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

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

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Speaker 1: This week, we're very pleased to welcome Wayne Dahl from

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Speaker 1: oak Tree. How are you Wayne, I'm great?

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Speaker 2: How are you?

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Speaker 3: James?

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Speaker 1: Very good?

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Speaker 3: Thank you.

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Speaker 1: Wayne. It's co portfolio manager for oak Tree's global credit

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Speaker 1: and investment grade solutions strategies.

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Speaker 2: Thank you very much for having me.

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Speaker 1: Thanks so much for joining us today. We're very excited

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Speaker 1: to hear your views. Plus, we're also delighted to have

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Speaker 1: back on the show Mike Holland with Bloomberg Intelligence. Hello, Mike, Hey, James.

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Speaker 3: Great to be here. I'm Mike Colin.

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Speaker 4: I'm a senior healthcare credit analyst here at Bloomberg, part

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Speaker 4: of Bloomberg's research department of five hundred analysts and strategists.

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Speaker 2: So great.

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Speaker 1: So, just to set the scene a bit here, credit

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Speaker 1: markets are struggling a bit, not really living up to

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Speaker 1: their year of the bond bill. That's mostly because of

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Speaker 1: rates which remain elevated, undermining total returns and also putting

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Speaker 1: pressure on weak companies that have a lot of debt.

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Speaker 1: Shorter duration assets like high yield and floating rate loans

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Speaker 1: are doing okay, though nowhere near as good as equities.

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Speaker 1: Debt spreads are very tight. You're not getting very much

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Speaker 1: compensation for the risk of default or downgrade of corporate debt,

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Speaker 1: and we've seen a ton of issuance. The ball case

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Speaker 1: is supported by strength in the US economy, which is

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Speaker 1: good for US companies, but credit markets in Europe and

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Speaker 1: Asia are doing better than the US. There seems to

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Speaker 1: be a fair amount of complacency. They're given all the

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Speaker 1: risks debt defaults, bankruptcies, commercial real estate, stress, war, geopolitics, elections.

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Speaker 1: Everybody's loaded up on US assets going into a very

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Speaker 1: noisy presidential election. A recession cannot be ruled out, So

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Speaker 1: I want to start there. When the first half of

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Speaker 1: the year hasn't been that great for credit unless you

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Speaker 1: are long Chinese junk bonds. There's a little bit of

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Speaker 1: excess return though, but not really a stellar year. So

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Speaker 1: what's your outlook for the second half? More of the

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Speaker 1: same or maybe a big rally if we finally get

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Speaker 1: those rates cuts. Everyone was home earlier this year.

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Speaker 2: Yeah, James, I think you touched on a few things

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Speaker 2: that are important to consider when looking at credit markets broadly.

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Speaker 2: You mentioned the fixed versus floating. Floating has done better

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Speaker 2: with rates. Higher fixed has done Okay, higher yielding fixed

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Speaker 2: rate has done better just given the higher yields, where lower,

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Speaker 2: higher quality fixed rate has has tended to underperform given

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Speaker 2: its slightly longer duration and lower coupons. But I think

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Speaker 2: the key is that you need to be diversified. There

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Speaker 2: are trade offs across all these different markets. So if

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Speaker 2: you can have the opportunity to have a portfolio that

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Speaker 2: can you know, touch each of these areas and kind

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Speaker 2: of balance out your exposure, you've done. You've done quite well.

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Speaker 2: And you know you did. Mention equity markets, Yes, the

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Speaker 2: S and P five hundred, Yes the NASDAC are both

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Speaker 2: up very well. But if you look at small caps

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Speaker 2: in general, they've largely underperformed high old bonds or broadly

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Speaker 2: syndicated loans. Even the Dow Jones is, you know, maybe

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Speaker 2: kind of in line with high old bonds through the

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Speaker 2: first half of the year. So I don't think it's

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Speaker 2: a stretch to you know, expect a similar outcome in

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Speaker 2: the second half of the year. Income has been your

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Speaker 2: friend for the last several months. I think that's going

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Speaker 2: to continue to be the case. The one thing that

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Speaker 2: we've seen with focusing on these income, high income generating

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Speaker 2: assets is they do have a way of protecting you

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Speaker 2: against some of the market volatility, which, as you alluded to,

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Speaker 2: we could certainly see in the second half with US

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Speaker 2: elections and other events that we're facing today.

