaker 2: it's about yield. So at the end of the day,

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Speaker 2: if you're a corporation, yes, your spreads are not really

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Speaker 2: you know, very punitive, but you're all in. Yield is

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Speaker 2: still punitive to be borrowing at five plus percent. So

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Speaker 2: I think most corporations aren't dying to to issue more

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Speaker 2: debt to to to do an m and A acquisition,

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Speaker 2: and they'd rather have a mix of equities. What are

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Speaker 2: at all time high, So I'd say equities are a

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Speaker 2: little bit cheaper source using rather than debt at this point.

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Speaker 1: So the golden age for bunds, as you put it

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Speaker 1: on our show early this year, that still continues, and

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Speaker 1: nothing else to worry about.

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Speaker 2: There's always things to worry about, but I do think

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Speaker 2: fundamentally speaking, you're on a really good path. The economy

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Speaker 2: looks really good, balance sheets are great, yields are This

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Speaker 2: is a year that I think a lot of people

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Speaker 2: thought they would have made more money in bonds, and

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Speaker 2: for second there was it was a little bit you know,

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Speaker 2: nerve racking. But at the end of the day, you're

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Speaker 2: probably still going to get four of six percent and

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Speaker 2: most investment great bond funds on the year, and you're

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Speaker 2: setting up for another really good year next year.

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Speaker 1: So, Kathy Jones, chief fixed Income Strategists at the shwelve

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Speaker 1: percent of for Financial Research. You've noted that there is

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Speaker 1: risk out there, there's a lot of volatility, but yields

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Speaker 1: are still high, and as you've written, volatility can translate

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Speaker 1: into opportunities. So what are those big opportunities in credit

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Speaker 1: for next year?

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Speaker 5: Yeah, we think that you can look at intermediate term

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Speaker 5: you know, shorter duration or intermediate term investment great credit

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Speaker 5: and still get pretty decent yields. If you want to

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Speaker 5: take a little bit more risk, take the duration risk.

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Speaker 5: The yield curve is steepened quite a bit, so you

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Speaker 5: do get rewarded for taking that risk. We're not really

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Speaker 5: crazy about a lot of duration risk at this stage

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Speaker 5: of the game. But if you have a view that

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Speaker 5: you're really a buy and hold investor, or if you

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Speaker 5: have a view that rates have more room to come down,

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Speaker 5: then that is an opportunity relative to where else you

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Speaker 5: can go in fixed income. We also looked at investment

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Speaker 5: grade floaters. The current yields at the short end are

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Speaker 5: higher than treasuries, so you get some you know, very

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Speaker 5: short duration, get some attractive yield, and if rates do

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Speaker 5: go up, you will ride that wave up.

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Speaker 1: But spreads still up very very tight. Indeed, how do

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Speaker 1: you fact that into your analysis?

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Speaker 5: Yeah, that's the tough part. So we look at it

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Speaker 5: and kind of the short version is fundamentals are good,

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Speaker 5: but valuations are really stretched. So if we had a

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Speaker 5: view that we were headed towards a downturn in the

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Speaker 5: economy or some sort of credit event, we would be

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Speaker 5: more concerned about spreads. That we do think there's room

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Speaker 5: for spread widening, but in investment grade it shouldn't be

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Speaker 5: something that really detracts seriously from your total return. If

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Speaker 5: I were in really low credit quality, I'd be more

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Speaker 5: concerned about it. But in investment grade you can probably

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Speaker 5: ride out some of the ups and downs and still

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Speaker 5: get a pretty decent return.

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Speaker 1: In the low end of the credit spectrum, I mean

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Speaker 1: I'm talking the really risky stuff, you know, triple C

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Speaker 1: rated debt. You have really been rewarded this year for

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Speaker 1: taking risk. You know, you're fifteen percent if you look

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Speaker 1: at the global Triple C index, which is quite impressive.

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Speaker 1: You can't really fight this huge pile of cash. There

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Speaker 1: isn't enough to buy. There's a you know, very bullish

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Speaker 1: feeling about next year in terms of the new administration.

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Speaker 1: What do you do in that situation? How do you

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Speaker 1: balance the obviously the fundamental concerns against the very strong technicals.

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Speaker 5: Yeah, what we're doing is shying away from going too

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Speaker 5: far down in credit quality, and we may miss, as

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Speaker 5: we did for the second half of this year, miss

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Speaker 5: a lot of spread tightening from here, but really, how

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Speaker 5: much more will they tighten? Even on good news? A

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Speaker 5: lot of good news is priced in, and I think

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Speaker 5: the worst case scenario is really a stagflation scenario that

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Speaker 5: would really be a negative and obviously those triple cs

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Speaker 5: would get hurt. Not that you maybe can't get some

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Speaker 5: decent returns again this year, if we continue to have

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Speaker 5: pretty easy financing conditions, if the economy does do well,

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Speaker 5: if that risk appetite stays really high, I could make

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Speaker 5: the case, but I think the risk reward just isn't

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Speaker 5: there for somebody who is not a really specialized investor

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Speaker 5: who knows that space.

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Speaker 1: Megan Rolbson, head of US Credit Strategy at BNP By,

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Speaker 1: Welcome to the Credit Edge. Thanks for having me, Thanks

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Speaker 1: so much for being here. So you are concerned about

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Speaker 1: the risks of a FED pause, about inflation, about rates

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Speaker 1: volatility for next year, tell me how does that affect credit?

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Speaker 6: So heading into next year, we're still We're still constructive.

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Speaker 6: We do think valuations are tight, but you still have

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Speaker 6: this very strong demand from from the yield buyer, and

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Speaker 6: so we are watching. We are calling for some modest

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Speaker 6: spread widening, and we do think that there's risks percolating

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Speaker 6: in the system related to policy, but it is in

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Speaker 6: our view too early to position for those. So we

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Speaker 6: think that yields are so high investors are really going

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Speaker 6: to benefit more by holding credit into first quarter. We

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Speaker 6: can see what Trump ends up doing before really adjusting

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Speaker 6: portfolios or turning negative on credit?

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Speaker 1: What does that mean for spreadso modest widening, I mean,

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Speaker 1: how much are we talking about?

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Speaker 6: Yeah, so in IG or in hi yield we're calling

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Speaker 6: for a spread target of three hundred basis point, so

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Speaker 6: it's about a fifty basis point widening, and then in

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Speaker 6: IG we're calling for about ten basis points widening, so

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Speaker 6: some decompression. There are some underperformance of high yield relative

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Speaker 6: to IG.

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Speaker 1: Okay, and do you expect a lot more supply next

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Speaker 1: year on a net basis, we're talking about a lot

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Speaker 1: more M and A potentially.

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Speaker 6: So BNP has an out of a little bit of

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Speaker 6: an out of consensus view, and that we're expecting the

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Speaker 6: tenure to drift a bit higher, so to a level

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Speaker 6: around four sixty five. I do think that there will

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Speaker 6: be this impulsive M and A with deregulation, but given

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Speaker 6: the rates, the higher rates level, I think that's going

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Speaker 6: to keep a lid on really seeing too much of

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Speaker 6: an increase. So we do build in about a fifteen

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Speaker 6: percent increase in net supply next year, but this is

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Speaker 6: from very low levels, so I think it could be

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Speaker 6: well absorbed into the market.

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Speaker 1: Okay, on the rates side, if rates do stay up

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Speaker 1: that high, and you know everyone's talking about higher for longer.

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Speaker 1: One of our guests used the words normal for longer.

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Speaker 1: So it depends on how you look at it. But

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Speaker 1: doesn't that put the weak borrows in a very tough spot?

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Speaker 6: So we have taken some it does. I think it

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Speaker 6: will be a challenge for Triple c's. We've had an

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Speaker 6: overweight to Triple C's following the US election and we've

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Speaker 6: just rotated out of that. Trade has performed really well.

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Speaker 6: But heading into next year, if you do see this

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Speaker 6: drift higher end rates or a FED pause, I think

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Speaker 6: that part of the market is especially especially vulnerable. So

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Speaker 6: for us, we do like still taking credit risk. We

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Speaker 6: would do so in the single bee market, so I

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Speaker 6: think especially loans. Single bee loans look quite attractive on

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Speaker 6: a carry basis.

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Speaker 1: Okay, And it's a more deffault potentially on the Triple

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Speaker 1: c's or more liability management, that kind of thing.

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Speaker 6: We're calling for some I think it'll be very liability management,

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Speaker 6: very sector specific, so I think in media in particular,

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Speaker 6: we're expecting a few of those. We do think overall defaults, though,

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Speaker 6: will we'll start to move lower. So we have two

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Speaker 6: and a half percent for high yield, and we think

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Speaker 6: that loans will move down to four percent, so still

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Speaker 6: a little bit elevated, just given that our call for

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Speaker 6: rates to be a little bit higher than most people expect.

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Speaker 1: You like services, though, you like cruise lines, what's the

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Speaker 1: story there?

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Speaker 6: So cruise lines have had you know, they're booked well

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Speaker 6: into next year. So I think the fundamentals forward looking

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Speaker 6: look attractive. The balance sheets have been cleaned up, We've

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Speaker 6: seen a lot of debt paydowns, and then if you

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Speaker 6: look at ratings and ratings forecasts, there are some solid

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Speaker 6: rising star candidates for next year. So I think in

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Speaker 6: terms of credit momentum, you could see ratings improve into

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Speaker 6: twenty twenty five.

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Speaker 1: What I mean we're seeing is there anything else that's

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Speaker 1: giving you the edge in terms of credit right now?

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Speaker 6: So we like we like avoiding building products in high yield.

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Speaker 6: I think this is a key call, and it's an

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Speaker 6: interesting one because there's a lot of converging factors. Higher rates,

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Speaker 6: higher mortgage rates will weigh on building products as people

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Speaker 6: struggle with higher mortgage rates. There's also an immigration angle,

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Speaker 6: so you have construction relying more on undocumented labor. You

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Speaker 6: could see some some vulnerabilities there depending on on what

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Speaker 6: President Electromp decides to do. And then there's also a

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Speaker 6: little bit of a terriff exposure as well from input

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Speaker 6: costs on building products. So that's a key area to

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Speaker 6: underweight and to hedge some of the policy risks for

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Speaker 6: next year.

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Speaker 1: When he sees Our global head of Strategy, Credit Sides,

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Speaker 1: Welcome to the Credit Edge.

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Speaker 7: Thank you so much for having me.

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Speaker 1: You have just mentioned on a panel here at THEBI

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Speaker 1: event status woe. What does that mean? Can you unpack

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Speaker 1: that for us? Please?

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Speaker 7: Well, it could mean a lot of things, right. It

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Speaker 7: could be woe in a good way, as we have

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Speaker 7: a lot of expectations around deregulatory and continued fundamental progress.