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Speaker 4: Hey, this is Mike Collins Wayne. Looking at the ag

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Speaker 4: right now. We're about five percent, you know on ig

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Speaker 4: credit and five point seven on triple b's if you're

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Speaker 4: looking at the index on Bloomberg and six point six

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Speaker 4: for double B seven point seven for single bees. You know,

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Speaker 4: last year, two years ago, we're looking at Yould bond

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Speaker 4: paper coming below four percent. As you look forward to

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Speaker 4: the end of this year and next year, where do

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Speaker 4: you see that vaul driving spreads and yields?

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Speaker 2: Yeah, I mean I think you've you've definitely touched on

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Speaker 2: some interesting things, Mike. I mean, and I think that's

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Speaker 2: been the trade off for investors these days. Is is

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Speaker 2: it fair to focus only on yield and ignore spread

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Speaker 2: or should I solely focus on spread? I definitely see

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Speaker 2: a situation where we could you know, kind of continue

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Speaker 2: along these lines where spreads kind of stay where they

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Speaker 2: are and you're kind of beholden to where to where

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Speaker 2: rates go. I think you've seen a bit of a

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Speaker 2: trade off there. Where As spreads have gone tighter in

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Speaker 2: most cases, that has meant the interest rates have gone higher.

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Speaker 2: So the yield, especially in high yield, has stayed relatively

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Speaker 2: flat for the last couple of years, in a bit

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Speaker 2: this year. So I think if you see a situation where,

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Speaker 2: you know, what spreads wider at this point, it probably

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Speaker 2: is some form of you know, negativity around the economy.

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Speaker 2: And you know, I think most investors would anticipate that

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Speaker 2: that could come with some rate cuts. So you know,

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Speaker 2: do you get some sort of offset there where maybe

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Speaker 2: a little bit of spread widening you know, is offset

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Speaker 2: by some rate tightening and again kind of net net,

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Speaker 2: the yield stays kind of similar and which which again

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Speaker 2: would kind of benefit those who are in it for

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Speaker 2: the for the carry and the long haul on.

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Speaker 1: The economy way and that do you expect a recession

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Speaker 1: and do you expect a deep recession? What it's your

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Speaker 1: vial on that and also interested in your rates outlook,

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Speaker 1: when do we expect to see cuts?

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Speaker 2: Yeah, I mean, I think the recession backdrop is is

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Speaker 2: an interesting one, and I think it's one that has

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Speaker 2: I don't know if i'd say confused the market, but

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Speaker 2: is maybe you know, colored the market view over the

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Speaker 2: last couple of years, there's been so much talk about

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Speaker 2: a recession and one hasn't materialized. And I think that

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Speaker 2: that is why you hear a lot of the talk

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Speaker 2: of spreads are too tight, spreads are too tight. If

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Speaker 2: if we never had this conversation about a recession, would

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Speaker 2: we feel the same way about spreads? I mean, going

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Speaker 2: forward from here, it's it's difficult to see, you know,

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Speaker 2: where where a recession would come from, the economy seems

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Speaker 2: to be doing well, consumers seem to be doing well.

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Speaker 2: Things are definitely slowing, but are they slowing enough for

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Speaker 2: a recession. I think it's very, very hard to predict.

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Speaker 2: And if you invest with you know, a very very

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Speaker 2: you know, strongly defined base case of a recession will

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Speaker 2: happen in three months or six months or nine months.

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Speaker 2: I think that's led to, you know, a path of

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Speaker 2: disappointment over the last uh, you know, several months.