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Speaker 7: Or it could be whoe as in what is happening

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Speaker 7: here with a new regime coming in and a number

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Speaker 7: of policies that may not be quite as positive as

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Speaker 7: perhaps the market is expecting.

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Speaker 1: Spreads are too tight according to your comments today, how

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Speaker 1: wide should they be?

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Speaker 7: So we think that a recalibration of spreads would be appropriate.

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Speaker 7: Our year end twenty twenty five target for high yield

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Speaker 7: spreads is three hundred and fifty basis points, so call

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Speaker 7: it seventy five to one hundred basis points wider than

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Speaker 7: where we are currently on expectations that forward, fundamental expectations

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Speaker 7: start to feel a little bit weaker than where we've been,

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Speaker 7: and perhaps the technical bid is not going to be

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Speaker 7: there as much to support valuations.

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Speaker 1: What happens to that technical bid though, I think everyone

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Speaker 1: is so convinced that there's always cash on the sidelines,

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Speaker 1: that there's barn demand, that there's cash just being recycled

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Speaker 1: from coople on payments and maturity everything else. What's the

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Speaker 1: sort of you know, warning sign view on the on

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Speaker 1: the demand side.

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Speaker 7: Well, the thing is there's always liquidity in the system

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Speaker 7: until there's not, and that switch can flip very quickly.

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Speaker 7: Right now, the liquidity and those strong technicals are very

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Speaker 7: much predicated on continued FED easing expectations and economic momentum.

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Speaker 7: If we see one of those two things change. So

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Speaker 7: if we expect that the FED is maybe not going

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Speaker 7: to be cut in quite as aggressively as the market

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Speaker 7: is currently pricing in, or perhaps they'll have to cut

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Speaker 7: even more aggressively because there is some sort of fundamental

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Speaker 7: issue of broad based economic deceleration, then those technicals really

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Speaker 7: can shift very quickly.

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Speaker 1: You've also mentioned massive supply out of the gate, which

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Speaker 1: makes sense given how tight spreads are. Inovation is going

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Speaker 1: to want to take advantage how much supply and what's

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Speaker 1: it going to be for.

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Speaker 7: So we think that in the high yield market it's

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Speaker 7: still going to be mostly refinancing, and our expectation is

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Speaker 7: for about three hundred billion of gross supply, which would

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Speaker 7: actually be a little bit of a downstep in twenty

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Speaker 7: twenty five compared to twenty twenty four levels, and that's

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Speaker 7: because we do expect spread volatility is going to pick

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Speaker 7: up in the broadly syndicated loan market. I think this

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Speaker 7: is where we could see the animal spirits really start

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Speaker 7: to work their way through the system again with more

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Speaker 7: m and a more LBOs. And importantly, we've already seen

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Speaker 7: dividend deals really increase in the loan market in twenty

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Speaker 7: twenty four. I don't see what stops that in the new.

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Speaker 1: Doesn't that just mean the whole load of more risk.

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Speaker 7: It does feel like that, And even before the outcome

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Speaker 7: of the election, we had been expecting a shift from

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Speaker 7: those balance sheet defense strategies to consolidation, those middle innings

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Speaker 7: of the credit cycle, which are consistent with things like

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Speaker 7: intentional releveraging, and that really brings execution risk to the

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Speaker 7: front and center.

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Speaker 1: Where's the best value right now? Is it duration? Is

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Speaker 1: it credit risk? What do you like?

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Speaker 7: So right now we do not love duration risk. We

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Speaker 7: actually re upgraded the broadly syndicated loan market to a

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Speaker 7: neutral weight allocation versus US and investment grade and high yield,

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Speaker 7: where we are underweight because we do think that there

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Speaker 7: will be a recalibration of FED expectations with fewer cuts

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Speaker 7: getting priced in and perhaps even rate hikes coming back

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Speaker 7: into the equation in sometime in twenty twenty five or

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Speaker 7: early twenty twenty six. So we like shorter duration, We

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Speaker 7: like floating rate. We don't want to get two over

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Speaker 7: our skis, and credit risk as borrowing costs are going

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Speaker 7: to be challenging if rates stay a little bit more elevated.

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Speaker 1: But credit risk has really rewarded the brave this year.

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Speaker 1: Triple c's are up fifteen percent in terms of you know,

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Speaker 1: the global index we track. You sound cautious, so I mean,

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Speaker 1: but on the other time, you can't refight this power

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Speaker 1: of the market, all this cash. You know that maybe

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Speaker 1: you know you risk underperformance if you do, so, how

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Speaker 1: do you balance those?

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Speaker 7: Yeah, this is a tricky one, and I feel like

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Speaker 7: we've been on the right side of the trade. We

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Speaker 7: came into twenty twenty three positive on credit risk. We

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Speaker 7: doubled down at the beginning of twenty twenty four, and

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Speaker 7: we've been notching down our risk tolerance as spreads have

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Speaker 7: hit levels that we think are not as sustainable. So

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Speaker 7: we realize there is that kind of tide that a

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Speaker 7: lot of people are fighting against where perhaps they were

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Speaker 7: a little bit overcashed at the beginning of this year

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Speaker 7: and under risked, And I fully empathize with the portfolio

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00:19:51,680 --> 00:19:53,920
Speaker 7: managers who have been dealing with that. But we do

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Speaker 7: think having a bit more of an up and quality

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Speaker 7: bias makes some sense.

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Speaker 1: You do have a global perspective, and I'm interested in

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Speaker 1: your view other regions. Everyone is so loaded up on

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Speaker 1: US assets and the dollar and all that stuff, but

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Speaker 1: surely there's value in other places Europe, Asia, where else.

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Speaker 7: Yeah, so we are sticking with a neutral allocation to

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Speaker 7: euro high yield versus underweight US. We see a bit

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Speaker 7: more spread value there. Alignment to domestic issuers can help

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00:20:19,080 --> 00:20:21,760
Speaker 7: mitigate some of the things like tariff risk, and we

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00:20:21,800 --> 00:20:23,920
Speaker 7: think that the risk reward there can be a little

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00:20:23,920 --> 00:20:27,119
Speaker 7: bit more attractive as valuations have lagged. We also like

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00:20:27,440 --> 00:20:31,399
Speaker 7: EMIG sovereigns. That's another place where you're getting a little

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Speaker 7: bit more yield and spread pickup than say the US

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Speaker 7: investment grade corporate market. And we see some potential for

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Speaker 7: continued relative performance.

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Speaker 1: And is there one big risk for next year that

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Speaker 1: really worries you.

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Speaker 7: There are so many risks that worry me for next year.

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Speaker 7: And I think that the big takeaway is there's a

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Speaker 7: lot of positivity being baked into market expectations and current valuations,

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Speaker 7: and that leads to complacency, and being complacent in an

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Speaker 7: environment that is rapidly changing can oftentimes be very detrimental

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Speaker 7: to portfolio performance.

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Speaker 1: Ohleg Melentia, I've head of high your Credit strategy at

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Speaker 1: Bank of America. Welcome to Credit Edge. Thank you, James,

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Speaker 1: so earlier on the Credit Edge earlier this year, I

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Speaker 1: should say you made some great points about the riskiest

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Speaker 1: end of credit markets. We talked about US companies with

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Speaker 1: about two hundred billion dollars of debt, roughly ten percent

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Speaker 1: of the high bond market that probably won't survive the

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Speaker 1: current period of elevated interest rates unscathed. Since then, you know,

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Speaker 1: the outlook for rates has probably become even more challenging

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Speaker 1: for some of those borrowers. What's the situation and what

439
00:21:43,400 --> 00:21:44,880
Speaker 1: should we be looking for next year?

440
00:21:45,200 --> 00:21:47,760
Speaker 8: So I think the most important development in the last

441
00:21:47,800 --> 00:21:52,760
Speaker 8: few months has been the completion of several liability management

442
00:21:52,880 --> 00:21:57,360
Speaker 8: exercises among those issuers. Some of the largest capital structures

443
00:21:57,400 --> 00:22:02,800
Speaker 8: have undergone those enemies, and if anycent that provided a

444
00:22:02,840 --> 00:22:07,280
Speaker 8: little bit of a relief in the market that those

445
00:22:07,320 --> 00:22:11,399
Speaker 8: issues are at least temporarily behind us. We don't know

446
00:22:11,480 --> 00:22:16,399
Speaker 8: that those are permanent solutions are not historically elements working

447
00:22:16,440 --> 00:22:19,040
Speaker 8: about sixty percent of cases, they don't work in the

448
00:22:19,040 --> 00:22:22,560
Speaker 8: other forty So time will tell, But in immediate sense,

449
00:22:22,680 --> 00:22:25,000
Speaker 8: it's it was definitely a relift to the market.

450
00:22:25,280 --> 00:22:27,280
Speaker 1: But there's still this worry about this what you call

451
00:22:27,320 --> 00:22:31,320
Speaker 1: the bossom ten percent. What specifically should we be looking

452
00:22:31,320 --> 00:22:32,600
Speaker 1: for there? I mean, is there is there going to

453
00:22:32,600 --> 00:22:34,439
Speaker 1: be a big increase in devotes, There is there going

454
00:22:34,480 --> 00:22:37,040
Speaker 1: to be a lot more stress, a lot more bankruptcies.

455
00:22:37,200 --> 00:22:38,520
Speaker 1: What do we expect in that ten percent?

456
00:22:39,200 --> 00:22:42,800
Speaker 8: So that ten percent, in our mind has not really

457
00:22:42,880 --> 00:22:47,600
Speaker 8: changed that much just in terms of over looking situation,

458
00:22:47,800 --> 00:22:53,120
Speaker 8: because look, leverage is still there. You know on average

459
00:22:53,160 --> 00:22:57,639
Speaker 8: that deactyle is lovered about eleven times. Interest coverage in

460
00:22:57,760 --> 00:23:00,720
Speaker 8: many cases is close to one. Sometimes they don't even

461
00:23:01,359 --> 00:23:04,639
Speaker 8: make enough money to pay the coupon? Did that to

462
00:23:04,800 --> 00:23:09,080
Speaker 8: enterprise value another measure we look at closely eighties percent,

463
00:23:10,000 --> 00:23:14,200
Speaker 8: So over time, unless we do see interest rates coming

464
00:23:14,240 --> 00:23:18,280
Speaker 8: down substantially, we do think this is an ongoing lemy material.

465
00:23:18,400 --> 00:23:20,800
Speaker 1: Yeah, so it's going to be more liability management exchanges,

466
00:23:20,840 --> 00:23:23,159
Speaker 1: which for our listeners who don't follow this close to

467
00:23:23,200 --> 00:23:25,879
Speaker 1: it basically means a loss of haircut for investors, right,

468
00:23:25,920 --> 00:23:26,560
Speaker 1: they're taking a hit.

469
00:23:26,760 --> 00:23:31,679
Speaker 8: So what it means is the last stop, hopefully the

470
00:23:31,760 --> 00:23:37,639
Speaker 8: last stop, but eight stop before bankruptcy. Right, bankruptcy process

471
00:23:38,680 --> 00:23:43,080
Speaker 8: is expensive, the recovery is are low. Everyone involved in

472
00:23:43,119 --> 00:23:46,400
Speaker 8: that situation prefers not to be in a bankruptcy court,

473
00:23:46,480 --> 00:23:49,040
Speaker 8: so they trying to solve those issues out of court.

474
00:23:49,520 --> 00:23:53,520
Speaker 8: And so in vast majority of cases, liability management exercise

475
00:23:53,720 --> 00:23:58,600
Speaker 8: is where both investors and issuers and sponsors go first. Again,

476
00:23:58,680 --> 00:24:02,919
Speaker 8: the question is the bankruptcy allows for a deeper structuring,

477
00:24:03,280 --> 00:24:08,679
Speaker 8: deep put that rite offs coupon extensions, et cetera, liability

478
00:24:08,720 --> 00:24:12,440
Speaker 8: management exercise. You have to reach that consensus essentially outside

479
00:24:12,480 --> 00:24:15,239
Speaker 8: of the courtroom, which which makes it more challenging. But

480
00:24:15,280 --> 00:24:18,600
Speaker 8: then recoveries are better, and the expectation is that maybe

481
00:24:18,640 --> 00:24:21,840
Speaker 8: that small change in cap structure is what's needed to

482
00:24:21,880 --> 00:24:22,480
Speaker 8: make it work.

483
00:24:22,760 --> 00:24:24,479
Speaker 1: And is it fair to say that this ten percent

484
00:24:24,600 --> 00:24:27,240
Speaker 1: of the market is bottom you know, the worst quality

485
00:24:27,280 --> 00:24:30,520
Speaker 1: parts of credit. We kind of know where it is,

486
00:24:30,560 --> 00:24:31,840
Speaker 1: We know what it is by now, and we just

487
00:24:31,880 --> 00:24:34,520
Speaker 1: avoid it and we carry on and everything else is

488
00:24:35,160 --> 00:24:36,920
Speaker 1: great for the rest of credit. I mean, it seems

489
00:24:36,920 --> 00:24:39,480
Speaker 1: like everyone's kind of isolated that and there's no contagion,

490
00:24:39,520 --> 00:24:42,640
Speaker 1: there's no spillover, there's no kind of even sentiment hit

491
00:24:42,760 --> 00:24:45,359
Speaker 1: for other investors across credit.

492
00:24:45,600 --> 00:24:50,560
Speaker 8: Yeah, look, it's going to take a very substantial deterioration

493
00:24:50,800 --> 00:24:55,240
Speaker 8: in kind of broader micro picture for any substantial credit

494
00:24:55,320 --> 00:24:59,000
Speaker 8: loss beyond that bottom descile. Like just realistically speaking, we

495
00:24:59,080 --> 00:25:02,040
Speaker 8: have to go back to the global financial crisis to

496
00:25:02,080 --> 00:25:06,040
Speaker 8: see default rates you know, north of ten percent, and

497
00:25:06,119 --> 00:25:08,679
Speaker 8: that that was an obvious calamity, right, so we we

498
00:25:08,720 --> 00:25:11,240
Speaker 8: haven't experienced tennis and like that since then, we haven't

499
00:25:11,280 --> 00:25:15,200
Speaker 8: experienced tennis and like that for decades before that, So

500
00:25:15,359 --> 00:25:18,159
Speaker 8: I would you know, put that at black swan event.

501
00:25:18,400 --> 00:25:21,240
Speaker 8: We can't forecast them, but can just hope they don't

502
00:25:21,240 --> 00:25:25,080
Speaker 8: repeat themselves. You know, in a garden variety of recession,

503
00:25:25,240 --> 00:25:28,360
Speaker 8: even if we get into one at some point our

504
00:25:28,480 --> 00:25:32,440
Speaker 8: enforeseeable future, we were pretty comfortable in saying default rates

505
00:25:32,440 --> 00:25:34,119
Speaker 8: should stay well inside of ten percent.

506
00:25:34,960 --> 00:25:38,080
Speaker 1: Are you know it's speaking today? Matt Breil from Invesco

507
00:25:38,320 --> 00:25:42,119
Speaker 1: made really kind of extremely pulish call on IG spreads.

508
00:25:42,160 --> 00:25:43,560
Speaker 1: I know you look at Yoda, I'm going to ask

509
00:25:43,600 --> 00:25:46,680
Speaker 1: you about anyway, fifty five basis points never been seen before.

510
00:25:46,720 --> 00:25:47,879
Speaker 1: And I asked him after this, how long is it

511
00:25:47,960 --> 00:25:50,720
Speaker 1: going to take? He said, by the first quarter, which

512
00:25:50,960 --> 00:25:52,840
Speaker 1: has to you know, if it happens. I'm not saying

513
00:25:52,920 --> 00:25:54,800
Speaker 1: that you think it does, but if it does, then

514
00:25:54,840 --> 00:25:56,840
Speaker 1: it has to reprice credit across the board. It means,

515
00:25:56,880 --> 00:26:00,320
Speaker 1: you know, everything just becomes dramatically size of First well,

516
00:26:00,520 --> 00:26:02,960
Speaker 1: I mean, do you think that that's at all a

517
00:26:03,040 --> 00:26:05,960
Speaker 1: feasible outcome? And secondly, what would it do to high

518
00:26:06,000 --> 00:26:07,120
Speaker 1: yield it did happen.

519
00:26:07,560 --> 00:26:10,480
Speaker 8: I think there is a decent chance it happens, So

520
00:26:10,520 --> 00:26:12,840
Speaker 8: we have a similar call on the high yield side.

521
00:26:12,840 --> 00:26:15,800
Speaker 8: We're basically saying there is a decent chance we break

522
00:26:15,840 --> 00:26:18,959
Speaker 8: through historical tides in hayield, and I do agree that

523
00:26:19,240 --> 00:26:22,760
Speaker 8: if it happens, it's more likely to happen sooner rather

524
00:26:22,800 --> 00:26:25,640
Speaker 8: than later. And the Russian alpha, the call from our

525
00:26:25,720 --> 00:26:30,440
Speaker 8: side at least is really the demand for credit is exceptional.

526
00:26:30,880 --> 00:26:32,879
Speaker 8: You know, the number of people that I speak to

527
00:26:33,440 --> 00:26:36,760
Speaker 8: who describe to me the capital they have raised, you know,

528
00:26:36,840 --> 00:26:41,360
Speaker 8: the cash balances they have accumulated, is incredible. So there

529
00:26:41,400 --> 00:26:45,119
Speaker 8: is a pressure to deploy. Nobody likes the spread. Everybody

530
00:26:45,200 --> 00:26:47,919
Speaker 8: gets it up, so everybody's waiting for pullback, and the

531
00:26:47,960 --> 00:26:51,600
Speaker 8: pullbacks are not happening often enough where they go deep enough.

532
00:26:52,160 --> 00:26:56,720
Speaker 8: And so especially in this seasonal moment where we go

533
00:26:56,760 --> 00:27:01,160
Speaker 8: in between holidays, issuing slows down, but the coupons don't,

534
00:27:02,000 --> 00:27:04,080
Speaker 8: there is a distant chance we actually would break through

535
00:27:04,119 --> 00:27:08,479
Speaker 8: that historical tight spread level in high yield. The reference

536
00:27:08,560 --> 00:27:10,879
Speaker 8: might have made for the fifty five and IG sounds

537
00:27:10,880 --> 00:27:11,960
Speaker 8: about about.

538
00:27:11,720 --> 00:27:12,080
Speaker 9: Right to me.

539
00:27:12,480 --> 00:27:14,000
Speaker 1: So what's your call on high yield spread?

540
00:27:14,320 --> 00:27:18,040
Speaker 8: So we think we could break closer to two twenty

541
00:27:18,080 --> 00:27:21,720
Speaker 8: five As as the bottom of the range, I don't

542
00:27:21,720 --> 00:27:23,760
Speaker 8: think we're going to stay there. I think again everybody

543
00:27:23,800 --> 00:27:28,399
Speaker 8: agrees that in a longer run it doesn't stack up

544
00:27:28,400 --> 00:27:30,879
Speaker 8: against kind of the normal volatility and the normal credit

545
00:27:30,920 --> 00:27:34,960
Speaker 8: loss profile. But as a temporary stop, two twenty five

546
00:27:35,080 --> 00:27:38,280
Speaker 8: is the potential bottom of the range. Three fifty or

547
00:27:38,280 --> 00:27:40,000
Speaker 8: so we think is going to be the top of

548
00:27:40,040 --> 00:27:42,359
Speaker 8: the range for next year, and kind of the middle

549
00:27:42,359 --> 00:27:44,520
Speaker 8: of it is roughly around three hundred based points.

550
00:27:44,520 --> 00:27:47,359
Speaker 1: Two twenty five on high yield in the first quarter potentially,

551
00:27:47,560 --> 00:27:51,000
Speaker 1: I would think, so, yeah, wow, amazing. So it's an

552
00:27:51,080 --> 00:27:54,960
Speaker 1: incredibly bullish outlook. You know, I have used the word

553
00:27:54,960 --> 00:27:58,119
Speaker 1: complacency on the show. Some people have called it a bubble.

554
00:27:58,320 --> 00:28:00,320
Speaker 1: Is that in any way you know, I mean you've

555
00:28:00,320 --> 00:28:02,080
Speaker 1: been in it's a long time XP you know, we

556
00:28:03,000 --> 00:28:05,800
Speaker 1: between as we remember things like the dot com all

557
00:28:05,840 --> 00:28:09,000
Speaker 1: that stuff. Does this in any way set of those

558
00:28:09,040 --> 00:28:10,040
Speaker 1: sorts of lambells view.

559
00:28:10,600 --> 00:28:15,520
Speaker 8: So volatility is extremely low, especially in credit. That's what

560
00:28:15,800 --> 00:28:18,359
Speaker 8: puzzles me the most personally as I look at all

561
00:28:18,400 --> 00:28:21,920
Speaker 8: these markets. You know, there is some equity volatility, rates

562
00:28:22,000 --> 00:28:26,000
Speaker 8: volatility has actually been elevated. Credit volatility has been into

563
00:28:26,040 --> 00:28:30,520
Speaker 8: the floor for months. So I would not argue for

564
00:28:30,640 --> 00:28:33,159
Speaker 8: a moment that there is some degree of complacency, is

565
00:28:33,200 --> 00:28:36,680
Speaker 8: a significant degree of complacency in all of this. But

566
00:28:36,920 --> 00:28:39,800
Speaker 8: longer term, when you zoom out and you look at history,

567
00:28:40,440 --> 00:28:43,680
Speaker 8: this is what history teaches us. Even if you were

568
00:28:43,840 --> 00:28:47,800
Speaker 8: unlucky enough to buy us high yield in May of

569
00:28:47,920 --> 00:28:50,680
Speaker 8: two thousand and seven, the last time we were in

570
00:28:50,800 --> 00:28:54,400
Speaker 8: this at these spread levels, and obviously the global financial

571
00:28:54,440 --> 00:28:58,640
Speaker 8: crisis was around the corner, within two years you will

572
00:28:58,680 --> 00:29:02,360
Speaker 8: breaking even on that investment and then you're making money

573
00:29:03,440 --> 00:29:05,480
Speaker 8: for S and P five hundred. It took five years.