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Speaker 4: You know, I listened to your lots of podcasts back

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Speaker 4: in I believe it was September, and you talked about

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Speaker 4: you know, we're both risk focused, you know, folks that

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Speaker 4: have looking for downside versus upside on you know, be

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Speaker 4: given that we're in credit and I wonder, you know,

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Speaker 4: do we even need a recession when you have all this.

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Speaker 3: Uncertainty that keeps ramping up?

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Speaker 4: I mean I looked to last week and the Chevron

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Speaker 4: doctrine the Supreme Court coming out talking about that. There's

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Speaker 4: there's so many moving parts to this broader economic story

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Speaker 4: and stuff that's happening around the edges. I wonder have

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Speaker 4: you guys even focused on this Chevron doctrine.

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Speaker 3: I mean, that was something that came out yesterday or

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Speaker 3: on Friday.

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Speaker 4: And as it relates to healthcare, I mean, we're thinking

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Speaker 4: about legislative and regulatory uncertainty ramping up, and we clearly

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Speaker 4: just had this conversation.

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Speaker 3: It's just in early stages.

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Speaker 4: But you know, how do you think about uncertainty on

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Speaker 4: the edges versus you know, does it have to be

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Speaker 4: you know, a binary recession or not? And how does

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Speaker 4: that affect credit spreads and yields going forward?

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Speaker 3: Yeah?

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Speaker 2: No, I think you make a great point, Mike. And

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Speaker 2: I think the one thing too, you know, kind of

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Speaker 2: look at there is you're right, do you need a

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Speaker 2: recession to have stress in certain parts of the market

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Speaker 2: you mentioned healthcare. Health Care has been an area, especially

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Speaker 2: in the leverage finance space where you have a lot

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Speaker 2: of private equity involvement there, levered balance sheets. They have

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Speaker 2: come under pressure, they've seen default rates tick higher as

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Speaker 2: you've as you've seen some you know, whether it's regulation

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Speaker 2: kind of shifting and changing on the state and federal level,

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Speaker 2: where you've had some labor stress given you know the

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Speaker 2: results of COVID and and you know wage pressures in

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Speaker 2: in the healthcare space. So I think you're absolutely right

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Speaker 2: that on a sector bi sector basis, you're you're going

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Speaker 2: to see and continue to see. I think some pressure

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Speaker 2: build in certain parts of the the credit markets. Now

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Speaker 2: that doesn't mean that you should avoid the credit markets completely.

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Speaker 2: I think it means that to have a kind of

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Speaker 2: bottom up, fundamental approach to how you're thinking about investments

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Speaker 2: and not just trying to own the entire index is

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Speaker 2: the right approach. I mean, many people refer to that

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Speaker 2: this period as a credit pickers market, and I think

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Speaker 2: what they mean by that is exactly what you alluded to.

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Speaker 2: You can avoid some of these broader challenges and take

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Speaker 2: advantage of these very attractive yields, which again, if you

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Speaker 2: can avoid those defaults in areas of stress, I think

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Speaker 2: they serve a very good need for portfolios today.

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Speaker 1: Just the point earlier on spreads, when you know, we've

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Speaker 1: talked about them being very very tight, and then when

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Speaker 1: we talk about that and people just say, well, look

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Speaker 1: at the yield, it's so big that it doesn't really matter.

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Speaker 1: But the textbook would tell us that we should worry

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Speaker 1: about the spread, and it seems that would only take

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Speaker 1: a little bit of volatility to come back to actually

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Speaker 1: push those a lot wider than where they are right now,

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Speaker 1: which would presumably mean losses. I mean, are we just

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Speaker 1: focusing on the wrong thing here? Should should we just

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Speaker 1: not be looking at the index and we should be

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Speaker 1: looking at as a dispersion, We should be looking at

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Speaker 1: individual bonds much more closely instead of the index.

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Speaker 2: I do think there is an argument to be made

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Speaker 2: to to look a little more closely at at individual

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Speaker 2: bonds rather than just trying to take a take a

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Speaker 2: market approach. I mean, and you can see this so

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Speaker 2: far in in some of the performance data. If you

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Speaker 2: look at the you know what, I would call the

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Speaker 2: non tradable high yield indices that are out there relative

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Speaker 2: to say ETFs in the first half of the year,

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Speaker 2: you know, especially in this in this most recent quarter,

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Speaker 2: you've seen some underperformance in UH in those ETFs relative

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Speaker 2: to to the index. So again, I think just trying

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Speaker 2: to you know, own that kind of most liquid, higher

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Speaker 2: quality part of the market has has proven a little

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Speaker 2: more challenging from a from a return perspective. But you know,

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Speaker 2: the other thing to consider as well, and I think

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Speaker 2: it's it's something to think about for high yield is

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Speaker 2: we like to look at spreads and we like to

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Speaker 2: look at them across time and compare them. Well, the

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Speaker 2: index was you know, three hundred and fifty basis points today,

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Speaker 2: it was three hundred and fifty basis points back in

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Speaker 2: twenty eighteen. But you know, at the same time, for

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Speaker 2: those who want to maybe get a little bit more

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Speaker 2: what i'll call nerdy in the high yield space, you've

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Speaker 2: seen a pretty significant drop in duration. And duration is

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Speaker 2: that kind of measure of sensitivity to interest rates or

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Speaker 2: credit spread. So with that number a lot shorter, then

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Speaker 2: you know, I think you do have an easier time

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Speaker 2: kind of looking at that market today, where again, your

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Speaker 2: your sensitivity against those moves in rates or credit spreads

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Speaker 2: give you give you a little bit you know, better

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Speaker 2: return when it comes to thinking about how much can

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Speaker 2: I lose and then most importantly how long does it

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Speaker 2: take me to earn that back through the current yield?

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Speaker 2: So higher current yield, lower duration, I think overall it

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Speaker 2: is less sensitive. So again, if you can kind of

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Speaker 2: pick those good credits, I think you're you're again going

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Speaker 2: to benefit from what is a great opportunity to earn

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Speaker 2: a higher yield.

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Speaker 1: We tilked about twenty eighteen and I had a chance

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Speaker 1: to check the spreads on that, and the spreads did

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Speaker 1: actually blow out at the end of twenty eighteen on

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Speaker 1: how yield. Maybe that was completely you know, for the

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Speaker 1: reasons that you know will not happen again. But it

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Speaker 1: just seems to me that things too priced to perfection,

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Speaker 1: that all of the risks that we see just being

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Speaker 1: underpriced at the moment. Do you not feel the same way.

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Speaker 2: Look, I mean there's no doubt that you know spreads

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Speaker 2: are tighter, and that you know people are kind of

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Speaker 2: pricing things for perfection, as you say, and you're right,

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Speaker 2: I mean, spreads did blow out at the end of

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Speaker 2: twenty eighteen. Remember twenty eighteen was was a hiking cycle.

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Speaker 2: The hiking cycle ended in December twenty eighteen, and that

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Speaker 2: fourth quarter where spreads went wider. I mean, in a way,

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Speaker 2: you could relate that fourth quarter move of twenty eighteen

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Speaker 2: to something more like what we saw in twenty twenty two,

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Speaker 2: where spreads definitely moved wider as rates went higher. But

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Speaker 2: you know, today in the US, we've we've passed that

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Speaker 2: period and I think everyone would agree, although there is

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Speaker 2: probably a you know, a tail risk out there that

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Speaker 2: rates could go higher again, that we're most likely going

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Speaker 2: to see the next move in rates being lower. So again,

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Speaker 2: as a high yield investor, if I think, well, you

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Speaker 2: know what's going to cause those spreads to go higher,

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Speaker 2: A lot of those scenarios are also most likely going

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Speaker 2: to drive interest rates to come tighter. So there is

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Speaker 2: a bit of an offsetting effect. And again, when I

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Speaker 2: don't know the timing of that, what I want to

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Speaker 2: do is make sure I'm in good companies that will

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Speaker 2: accrue that yield in my favor while i'm you know,

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Speaker 2: call it waiting for that for that event to hit.