574
00:29:06,520 --> 00:29:08,959
Speaker 8: So that is the thing about credit is you can

575
00:29:09,280 --> 00:29:12,120
Speaker 8: call it bubble, but at the end, the kind of

576
00:29:12,160 --> 00:29:15,600
Speaker 8: the structural advantage, the coupon, the fixed coupon nature, the

577
00:29:15,680 --> 00:29:19,320
Speaker 8: contractual nature of this asset class, it's going to bail

578
00:29:19,360 --> 00:29:21,960
Speaker 8: you out on the other side. And that's what investors

579
00:29:22,000 --> 00:29:24,360
Speaker 8: are gravitating for. That's why I think the demand is

580
00:29:24,440 --> 00:29:27,959
Speaker 8: so strong, especially among institutional investors, is they look at

581
00:29:27,960 --> 00:29:30,760
Speaker 8: that historical profile, they compare it to rates, they compare

582
00:29:30,800 --> 00:29:32,880
Speaker 8: it to equities, and they say, we don't have enough

583
00:29:32,920 --> 00:29:33,080
Speaker 8: of it.

584
00:29:38,040 --> 00:29:40,600
Speaker 1: Matt Mish, head of credit strategy at UBS, Welcome to

585
00:29:40,640 --> 00:29:41,160
Speaker 1: the credit edge.

586
00:29:41,320 --> 00:29:42,000
Speaker 3: Thank you for having me.

587
00:29:42,280 --> 00:29:45,160
Speaker 1: So we just heard from Investco at this the event

588
00:29:45,480 --> 00:29:48,520
Speaker 1: in New York that IG spreads will hit fifty five

589
00:29:48,560 --> 00:29:51,760
Speaker 1: basis points next year. And I asked Matt Braille from

590
00:29:51,800 --> 00:29:53,440
Speaker 1: Invesco how long that would take, and he said, in

591
00:29:53,480 --> 00:29:57,080
Speaker 1: the first quarter. I know you look at you know,

592
00:29:57,680 --> 00:29:59,760
Speaker 1: all these markets, and if it does go that far,

593
00:30:00,120 --> 00:30:02,640
Speaker 1: that tight, that fast, what does that do to credit?

594
00:30:02,800 --> 00:30:06,080
Speaker 3: Well, I guess, first look, James, we don't think it

595
00:30:06,200 --> 00:30:08,600
Speaker 3: goes that far that fast, But we think the market

596
00:30:08,760 --> 00:30:14,480
Speaker 3: gets disrupted by the more negative side of President Elect

597
00:30:14,520 --> 00:30:18,840
Speaker 3: Trump's second administration, in particular we think tariffs, but the

598
00:30:19,600 --> 00:30:23,440
Speaker 3: overall kind of undertones to Matt's point, clients are pricing

599
00:30:23,480 --> 00:30:25,360
Speaker 3: a lot of the good news in without actually looking

600
00:30:25,400 --> 00:30:27,480
Speaker 3: at both sides of the policy mix. So I guess

601
00:30:27,520 --> 00:30:29,600
Speaker 3: the first point is we just simply disagree with that.

602
00:30:30,000 --> 00:30:33,240
Speaker 3: We think tariff headlines, in particular size of the tariffs

603
00:30:33,240 --> 00:30:36,560
Speaker 3: were looking for twice what you saw in the first administration. Right,

604
00:30:36,600 --> 00:30:38,560
Speaker 3: We're coming into a market where spreads are at least

605
00:30:38,600 --> 00:30:41,960
Speaker 3: for USIG at twenty year tights right at seventy five.

606
00:30:42,000 --> 00:30:44,000
Speaker 3: And so the idea that you will compress down to

607
00:30:44,080 --> 00:30:47,120
Speaker 3: fifty five, particularly in a world where we think M

608
00:30:47,200 --> 00:30:50,400
Speaker 3: and A has been pent up, there's deregulation. There's a

609
00:30:50,600 --> 00:30:54,480
Speaker 3: lot and lot and lot of conversation, including at this conference,

610
00:30:54,520 --> 00:30:56,880
Speaker 3: about capital market activity and M and A coming down

611
00:30:56,920 --> 00:30:59,400
Speaker 3: the pipe. I just don't see fifty five. But if

612
00:30:59,440 --> 00:31:02,280
Speaker 3: you get to fifty five, Matt's going to be happy.

613
00:31:03,680 --> 00:31:06,760
Speaker 1: You also say markets are taking all the good and

614
00:31:06,880 --> 00:31:09,880
Speaker 1: not heating enough of the bad of the next administration.

615
00:31:10,680 --> 00:31:13,080
Speaker 1: Other than tariffs, what else are we worried about?

616
00:31:13,280 --> 00:31:15,080
Speaker 3: So we generally think that you are going to see

617
00:31:15,080 --> 00:31:18,520
Speaker 3: a slowdown in growth as kind of energizer bunny type

618
00:31:19,080 --> 00:31:21,440
Speaker 3: US economy is going to be subject to a bit

619
00:31:21,480 --> 00:31:24,680
Speaker 3: of slippage in consumption. I also think that you know,

620
00:31:24,720 --> 00:31:27,760
Speaker 3: if you look at the market, there's three risks really right.

621
00:31:27,880 --> 00:31:30,920
Speaker 3: One is a slow down in growth and particularly profits. Second,

622
00:31:30,920 --> 00:31:33,360
Speaker 3: particularly for high yield credit, is going to be unexpected

623
00:31:33,400 --> 00:31:36,520
Speaker 3: monetary policy tightening. So that's not something that we anticipate

624
00:31:37,160 --> 00:31:39,600
Speaker 3: in the baseline next year, but it is certainly a

625
00:31:39,720 --> 00:31:43,480
Speaker 3: risk in the context of some of the potential inflationary

626
00:31:43,600 --> 00:31:45,720
Speaker 3: policies were they to come down the pike. So to

627
00:31:45,760 --> 00:31:50,720
Speaker 3: be clear, we're expecting sixty percent tariffs on Chinese imports,

628
00:31:51,280 --> 00:31:54,360
Speaker 3: but if you got ten percent on all other imports,

629
00:31:54,400 --> 00:31:57,600
Speaker 3: that would be very inflationary. The other thing that we're

630
00:31:57,640 --> 00:32:02,680
Speaker 3: not expecting but as possible is portation, so actually reversing

631
00:32:03,200 --> 00:32:05,320
Speaker 3: the immigration wave that we've seen the last few years,

632
00:32:05,360 --> 00:32:09,440
Speaker 3: that also would be inflationary. So unexpected monetary policy tightening,

633
00:32:10,120 --> 00:32:12,640
Speaker 3: damage to profits and margins from tariffs, and then the

634
00:32:12,680 --> 00:32:14,920
Speaker 3: last point I would just say, a systemic risks. Right,

635
00:32:14,960 --> 00:32:20,680
Speaker 3: the market is always sensitive to the issues around credit

636
00:32:20,760 --> 00:32:23,720
Speaker 3: risk flare ups, and in particular watching commercial real estate.

637
00:32:24,280 --> 00:32:26,680
Speaker 3: We are also watching although we're fairly sang when at

638
00:32:26,760 --> 00:32:30,280
Speaker 3: least to start next year, fairly sang when around leverage loans,

639
00:32:30,320 --> 00:32:33,160
Speaker 3: but leverage loans in private credit, these areas have a

640
00:32:34,480 --> 00:32:38,160
Speaker 3: you know, have seen delinquency or ase quality trends deterirate

641
00:32:38,320 --> 00:32:41,000
Speaker 3: or stabilize and deteriorrate, and I still think that they

642
00:32:41,080 --> 00:32:43,440
Speaker 3: have to be essentially on investors' radar as we go

643
00:32:43,640 --> 00:32:45,480
Speaker 3: through the entirety of twenty twenty five.

644
00:32:45,880 --> 00:32:50,480
Speaker 1: The economic picture that you're painting sounds quite bad for credit,

645
00:32:50,560 --> 00:32:53,520
Speaker 1: sounds quite bad for borrows, the weak ones, and yet

646
00:32:53,600 --> 00:32:56,280
Speaker 1: no one's really expecting a big increase in default. How

647
00:32:56,320 --> 00:32:56,800
Speaker 1: does that work?

648
00:32:57,160 --> 00:33:01,320
Speaker 3: Well, companies have had very favorable capital market conditions if

649
00:33:01,360 --> 00:33:03,560
Speaker 3: you look, more so in the US than Europe, but

650
00:33:03,560 --> 00:33:06,960
Speaker 3: if you look at the maturity wall, there really isn't

651
00:33:07,080 --> 00:33:09,600
Speaker 3: a lot that's there over the next twelve months. I

652
00:33:09,680 --> 00:33:13,520
Speaker 3: think also in addition to that, you do have, we

653
00:33:13,680 --> 00:33:17,800
Speaker 3: think a federal reserve where partly due to slower growth

654
00:33:17,960 --> 00:33:21,440
Speaker 3: and easing inflation, at least in our baseline, interest rates

655
00:33:21,480 --> 00:33:24,480
Speaker 3: are coming down. And I think the last point, particularly

656
00:33:24,520 --> 00:33:26,880
Speaker 3: in some of the areas like private credit, is that

657
00:33:27,000 --> 00:33:31,320
Speaker 3: you've seen flexibility on sponsors and the part of investors

658
00:33:31,400 --> 00:33:33,479
Speaker 3: to basically put more money in too kind of extend

659
00:33:33,520 --> 00:33:35,880
Speaker 3: the runway. So I think that's the reason why and

660
00:33:36,360 --> 00:33:38,840
Speaker 3: ourselves included to have more of a rangebound environment for

661
00:33:38,960 --> 00:33:41,600
Speaker 3: default rates next year. We are a little bit more

662
00:33:41,680 --> 00:33:45,120
Speaker 3: cautious on Europe, but it's exactly for the reverse of

663
00:33:45,200 --> 00:33:48,000
Speaker 3: some of those reasons. We think, in particular, the economic

664
00:33:48,040 --> 00:33:49,640
Speaker 3: growth for Europe is going to be a little bit

665
00:33:49,680 --> 00:33:52,680
Speaker 3: more sluggish, and we do think the refinancing hurdle is

666
00:33:52,800 --> 00:33:56,040
Speaker 3: larger in part because of the lack of supply we've

667
00:33:56,040 --> 00:33:57,720
Speaker 3: seen in the last twelve to eighteen months. Out of

668
00:33:57,760 --> 00:33:59,120
Speaker 3: European high yield firms.