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Speaker 4: Wan One of the sectors. Of the very subsectors in

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Speaker 4: healthcare that I cover, obviously payers and if you look

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Speaker 4: at where payer spreads are now today, you know, look

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Speaker 4: United and SIGNA and out of vants ECBs kind of

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Speaker 4: wider on the margin.

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Speaker 3: Price to perfection.

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Speaker 4: Meanwhile, Congress is talking about, you know, regulating PBMs and

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Speaker 4: you know, maybe causing some changes to the way the

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Speaker 4: payers operate. You see that spreads haven't gapped out at all.

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Speaker 4: And I wonder, I mean, do you have do you

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Speaker 4: have to have an incident to happen.

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Speaker 3: First before spreads widen?

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Speaker 4: And I'm talking regulatory pushback against payers and making acquisitions

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Speaker 4: outside of their normal payer side regulated revenue. I wonder

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Speaker 4: you know that that's something that I see as a risk.

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Speaker 4: And I wonder you know across sectors. You know, obviously

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Speaker 4: healthcare is very regulated. Are there any other sectors that

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Speaker 4: you're interested in right now from a long or short

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Speaker 4: perspective where you see trends favorable or unfavorable?

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Speaker 2: Yeah, I mean, you're you're right for sure, Mike, that

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Speaker 2: you know, I think you will probably you know, people

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Speaker 2: will try and hold on maybe for as long as

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Speaker 2: they can. And again, I think that does speak to

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Speaker 2: the power of you know, kind of active management versus

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Speaker 2: passive management. And that's one thing that we have focused

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Speaker 2: on over the last you know, call it year plus,

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Speaker 2: is you know, looking across the market and looking at

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Speaker 2: opportunities in various sectors where you have a chance to

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Speaker 2: rotate into something that you may view as a little

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Speaker 2: bit more defensive at you know, similar spreads and yields,

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Speaker 2: which again, I mean you have to make those moves early.

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Speaker 2: You can't. You can't wait and kind of after the

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Speaker 2: fact is as you said in your example, you know,

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Speaker 2: maybe a regulation does change spreads, move at that point

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Speaker 2: it's too late. So you know, there certainly are are

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Speaker 2: some parts of the market where there there's maybe things

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Speaker 2: a little bit more attractive i mean food and beverage,

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Speaker 2: you know, certainly a bit more on the staple front.

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Speaker 2: You know, things like that are are good. I mean

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Speaker 2: power is an area that that in certain parts of

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Speaker 2: the market you've seen an increased demand for There's a

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Speaker 2: lot of talk around you know, data centers and AI

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Speaker 2: and their kind of demand for more power and maybe

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Speaker 2: we're kind of underappreciating or underpricing the need for that

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Speaker 2: to grow. You've also seen some pretty good strength in

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Speaker 2: the various insurance sectors. So you know, there are parts

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Speaker 2: of the market that I think when you kind of

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Speaker 2: look at the landscape and think, you know, do I

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Speaker 2: want to maybe give up a few basis points of

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Speaker 2: yield or spread and lock into something which, again I

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Speaker 2: think to your point has maybe less of that tail

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Speaker 2: risk in it.

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Speaker 3: Yeah, that's helpful.

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Speaker 4: I think, you know, our food and beverage team on

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Speaker 4: the credit side do have some interesting views.

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Speaker 3: For sure.

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Speaker 4: They've been talking a lot about GLP ones and potential

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Speaker 4: impacts there, which we think will be a longer term trend.

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Speaker 4: But I think stepping back, I mean, Bloomberg is Bloomberg

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Speaker 4: Intelligence here has put out twenty years or twenty I'm sorry,

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Speaker 4: twenty years twenty editions of our bi credit medians, and

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Speaker 4: we're looking at trends recently for the last several quarters.

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Speaker 3: You know, Joe Lovington's the head of.