669
00:33:59,320 --> 00:34:01,360
Speaker 1: And going back to the US markets and how you

670
00:34:01,720 --> 00:34:05,120
Speaker 1: more generally, do you expect an increase in net supply,

671
00:34:05,200 --> 00:34:07,000
Speaker 1: because that's not really been there for a while.

672
00:34:07,440 --> 00:34:07,640
Speaker 2: We do.

673
00:34:07,800 --> 00:34:10,920
Speaker 3: I mean, we're looking for gross issuance up about ten percent,

674
00:34:11,680 --> 00:34:13,840
Speaker 3: and I think net will go up more. Some of

675
00:34:13,880 --> 00:34:16,040
Speaker 3: that net, importantly is not just going to be m

676
00:34:16,120 --> 00:34:20,360
Speaker 3: and A, so more non refinancing or more shareholder friendly initiatives.

677
00:34:20,760 --> 00:34:23,720
Speaker 3: But we also, you know, would point out that supply

678
00:34:23,840 --> 00:34:27,120
Speaker 3: from investment create to high yield, so fallen angels, we're

679
00:34:27,200 --> 00:34:30,000
Speaker 3: at arguably the lowest level we've had in over ten

680
00:34:30,080 --> 00:34:32,839
Speaker 3: years last year, and so we think that number goes up.

681
00:34:32,880 --> 00:34:36,359
Speaker 3: We're looking for about fifty billion in fallen angels. That's

682
00:34:36,440 --> 00:34:41,120
Speaker 3: not an above average amount, but given the very very

683
00:34:41,239 --> 00:34:44,560
Speaker 3: tepid level of ratings transitions that we saw in twenty

684
00:34:44,640 --> 00:34:46,920
Speaker 3: twenty four, it is going to be more of an

685
00:34:46,960 --> 00:34:47,960
Speaker 3: issue next year.

686
00:34:48,480 --> 00:34:52,120
Speaker 1: So that all sounds quite worrying, quite cautious. And yet

687
00:34:52,239 --> 00:34:56,000
Speaker 1: everybody you know that you ask is pretty long the

688
00:34:56,120 --> 00:34:58,400
Speaker 1: market in terms of credit, and they want more of it,

689
00:34:58,480 --> 00:35:01,239
Speaker 1: and there's not enough, and there's just an endless bid

690
00:35:01,320 --> 00:35:03,600
Speaker 1: and there's all this excitement about cash on the sidelines,

691
00:35:03,600 --> 00:35:06,319
Speaker 1: all this stuff. If you have a more cautious view,

692
00:35:06,360 --> 00:35:08,920
Speaker 1: how do you express that, given the risk assets really

693
00:35:08,960 --> 00:35:09,600
Speaker 1: are performing.

694
00:35:09,920 --> 00:35:11,800
Speaker 3: Yeah, well, I think you need to be selective. I

695
00:35:11,840 --> 00:35:14,160
Speaker 3: mean to be clear. You know, Matt's view is slightly

696
00:35:14,239 --> 00:35:17,120
Speaker 3: different than ours. You know, we assume under Tariff's US

697
00:35:17,200 --> 00:35:19,640
Speaker 3: investment gray doesn't go from seventy five to fifty five.

698
00:35:19,719 --> 00:35:23,319
Speaker 3: We're looking more for widening as those headlines and as

699
00:35:23,400 --> 00:35:26,839
Speaker 3: those announcements are implemented next year, along with slower growth,

700
00:35:27,320 --> 00:35:29,440
Speaker 3: a pickup and net supply. We have IG going about

701
00:35:29,440 --> 00:35:32,360
Speaker 3: eighty five ninety basis points I yield. We have widening

702
00:35:32,360 --> 00:35:34,480
Speaker 3: about thirty or forty base points to three hundred. So

703
00:35:34,920 --> 00:35:38,040
Speaker 3: it's not dramatic. We're not looking for a regime shift

704
00:35:38,840 --> 00:35:41,120
Speaker 3: in the macro environment, at least with regard to growth.

705
00:35:42,000 --> 00:35:43,560
Speaker 3: But we do think that there's going to be some

706
00:35:43,719 --> 00:35:47,080
Speaker 3: repricing from you know, fairly tight valuations in terms of

707
00:35:47,080 --> 00:35:49,680
Speaker 3: the areas where we think there's value. I'll just highlight three.

708
00:35:49,840 --> 00:35:52,320
Speaker 3: One is we do think that the loan market in

709
00:35:52,360 --> 00:35:54,279
Speaker 3: the US offers more value. A lot of that is

710
00:35:54,440 --> 00:35:57,839
Speaker 3: just traditional credit carry. You've got over one hundred base

711
00:35:57,920 --> 00:36:00,600
Speaker 3: points more in spread. You've got an invert yield curve

712
00:36:00,640 --> 00:36:02,719
Speaker 3: in the US, so you're all in yield even as

713
00:36:02,760 --> 00:36:05,680
Speaker 3: short rates are coming down in the curve normalizes is

714
00:36:05,719 --> 00:36:07,960
Speaker 3: pretty attractive. The second thing we would say in high

715
00:36:08,040 --> 00:36:10,880
Speaker 3: yield and investment grade is the telecom sector we like,

716
00:36:11,000 --> 00:36:14,239
Speaker 3: We think secretly there's a good story there. In many

717
00:36:14,320 --> 00:36:17,719
Speaker 3: cases it's a try or a duopoly. You've got a

718
00:36:17,800 --> 00:36:20,719
Speaker 3: sector that should benefit from slightly lower tax rates, so

719
00:36:20,719 --> 00:36:23,720
Speaker 3: where we have the aggregate rate going down to eighteen

720
00:36:23,800 --> 00:36:26,279
Speaker 3: percent in the US. And then the last point is

721
00:36:26,360 --> 00:36:28,799
Speaker 3: that is the sector, particularly in high yield, that did

722
00:36:28,880 --> 00:36:32,160
Speaker 3: the best in twenty eighteen as we went through tariffs.

723
00:36:32,960 --> 00:36:34,360
Speaker 3: So let me leave it there. I think that was

724
00:36:34,400 --> 00:36:36,200
Speaker 3: two and not three. But those are some of the

725
00:36:36,280 --> 00:36:39,440
Speaker 3: areas that we think clients need to be selective in

726
00:36:39,520 --> 00:36:41,080
Speaker 3: position in next year.

727
00:36:46,160 --> 00:36:48,840
Speaker 1: Megan Graper, Global head of Debt Capital Markets with Bartley's

728
00:36:48,880 --> 00:36:49,719
Speaker 1: Welcome to the Credit Edge.

729
00:36:49,920 --> 00:36:51,440
Speaker 10: Great to see you, Thanks so much for having me.

730
00:36:51,680 --> 00:36:54,040
Speaker 1: Thank you. And so today we're hearing a very bullish

731
00:36:54,160 --> 00:36:58,040
Speaker 1: outlook for credit record low spreads. Potentially, what does that

732
00:36:58,120 --> 00:37:01,399
Speaker 1: mean for supply shorty that attracts every issue out there

733
00:37:01,440 --> 00:37:02,480
Speaker 1: and you know, there's going to be some M and

734
00:37:02,600 --> 00:37:04,279
Speaker 1: A as well, so it's going to be very busy

735
00:37:04,360 --> 00:37:04,759
Speaker 1: next year.

736
00:37:05,040 --> 00:37:06,040
Speaker 10: Yeah, you're absolutely right.

737
00:37:06,120 --> 00:37:08,200
Speaker 11: I think it's hard to believe we're to December given

738
00:37:08,200 --> 00:37:10,800
Speaker 11: the amount of supply we've already seen front loaded and

739
00:37:10,920 --> 00:37:14,719
Speaker 11: accelerated into twenty twenty four. So there were some in

740
00:37:14,880 --> 00:37:18,080
Speaker 11: conversations we've been having around your end, expecting that maybe

741
00:37:18,120 --> 00:37:19,919
Speaker 11: we might see a bit of a pullback, that maybe

742
00:37:20,160 --> 00:37:22,240
Speaker 11: much of it had already been taken off the shelf

743
00:37:22,440 --> 00:37:25,040
Speaker 11: in this side of your end, And the reality is

744
00:37:25,080 --> 00:37:26,920
Speaker 11: we actually think we're going to see an incremental one

745
00:37:27,000 --> 00:37:29,719
Speaker 11: hundred billion relative to the volumes we saw this year,

746
00:37:29,880 --> 00:37:33,799
Speaker 11: So one point sixty five trillion of issuance in investment grade.

747
00:37:34,680 --> 00:37:36,800
Speaker 11: That feels like a sizable amount, but in the context

748
00:37:36,840 --> 00:37:38,719
Speaker 11: of an eight and a half trillion dollar market, it

749
00:37:38,800 --> 00:37:42,240
Speaker 11: actually feels manageable, particularly in the context of the demand

750
00:37:42,360 --> 00:37:43,319
Speaker 11: backdrop that we're seeing.

751
00:37:43,680 --> 00:37:45,640
Speaker 1: What does that mean on a net basis though, because

752
00:37:45,719 --> 00:37:48,200
Speaker 1: net supply, you know, the gross numbers look very high,

753
00:37:48,200 --> 00:37:49,640
Speaker 1: but the net has not been there.

754
00:37:49,840 --> 00:37:51,400
Speaker 10: They do, and that's a huge part of the equation.

755
00:37:51,520 --> 00:37:54,239
Speaker 11: So what's driving that uptick in volume is really this

756
00:37:54,880 --> 00:37:58,759
Speaker 11: pandemic related issuance rolling off. So there are maturities that

757
00:37:58,800 --> 00:38:02,040
Speaker 11: are up a full twenty six sent next year, which

758
00:38:02,120 --> 00:38:04,640
Speaker 11: is going to force some REFI. But it also means,

759
00:38:04,760 --> 00:38:07,759
Speaker 11: net net, there's money rolling back into investor's hands. So

760
00:38:07,880 --> 00:38:10,640
Speaker 11: from a net supply perspective, that is certainly a factor.

761
00:38:11,560 --> 00:38:13,359
Speaker 10: You mentioned M and A. I think that's another piece

762
00:38:13,400 --> 00:38:13,520
Speaker 10: of it.

763
00:38:13,640 --> 00:38:16,600
Speaker 11: What's going to mitigate erosion in some of the headline

764
00:38:16,640 --> 00:38:20,160
Speaker 11: numbers is I think the re emergence of a willingness

765
00:38:20,840 --> 00:38:25,280
Speaker 11: from investors to support issuers that are willing to tolerate

766
00:38:25,400 --> 00:38:28,320
Speaker 11: higher degrees of leverage. So we're going to see M

767
00:38:28,360 --> 00:38:31,480
Speaker 11: and A pickup, We're going to see keepex activity pick up.

768
00:38:31,719 --> 00:38:34,080
Speaker 11: All of that will fuel activity in the new issue

769
00:38:34,080 --> 00:38:34,799
Speaker 11: markets next year.

770
00:38:35,239 --> 00:38:37,200
Speaker 1: And do you expect spreads to go even tight? I mean,

771
00:38:37,239 --> 00:38:40,560
Speaker 1: one of our guests today, investo Matt Brill, thinks that

772
00:38:40,719 --> 00:38:43,600
Speaker 1: spreads will go to fifty five basis points. I asked

773
00:38:43,640 --> 00:38:45,960
Speaker 1: him afterwards when he said in the first quarter, that

774
00:38:46,120 --> 00:38:48,560
Speaker 1: just really sounds very aggressive to me. Does that seem

775
00:38:48,960 --> 00:38:49,640
Speaker 1: feasible to you?

776
00:38:50,440 --> 00:38:52,920
Speaker 11: Well, I think the trajectory is certainly going to be tighter,

777
00:38:53,080 --> 00:38:55,400
Speaker 11: and so if you talk to investors, many of them

778
00:38:55,480 --> 00:38:58,880
Speaker 11: are really spread agnostic, and what we're seeing is demand

779
00:38:59,000 --> 00:39:02,160
Speaker 11: underpinned by all in you. We hosted a round table

780
00:39:02,320 --> 00:39:06,160
Speaker 11: just recently and it was hedge funds, asset managers, insurance companies,

781
00:39:06,200 --> 00:39:08,880
Speaker 11: and all of them said, you need to be south

782
00:39:08,960 --> 00:39:11,960
Speaker 11: of four percent from an all and yield perspective before

783
00:39:12,200 --> 00:39:14,480
Speaker 11: their demand starts to wane. And so we've got a

784
00:39:14,600 --> 00:39:16,560
Speaker 11: fair ways to go with the index right at four

785
00:39:16,680 --> 00:39:19,560
Speaker 11: eighty before that demand erosion starts to materialize.

786
00:39:20,120 --> 00:39:22,759
Speaker 1: That's interesting because what stuck with me this time last year,

787
00:39:22,840 --> 00:39:24,480
Speaker 1: and I you know, I'm such a credit geek that

788
00:39:24,480 --> 00:39:26,759
Speaker 1: I remember these things. You said at this event that

789
00:39:27,080 --> 00:39:28,840
Speaker 1: four and a half was the kind of level that,

790
00:39:28,960 --> 00:39:31,640
Speaker 1: you know, beyond which demand might drop off. So it's

791
00:39:31,680 --> 00:39:33,239
Speaker 1: gone even lower than that it has.

792
00:39:33,400 --> 00:39:35,439
Speaker 10: I mean, this is the lowest it's been in eighteen months.

793
00:39:35,480 --> 00:39:37,520
Speaker 11: We asked that question at every round table, and it

794
00:39:37,640 --> 00:39:40,319
Speaker 11: was pretty consistently for eighteen months four and a half

795
00:39:40,440 --> 00:39:43,439
Speaker 11: or higher. And I was surprised as we headed into

796
00:39:43,480 --> 00:39:45,520
Speaker 11: the turn of the year that actually that has changed

797
00:39:45,520 --> 00:39:48,839
Speaker 11: fairly drastically in the context of Trump two point zero.

798
00:39:49,160 --> 00:39:51,319
Speaker 1: And then on the other side, on the risk side,

799
00:39:51,320 --> 00:39:55,160
Speaker 1: you were talking about downgrade risk fallen angels rising substantially.

800
00:39:55,200 --> 00:39:57,920
Speaker 1: You mentioned a number of you have forty billion dollars

801
00:39:58,000 --> 00:40:01,399
Speaker 1: worth of downgrades out of investment grade into high yield

802
00:40:01,480 --> 00:40:03,000
Speaker 1: next year. What's that all about?

803
00:40:03,360 --> 00:40:04,360
Speaker 10: Yeah, I think it's possible.

804
00:40:04,440 --> 00:40:06,880
Speaker 11: Look, I think fundamentals are an incredibly good shape, and

805
00:40:06,960 --> 00:40:10,240
Speaker 11: I think forty billion feels like a fairly manageable number.

806
00:40:10,560 --> 00:40:12,279
Speaker 11: I mean what we do is sort of look at

807
00:40:12,440 --> 00:40:15,319
Speaker 11: the willingness to lever up. What I think is more

808
00:40:15,480 --> 00:40:18,120
Speaker 11: likely to be the case here is not broad based downgrades,

809
00:40:18,320 --> 00:40:21,959
Speaker 11: but actually a handful of large issuers who could see

810
00:40:22,120 --> 00:40:25,120
Speaker 11: a move from cuspy triple B down into too high yield.

811
00:40:25,960 --> 00:40:28,840
Speaker 11: There are one hundred and fifty billion of low triple

812
00:40:28,880 --> 00:40:32,799
Speaker 11: B names in the index. Currently only about sixty of those,

813
00:40:32,960 --> 00:40:35,800
Speaker 11: or sixty billion of those are within one notch of

814
00:40:35,920 --> 00:40:38,440
Speaker 11: being moved to junk. So we think it's a contained universe.

815
00:40:38,520 --> 00:40:40,480
Speaker 11: But it does mean credit selection is going to be

816
00:40:40,560 --> 00:40:42,799
Speaker 11: incrementally more important than twenty twenty five.

817
00:40:43,280 --> 00:40:45,840
Speaker 1: But again, the investors just don't seem to care. The

818
00:40:45,880 --> 00:40:50,120
Speaker 1: demand just keeps rising. I'm interested also in your use

819
00:40:50,120 --> 00:40:52,040
Speaker 1: of foreign demand, given that the dollar is going to

820
00:40:52,080 --> 00:40:54,520
Speaker 1: be so strong as well. Does any of that trail

821
00:40:54,560 --> 00:40:55,399
Speaker 1: off because of the dollar?

822
00:40:55,719 --> 00:40:57,680
Speaker 11: Yeah, I mean the breadth and depth of the demand

823
00:40:57,800 --> 00:41:00,920
Speaker 11: in the US dollar new issue market in particular has

824
00:41:01,040 --> 00:41:04,880
Speaker 11: really been buoyed by the growth of sponsorship from overseas investors.

825
00:41:05,239 --> 00:41:07,920
Speaker 11: It used to be that that was really concentrated just

826
00:41:08,120 --> 00:41:11,120
Speaker 11: in China or just in Japan. The reality is that

827
00:41:11,239 --> 00:41:14,160
Speaker 11: now the Middle East is involved, Europe is involved. So

828
00:41:14,520 --> 00:41:16,560
Speaker 11: the sort of the breadth and depth of the market

829
00:41:16,760 --> 00:41:19,520
Speaker 11: is much more robust than we've ever seen. So even

830
00:41:19,680 --> 00:41:22,720
Speaker 11: if we start to see dispersion in terms of underlying rates,

831
00:41:22,960 --> 00:41:26,319
Speaker 11: my concern to some degrees Japanese investors start to see

832
00:41:26,680 --> 00:41:30,040
Speaker 11: underlying yields in their home market actually pulling them back

833
00:41:30,520 --> 00:41:34,439
Speaker 11: to invest domestically, that in and of itself won't be enough,

834
00:41:34,640 --> 00:41:38,919
Speaker 11: I think to weigh on overarching demand technicals in our world.

835
00:41:39,280 --> 00:41:42,759
Speaker 1: Does money market funds? Does that come into this market

836
00:41:42,800 --> 00:41:43,640
Speaker 1: at any point? Do you think?

837
00:41:44,080 --> 00:41:44,239
Speaker 3: Well?

838
00:41:44,320 --> 00:41:47,759
Speaker 11: I think there is some extension of maturity extension that

839
00:41:47,800 --> 00:41:49,960
Speaker 11: we're seeing from some two A seven investors, But in

840
00:41:50,080 --> 00:41:55,239
Speaker 11: some cases that's not precluding them from continuing to participate

841
00:41:55,360 --> 00:41:58,400
Speaker 11: in two A seven land. It's actually just redeploying some

842
00:41:58,600 --> 00:42:02,640
Speaker 11: cash out the curves underlying yields become compelling. The reality

843
00:42:02,719 --> 00:42:04,560
Speaker 11: is with the FED still in play, the front end

844
00:42:04,680 --> 00:42:07,200
Speaker 11: is probably most exposed, and so I think that's contained

845
00:42:07,239 --> 00:42:09,000
Speaker 11: and maybe more of a second half phenomenon.

846
00:42:14,600 --> 00:42:16,800
Speaker 1: And also a global head of private credit and co

847
00:42:16,920 --> 00:42:19,319
Speaker 1: head of Financial Institutions at Moodies, welcome to the credit edge.

848
00:42:19,760 --> 00:42:20,759
Speaker 9: Thank you for having me back.

849
00:42:21,640 --> 00:42:24,520
Speaker 1: So I wanted to start with the consolidation we're seeing

850
00:42:24,520 --> 00:42:27,080
Speaker 1: in private credit. You know, a big black Rock deal

851
00:42:27,200 --> 00:42:29,360
Speaker 1: just announced. What does that mean for private credit? And

852
00:42:29,520 --> 00:42:31,600
Speaker 1: you know, the democratization of the asset class.

853
00:42:32,440 --> 00:42:35,200
Speaker 9: I think it's continuing in that Vein a couple of

854
00:42:35,280 --> 00:42:39,000
Speaker 9: years ago, private credit was considered alternative, nesoteric. It doesn't

855
00:42:39,040 --> 00:42:42,360
Speaker 9: sound to be the case anymore with the largest liquid

856
00:42:42,400 --> 00:42:47,000
Speaker 9: asset manager buys a reputable private credit fund.

857
00:42:47,800 --> 00:42:48,919
Speaker 1: But it makes a lot of sense.