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Speaker 4: Our team, and he put this out last week basically

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Speaker 4: showing you know, the sequential uptick and leverage across ratings classes,

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Speaker 4: you know, from A to triple BB and you know

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Speaker 4: approaching you know, higher levels that we've seen since you know,

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Speaker 4: post COVID. What what are your views on broad sector

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Speaker 4: trends and how that could and leverage trends and coverage

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Speaker 4: trends which are clearly getting more coverage is declining, leverages rising.

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Speaker 4: Do you think that we're on a glide path towards

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Speaker 4: something you know, more negative or on the corporate side,

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Speaker 4: or what signals are you seeing over at oak Tree,

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Speaker 4: across the across the spectrum in terms of leverage and

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Speaker 4: should that be a concern.

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Speaker 2: Yeah, I mean, I think you're right. I mean, leverage

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Speaker 2: has certainly ticked up from from those lows. But if

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Speaker 2: you kind of take a step back and look and

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Speaker 2: go back a little bit further into the into the

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Speaker 2: pre COVID days, you'll see that, you know, leverage for

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Speaker 2: the most part, whether it's loans, whether it's bonds, it's

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Speaker 2: you know, kind of at the median or below the median,

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Speaker 2: below the average in many cases. So you know, it

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Speaker 2: certainly shows you that companies have not been what I

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Speaker 2: would call irresponsible over this most recent time period. They've

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Speaker 2: been pretty measured in their cases for increasing leverage, whether

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Speaker 2: that's through acquisitions or you know, large capital expenditures which

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Speaker 2: would require the issuance of new debt packing on leverage.

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Speaker 2: I mean, I think I think companies have been pretty

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Speaker 2: responsible and I think overall from a credit perspective, that

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Speaker 2: should be good for investors. On the coverage front, it's

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Speaker 2: it's interesting, I think over the last few months you're

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Speaker 2: seeing coverage almost go in the opposite direction if you

354
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Speaker 2: look at the high yield market versus the loan market,

355
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Speaker 2: where high yield borrowers, because they've been fixed rate, they've

356
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Speaker 2: been able to kind of live out this term of

357
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Speaker 2: higher rates for longer than floating rate products where they've

358
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Speaker 2: immediately felt that impact. High yeld bonds are now just

359
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Speaker 2: starting to refinance and have started to refinance into higher rates.

360
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Speaker 2: So yep, you're seeing coverage tickdown, but again tick down

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Speaker 2: from very very high levels into areas that are still

362
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Speaker 2: very very reasonable. And on the loan side, in this

363
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Speaker 2: year of pretty significant refinancings, you've actually seen loan borrowers

364
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Speaker 2: be able to improve their coverage metrics because that loan

365
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Speaker 2: that they issued two years ago or eighteen months ago

366
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Speaker 2: is now being refinanced at a fifty basis points spread

367
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Speaker 2: roughly lower. So you are seeing a little bit of

368
00:19:36,160 --> 00:19:39,040
Speaker 2: relief there, but it's certainly an area that you still

369
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Speaker 2: have to watch out for in companies with excessive leverage

370
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Speaker 2: are going to be the ones that continue to struggle. Again,

371
00:19:46,320 --> 00:19:50,040
Speaker 2: kind of making that case for active management over just

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Speaker 2: purely trying to own the market.

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Speaker 1: A Now that really struggling end when there is increased

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Speaker 1: incidence of liability management, which is coercive, it's violent, it's

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Speaker 1: inflicting losses and a little of pain on investors. How

376
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Speaker 1: much are you engaged in those sorts of transactions and

377
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Speaker 1: what are you doing to fight back?