858
00:42:48,960 --> 00:42:53,840
Speaker 9: Look, Blackrock can offer every kind of product and solution

859
00:42:54,000 --> 00:42:57,719
Speaker 9: to number of financial institutions, pension funds, insurance companies that

860
00:42:57,800 --> 00:43:02,320
Speaker 9: it serves, and it missed this key asset class, particularly

861
00:43:02,320 --> 00:43:06,160
Speaker 9: in this scale, and when it's it's a market that's

862
00:43:06,160 --> 00:43:08,720
Speaker 9: obviously gonna grow, and we do believe that's gonna continue

863
00:43:08,760 --> 00:43:13,719
Speaker 9: growing even with the increased competition and consolidation. For Black

864
00:43:13,800 --> 00:43:17,000
Speaker 9: Crook having their stock prices occurrency, it made a lot

865
00:43:17,040 --> 00:43:19,080
Speaker 9: of sense to to make the bid and complement their

866
00:43:19,120 --> 00:43:21,120
Speaker 9: offerings to their clients.

867
00:43:21,560 --> 00:43:23,120
Speaker 1: Does it mean private credit for everyone?

868
00:43:23,680 --> 00:43:26,839
Speaker 9: Well, private career for everyone is definitely an ambition as

869
00:43:26,880 --> 00:43:30,080
Speaker 9: we know, particularly we know a Pollo with that big

870
00:43:31,239 --> 00:43:34,000
Speaker 9: I was a part of the strategy. This year was retalization.

871
00:43:34,960 --> 00:43:38,120
Speaker 9: Last year was all about a BF and and D banking,

872
00:43:38,239 --> 00:43:42,479
Speaker 9: and D year is about private career for everyone or retalization. Look,

873
00:43:42,680 --> 00:43:45,200
Speaker 9: there's gonna be regulatory hurdles to be to be cleared,

874
00:43:45,280 --> 00:43:48,560
Speaker 9: and we're having a new SEC chair, so we all

875
00:43:48,640 --> 00:43:51,080
Speaker 9: gonna for next year, so we're gonna watch what that happens.

876
00:43:51,120 --> 00:43:53,800
Speaker 9: But just kind of as a lead example, we know

877
00:43:54,000 --> 00:43:58,600
Speaker 9: that ETF that Apollo has proposed has not been approved yet,

878
00:43:58,800 --> 00:43:59,880
Speaker 9: So just something to.

879
00:44:00,640 --> 00:44:02,960
Speaker 1: How big does the market get? We've heard mate, you

880
00:44:03,000 --> 00:44:05,920
Speaker 1: know once you add acid based finance, you know, forty

881
00:44:06,120 --> 00:44:09,440
Speaker 1: fifty trillion dollars, you know, keeps getting bigger every time

882
00:44:09,440 --> 00:44:11,160
Speaker 1: you hear about it. How big do you think reasonably?

883
00:44:11,239 --> 00:44:11,600
Speaker 1: It could be?

884
00:44:12,120 --> 00:44:16,320
Speaker 9: Actually perfect timing, We just published our asset management Outlook

885
00:44:16,719 --> 00:44:19,880
Speaker 9: and we put a number there three to six trillion

886
00:44:19,960 --> 00:44:22,160
Speaker 9: dollars over the next five to ten years, And it's

887
00:44:22,160 --> 00:44:26,560
Speaker 9: actually very simple math. This is really more of just

888
00:44:26,680 --> 00:44:32,520
Speaker 9: conceptual aspect of understanding what the banking may mean. And

889
00:44:32,600 --> 00:44:35,440
Speaker 9: again it really matters of where we end up in basil,

890
00:44:35,560 --> 00:44:41,080
Speaker 9: both in the US and in Europe particularly. So if

891
00:44:41,080 --> 00:44:44,400
Speaker 9: you think about seventeen trillion dollars or loans roughly on

892
00:44:44,640 --> 00:44:47,279
Speaker 9: US banks balancing or in eighteen trillion euros on the

893
00:44:47,360 --> 00:44:51,560
Speaker 9: European banks balance, so that's roughly thirty trillion plus loans.

894
00:44:51,840 --> 00:44:53,880
Speaker 9: So you know, you name, I guess is it going

895
00:44:53,960 --> 00:44:56,360
Speaker 9: to be ten percent of that potentially living the system

896
00:44:56,440 --> 00:44:58,399
Speaker 9: and in a secuzation for over the next ten years.

897
00:44:58,440 --> 00:45:02,120
Speaker 9: I would say three trillion is probably the lawmark. So

898
00:45:02,280 --> 00:45:04,840
Speaker 9: that's you know, McKinsey put like our six trillion, So

899
00:45:04,960 --> 00:45:07,919
Speaker 9: we are ranges through to six trillion, but it's truly

900
00:45:08,000 --> 00:45:10,640
Speaker 9: based on the balance sheet of the banks and the

901
00:45:10,760 --> 00:45:13,720
Speaker 9: assets that potentially may may leave to be more capital efficient.

902
00:45:14,239 --> 00:45:17,480
Speaker 1: So when Apollo says forty trillion, that just I think they're.

903
00:45:17,320 --> 00:45:20,120
Speaker 10: Just summing up the europe and the US banks balance.

904
00:45:20,680 --> 00:45:21,880
Speaker 1: That's not really the prophesizon.

905
00:45:23,360 --> 00:45:25,680
Speaker 9: I don't think so well, depends on the horizon. Let

906
00:45:25,760 --> 00:45:27,680
Speaker 9: me correct myself, you know, depending on the horizon it.

907
00:45:27,960 --> 00:45:29,920
Speaker 1: Do you think that next year, twenty twenty five, we

908
00:45:29,960 --> 00:45:32,680
Speaker 1: will still be talking about private credit as much as

909
00:45:32,719 --> 00:45:33,720
Speaker 1: we have been this year.

910
00:45:34,280 --> 00:45:39,400
Speaker 9: Yes, because the competition is going to be fierce and

911
00:45:40,400 --> 00:45:44,600
Speaker 9: the banks will probably not gonna have the danger of

912
00:45:44,719 --> 00:45:48,920
Speaker 9: Basil in its original proposed form, which means that the

913
00:45:49,040 --> 00:45:52,080
Speaker 9: competition not just between the private credit lenders but within

914
00:45:52,239 --> 00:45:54,840
Speaker 9: private credit and BSL is going to continue like you

915
00:45:54,920 --> 00:45:58,040
Speaker 9: did this year. But think about this year was largely

916
00:45:58,120 --> 00:46:01,520
Speaker 9: refised no m and A, and next year, if the

917
00:46:01,640 --> 00:46:07,520
Speaker 9: economic projections are sustained of stable and the growth or

918
00:46:07,600 --> 00:46:10,440
Speaker 9: unleashing the animal spirits is the new administration wants to

919
00:46:10,520 --> 00:46:12,520
Speaker 9: call it, there's going to be m and A, which

920
00:46:12,560 --> 00:46:15,200
Speaker 9: means that a lot of these deals will continue going

921
00:46:15,320 --> 00:46:18,520
Speaker 9: dual process, so the spreaci of titan and will continue

922
00:46:18,520 --> 00:46:21,600
Speaker 9: to tighten apps in some big macroeconomic shock or or

923
00:46:21,680 --> 00:46:22,640
Speaker 9: geopolitical issue.

924
00:46:23,000 --> 00:46:25,719
Speaker 1: That all sounds very much like a rational exuberance to me.

925
00:46:25,800 --> 00:46:27,640
Speaker 1: Does that not mean a lot more risk in private

926
00:46:27,680 --> 00:46:28,480
Speaker 1: credit next year?

927
00:46:29,120 --> 00:46:29,560
Speaker 2: For sure?

928
00:46:30,040 --> 00:46:33,000
Speaker 9: From a risk perspective, competition on terms and pricing is

929
00:46:33,080 --> 00:46:36,280
Speaker 9: not good so that's something that definitely willing to be watching.

930
00:46:36,640 --> 00:46:41,360
Speaker 9: As you know, earlier this year, we start differentiating our ratings,

931
00:46:41,760 --> 00:46:44,640
Speaker 9: particularly the large credit PDCs that we read, and we

932
00:46:44,760 --> 00:46:48,160
Speaker 9: certainly have seen divergence of performance and some some of

933
00:46:48,200 --> 00:46:51,800
Speaker 9: the PDCs are suffering not only from a non ACRUL perspective,

934
00:46:51,920 --> 00:46:54,640
Speaker 9: you know, the level of payment and kind loans. So

935
00:46:55,239 --> 00:46:56,839
Speaker 9: I think next year is going to be another year

936
00:46:56,880 --> 00:46:57,520
Speaker 9: of differentiation.

937
00:47:03,080 --> 00:47:05,960
Speaker 1: Aidan Cheslin, head of European credit research at Bloomberg Intelligence,

938
00:47:06,000 --> 00:47:07,480
Speaker 1: thank you so much for being on the credit edge.

939
00:47:07,840 --> 00:47:08,719
Speaker 4: Great to be here again.

940
00:47:09,000 --> 00:47:11,400
Speaker 1: We're in the US. All we hear about markets right

941
00:47:11,440 --> 00:47:14,120
Speaker 1: now is US exceptionalism. All we hear about Europe is

942
00:47:14,160 --> 00:47:18,440
Speaker 1: political crisis and ailien economies and all sorts of problems.

943
00:47:18,840 --> 00:47:22,040
Speaker 1: But when you look ahead to next year, Aiden, what

944
00:47:22,120 --> 00:47:24,360
Speaker 1: are the bright spots in terms of European credit.

945
00:47:25,000 --> 00:47:27,640
Speaker 4: I think there are a few. I think you look

946
00:47:27,680 --> 00:47:30,000
Speaker 4: at some of the sectors that have outperformed like this year,

947
00:47:30,120 --> 00:47:33,920
Speaker 4: like high yield and corporate hybrids in particular, corporate hybrids

948
00:47:34,040 --> 00:47:38,160
Speaker 4: has been one of our pet trades for the last year.

949
00:47:38,200 --> 00:47:41,680
Speaker 4: I think I was on this podcast earlier in twenty

950
00:47:41,760 --> 00:47:44,719
Speaker 4: twenty four talking about a focus idea that we had

951
00:47:44,760 --> 00:47:47,799
Speaker 4: on the asset class where we looked at the relationship

952
00:47:47,920 --> 00:47:53,480
Speaker 4: between where hybrid bonds were trading and versus high yield,

953
00:47:54,080 --> 00:47:57,920
Speaker 4: and we thought that that relationship between those two asset classes,

954
00:47:57,920 --> 00:47:59,959
Speaker 4: which was around one hundred and fifty basis points spread

955
00:48:00,200 --> 00:48:04,200
Speaker 4: between the average yield on a non real estate corporate

956
00:48:04,280 --> 00:48:07,360
Speaker 4: hybrid bond and the double B senior space. It was

957
00:48:07,400 --> 00:48:09,839
Speaker 4: around one hundred and fifty bits that came in as

958
00:48:10,000 --> 00:48:14,080
Speaker 4: tight as about forty forty five basis points two or

959
00:48:14,120 --> 00:48:17,720
Speaker 4: three weeks ago. It's widened back out to about seventy

960
00:48:17,800 --> 00:48:22,120
Speaker 4: eighty basis points. But we think that there's still plenty

961
00:48:22,200 --> 00:48:26,120
Speaker 4: left in that trade, given that these two curves traded

962
00:48:26,200 --> 00:48:29,000
Speaker 4: flat to one another several times during the last three

963
00:48:29,080 --> 00:48:32,640
Speaker 4: to four years. So notwithstanding the amount of carry that

964
00:48:32,680 --> 00:48:35,520
Speaker 4: there isn't in that space as well, I definitely say

965
00:48:35,640 --> 00:48:38,719
Speaker 4: corporate hybrids is something to continue to look out for

966
00:48:38,880 --> 00:48:39,279
Speaker 4: next year.