378
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Speaker 2: I mean, you certainly have to pay very close attention

379
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Speaker 2: to the capital structures that you know seem most likely

380
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Speaker 2: to go through that kind of activity. And again, as

381
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Speaker 2: I mentioned with the idea of you know, kind of

382
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Speaker 2: rotating away from trouble sectors, you have to be prepared

383
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Speaker 2: for that. You have to do that in advance. It's

384
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Speaker 2: very similar here. You don't want to be you don't

385
00:20:31,840 --> 00:20:34,240
Speaker 2: want to be surprised by one of these activities, and

386
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Speaker 2: that might mean you know, speaking to other lenders, talking

387
00:20:38,119 --> 00:20:40,919
Speaker 2: to other parties, and again kind of preparing it. And

388
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Speaker 2: in some cases it might mean you know, leaving leaving

389
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Speaker 2: a bit of return on the table and switching out

390
00:20:47,680 --> 00:20:49,879
Speaker 2: from a name or a sector rather than kind of

391
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Speaker 2: trying to squeeze out those last few basis points.

392
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Speaker 4: In healthcare, there's been a couple of instances when where

393
00:20:56,760 --> 00:21:00,000
Speaker 4: we've had just you know, discounted buybacks, but the agencies

394
00:21:00,240 --> 00:21:03,000
Speaker 4: turned them opportunistic versus distressed.

395
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Speaker 3: And I wonder is that something you guys have looked into?

396
00:21:07,240 --> 00:21:12,080
Speaker 4: Meaning there are instances where liability management exercises are reducing

397
00:21:12,119 --> 00:21:15,879
Speaker 4: PAR basically or haircut and par, but they're not getting

398
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Speaker 4: you know, they're not being assessed as a distressed exchange.

399
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Speaker 4: The company comes to mind as multiplan that I've been

400
00:21:21,400 --> 00:21:24,239
Speaker 4: working on for many years, and they were they did

401
00:21:24,240 --> 00:21:26,080
Speaker 4: it sell par buy back, And I wonder do you

402
00:21:26,080 --> 00:21:28,800
Speaker 4: see much of that? I mean, are there instances where

403
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Speaker 4: companies are doing are basically defaulting on their part payment

404
00:21:34,000 --> 00:21:36,600
Speaker 4: and getting almost getting away with it. Maybe that's just

405
00:21:36,680 --> 00:21:40,200
Speaker 4: a something that I'm keying in on here. It seems

406
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Speaker 4: strange to me.

407
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Speaker 2: Yeah, I mean, look, I think one thing that you know,

408
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Speaker 2: periods of I would call Marcus stress certainly seem to

409
00:21:49,640 --> 00:21:54,320
Speaker 2: bring out, you know, creative solutions to problems that we

410
00:21:54,400 --> 00:21:57,800
Speaker 2: haven't seen historically. And and there's no doubt that those

411
00:21:57,880 --> 00:22:01,159
Speaker 2: are going to grow for those balance shees that have

412
00:22:01,240 --> 00:22:04,080
Speaker 2: the most leverage. I mean, the other area that you've

413
00:22:04,119 --> 00:22:07,320
Speaker 2: probably looked at in detail as well is just you know,

414
00:22:07,359 --> 00:22:10,160
Speaker 2: what's going on in the private credit markets. We don't

415
00:22:10,200 --> 00:22:13,240
Speaker 2: see those headlines as much, but we know that there

416
00:22:13,280 --> 00:22:16,360
Speaker 2: are being you know, there are situations where companies are

417
00:22:16,440 --> 00:22:20,560
Speaker 2: choosing to pay their interesting kind or a portion of

418
00:22:20,600 --> 00:22:24,240
Speaker 2: their interesting kind, rather than pay it in cash. And again,

419
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Speaker 2: you know, is that a default? Is that not a default?