967
00:48:39,840 --> 00:48:41,160
Speaker 1: What kind of sectors are we talking about when we

968
00:48:41,200 --> 00:48:42,240
Speaker 1: talk about hybrids in Europe?

969
00:48:43,120 --> 00:48:45,560
Speaker 4: It's cross all sectors really, you know, a lot of

970
00:48:45,600 --> 00:48:47,680
Speaker 4: the beta has come from real estate over the last

971
00:48:47,760 --> 00:48:52,239
Speaker 4: couple of years. We exclude those names from the analysis.

972
00:48:52,280 --> 00:48:55,200
Speaker 4: That I was just discussing, but certainly real estate had

973
00:48:55,239 --> 00:48:58,920
Speaker 4: a better year than I think consensus was really expecting

974
00:48:58,960 --> 00:49:02,160
Speaker 4: in twenty twenty four. A lot of the more distressed names,

975
00:49:02,200 --> 00:49:04,080
Speaker 4: if you think of the around towns of this world,

976
00:49:04,920 --> 00:49:08,040
Speaker 4: did end up tendering for bonds and even calling some

977
00:49:08,200 --> 00:49:10,960
Speaker 4: bonds that the market was very nervous about getting called

978
00:49:11,040 --> 00:49:13,680
Speaker 4: or not. So the behavior was a lot better than

979
00:49:13,760 --> 00:49:16,040
Speaker 4: expected there and that's led to quite a broad based

980
00:49:16,120 --> 00:49:22,200
Speaker 4: rally across the corporate hybrid universe. And I think, you know,

981
00:49:22,280 --> 00:49:26,400
Speaker 4: we see some more issuance in that space in twenty

982
00:49:26,480 --> 00:49:31,680
Speaker 4: twenty five, which will give opportunity for yield for investors

983
00:49:32,600 --> 00:49:36,960
Speaker 4: that are experienced in European real estate sector.

984
00:49:37,760 --> 00:49:40,520
Speaker 1: Most people looking at European hybrids would have thought about

985
00:49:40,640 --> 00:49:44,360
Speaker 1: bank debt eighty One's that sort of thing. I know

986
00:49:44,440 --> 00:49:46,239
Speaker 1: that's not your direct area of focus. But is that

987
00:49:46,920 --> 00:49:48,680
Speaker 1: trade played out now? Is it still juc in it?

988
00:49:48,760 --> 00:49:49,440
Speaker 1: You think so?

989
00:49:49,560 --> 00:49:53,920
Speaker 4: Our bank's analysts still like the sector. Admittedly probably not

990
00:49:54,080 --> 00:49:57,520
Speaker 4: as much spread tightening as we saw in twenty twenty four,

991
00:49:57,719 --> 00:49:59,959
Speaker 4: probably potentially a little bit more of a carry trade

992
00:50:00,040 --> 00:50:03,560
Speaker 4: in twenty twenty five, but by and large we still

993
00:50:03,600 --> 00:50:07,240
Speaker 4: remain constructive on bank capital and subordinative bank capital.

994
00:50:07,760 --> 00:50:09,960
Speaker 1: One name that I'd like to ask you about constantly

995
00:50:10,040 --> 00:50:13,200
Speaker 1: is Altice because it's such a huge capital structure that

996
00:50:13,360 --> 00:50:15,080
Speaker 1: has been in trouble and I think used the word

997
00:50:15,480 --> 00:50:19,040
Speaker 1: Jenga tower when you were on this show earlier this year,

998
00:50:20,120 --> 00:50:22,919
Speaker 1: and you know, it's obviously got big ramifications for US

999
00:50:23,160 --> 00:50:25,399
Speaker 1: creditors as well. But what's the situation now and where

1000
00:50:25,400 --> 00:50:26,920
Speaker 1: do we think things are going to go next year?

1001
00:50:27,560 --> 00:50:32,040
Speaker 4: Yep, So we're talking about Altis France specifically. We've already

1002
00:50:32,080 --> 00:50:37,800
Speaker 4: had one round of talks between the company sponsors and

1003
00:50:39,360 --> 00:50:43,520
Speaker 4: it's a debt group or the group of bondholders that

1004
00:50:43,640 --> 00:50:48,919
Speaker 4: formed to discuss a potential restructuring, which is didn't seem

1005
00:50:49,000 --> 00:50:51,440
Speaker 4: that far apart on absolute numbers, but I think there

1006
00:50:51,560 --> 00:50:56,320
Speaker 4: was a desire to get a better control of the

1007
00:50:56,440 --> 00:50:59,880
Speaker 4: direction of the company amongst the bondholders, and that was

1008
00:51:00,000 --> 00:51:02,080
Speaker 4: where a lot of the gap seem to be between

1009
00:51:02,320 --> 00:51:05,279
Speaker 4: the bondholders and the company in terms of coming up

1010
00:51:05,320 --> 00:51:08,120
Speaker 4: with a restructuring program that has to you think, reach

1011
00:51:08,200 --> 00:51:10,439
Speaker 4: some kind of conclusion before some of the twenty twenty

1012
00:51:10,480 --> 00:51:14,000
Speaker 4: five debt maturities. So I think we'll hear more on

1013
00:51:14,080 --> 00:51:17,680
Speaker 4: that probably in Q one. And then the other question

1014
00:51:17,800 --> 00:51:20,320
Speaker 4: around that we get asked is well, what's what's the

1015
00:51:20,440 --> 00:51:24,400
Speaker 4: next Altis France? Is it Eltis International. There's certainly some

1016
00:51:24,480 --> 00:51:27,239
Speaker 4: big challenges with Altis International. We've seen a big rise

1017
00:51:27,320 --> 00:51:31,480
Speaker 4: in in leverage this year there and I think you know,

1018
00:51:31,560 --> 00:51:34,360
Speaker 4: particularly if you look at how the subordinated bonds of

1019
00:51:34,400 --> 00:51:37,439
Speaker 4: out East France have been treated, there's some tail risk

1020
00:51:37,560 --> 00:51:40,920
Speaker 4: in the subordinated bonds of Oltis International. And the other

1021
00:51:41,239 --> 00:51:45,040
Speaker 4: area that's kind of adjacent to that where there's a

1022
00:51:45,080 --> 00:51:47,600
Speaker 4: potential for more distress I'd say more medium term rather

1023
00:51:47,640 --> 00:51:50,800
Speaker 4: than very short term, but is in the satellite space.

1024
00:51:51,640 --> 00:51:55,680
Speaker 4: So there are two big satellite names in Europe. One

1025
00:51:55,800 --> 00:51:58,120
Speaker 4: util Sat, which has fallen to single B and is

1026
00:51:58,800 --> 00:52:02,960
Speaker 4: looking in crely distressed, and then you've got Sees sitting

1027
00:52:03,000 --> 00:52:05,759
Speaker 4: at triple bus with a lot of work to do

1028
00:52:06,000 --> 00:52:09,720
Speaker 4: to convince the market that it justifies investment grades spreads.

1029
00:52:10,840 --> 00:52:13,560
Speaker 1: There's also a lot of political noise in the big

1030
00:52:13,640 --> 00:52:16,360
Speaker 1: economies in Europe, and there's also potentially a big impact

1031
00:52:16,400 --> 00:52:18,400
Speaker 1: from tariffs and all of the stuff that might be

1032
00:52:18,480 --> 00:52:20,680
Speaker 1: coming from the next US administration. Does any of that

1033
00:52:20,880 --> 00:52:23,759
Speaker 1: bleed through to your credit work and the outlook that

1034
00:52:23,800 --> 00:52:24,800
Speaker 1: you have some of these companies.

1035
00:52:25,040 --> 00:52:28,040
Speaker 4: Yeah, of course, you know, you can't really ignore it.

1036
00:52:29,640 --> 00:52:32,160
Speaker 4: I think, you know, we've seen Trump use tariffs as

1037
00:52:32,200 --> 00:52:34,560
Speaker 4: a bit of a stick before, so I think there's

1038
00:52:34,560 --> 00:52:37,840
Speaker 4: a very much a wait and see attitude in Europe

1039
00:52:37,880 --> 00:52:39,640
Speaker 4: really is to you know, I think some of the

1040
00:52:39,680 --> 00:52:42,920
Speaker 4: widening has been kind of already happened, but there's a

1041
00:52:42,960 --> 00:52:44,719
Speaker 4: bit of a wait and see attitude now to see

1042
00:52:44,760 --> 00:52:50,120
Speaker 4: whether that really filters through into tarishs that genuinely damage economies,

1043
00:52:50,200 --> 00:52:52,879
Speaker 4: or whether it's more of a stick to beat those

1044
00:52:52,920 --> 00:52:56,600
Speaker 4: economies into spending more on defense or whatever the pet

1045
00:52:56,640 --> 00:52:58,320
Speaker 4: peeve is. So I think we're kind of in a

1046
00:52:58,400 --> 00:53:01,360
Speaker 4: wait and see holding pattern on that. For continental Europe.

1047
00:53:02,000 --> 00:53:04,480
Speaker 4: I think the UK is probably slightly better positioned, but

1048
00:53:04,560 --> 00:53:06,040
Speaker 4: we'll just have to wait and see on that one.

1049
00:53:06,160 --> 00:53:07,919
Speaker 1: Great stuff. Thank you very much for being on the show.

1050
00:53:08,239 --> 00:53:11,520
Speaker 1: Please do subscribe wherever you get your podcasts. We're on Apple, Spotify,

1051
00:53:11,640 --> 00:53:14,440
Speaker 1: and all other good providers, including the Bloomberg Terminal at

1052
00:53:14,520 --> 00:53:17,640
Speaker 1: bpod Go. Give us a review, tell your friends, or

1053
00:53:17,680 --> 00:53:21,680
Speaker 1: email me directly at Jcrombieight at Bloomberg dot net. I'm

1054
00:53:21,760 --> 00:53:23,600
Speaker 1: James Cromby. It's been a pleasure having you join us

1055
00:53:23,640 --> 00:53:25,239
Speaker 1: again next week on the Credit Edge