420
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Speaker 2: How do we treat that going forward? I think you

421
00:22:30,359 --> 00:22:33,600
Speaker 2: know these periods where or again times are going to

422
00:22:33,600 --> 00:22:36,000
Speaker 2: get tough for certain balance shees. I think you have

423
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Speaker 2: to expect more and more creative solutions. And again, the companies,

424
00:22:39,760 --> 00:22:42,399
Speaker 2: as you mentioned, tend to be ahead of how the

425
00:22:42,480 --> 00:22:45,600
Speaker 2: rating agencies think about this. So you know, again, I

426
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Speaker 2: think it's going to be one of those situations that

427
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Speaker 2: we look back on in a few years and you know,

428
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Speaker 2: everyone will try and kind of take the lessons forward,

429
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Speaker 2: as typically happens, we always fight problems in reverse. But

430
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Speaker 2: you know, again, it's it shows that there is just

431
00:23:01,359 --> 00:23:04,160
Speaker 2: no replacement for a focus on kind of bottom up

432
00:23:04,200 --> 00:23:08,480
Speaker 2: fundamental credit work, especially at times like this where you

433
00:23:08,880 --> 00:23:11,600
Speaker 2: can and will probably continue to be surprised by some

434
00:23:11,640 --> 00:23:12,680
Speaker 2: companies actions.

435
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Speaker 1: Can we talk a bit about securitize credit. A lot

436
00:23:16,040 --> 00:23:19,679
Speaker 1: of guests on this show really excited about it. They

437
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Speaker 1: see a ton of opportunity, they see more relative value

438
00:23:22,119 --> 00:23:26,159
Speaker 1: that compared to you know, playing vanilla bunds. Where where's

439
00:23:26,200 --> 00:23:29,000
Speaker 1: the where's the excitement when you even to securitize credit.

440
00:23:29,760 --> 00:23:33,000
Speaker 2: Yeah, I think securitized credit has been a great addition

441
00:23:33,119 --> 00:23:37,359
Speaker 2: to UH to fixed income portfolios. I know some of

442
00:23:37,400 --> 00:23:40,760
Speaker 2: your prior guests have spoken about the CLO market, and

443
00:23:40,760 --> 00:23:43,680
Speaker 2: and rightfully so. I mean the CLO market has offered

444
00:23:44,280 --> 00:23:48,760
Speaker 2: some pretty big premiums relative to other fixed income spreads

445
00:23:48,800 --> 00:23:51,600
Speaker 2: that that we've seen in a while. And I think

446
00:23:51,640 --> 00:23:54,600
Speaker 2: there's a there's a couple of reasons for that. Number One,

447
00:23:55,359 --> 00:23:58,000
Speaker 2: if you look at a CLO, the spread for that

448
00:23:58,080 --> 00:24:00,840
Speaker 2: will come, you know, as a result of the quality

449
00:24:00,840 --> 00:24:05,359
Speaker 2: of the underlying collateral, and we know that that has

450
00:24:05,480 --> 00:24:07,719
Speaker 2: you know, gone through periods of widening and tightening over

451
00:24:07,760 --> 00:24:11,080
Speaker 2: the last year. But there's another element within securitized which

452
00:24:11,119 --> 00:24:14,840
Speaker 2: is the financing piece of that, and that is where

453
00:24:14,880 --> 00:24:19,040
Speaker 2: I think you saw a bigger premium come in, primarily

454
00:24:19,040 --> 00:24:21,520
Speaker 2: in the form of of you know, US banks that

455
00:24:21,560 --> 00:24:25,840
Speaker 2: were very very big participants in triple A securitizations following COVID,

456
00:24:26,400 --> 00:24:31,800
Speaker 2: their reserves, you know, spiked dramatically once quantitative tightening came in.

457
00:24:31,920 --> 00:24:36,520
Speaker 2: Everyone expected, well, if reserves went up during quantitative easing,

458
00:24:36,600 --> 00:24:40,800
Speaker 2: the natural reaction would be reserves would decline. So in

459
00:24:40,840 --> 00:24:43,880
Speaker 2: a way, you saw a pullback in anticipation of that,

460
00:24:44,680 --> 00:24:47,600
Speaker 2: and that push spreads wider and created a great opportunity

461
00:24:47,680 --> 00:24:51,040
Speaker 2: to invest. Reserves did not fall, So you've seen some

462
00:24:51,080 --> 00:24:55,040
Speaker 2: of that normalized. But securities, I think is definitely an

463
00:24:55,080 --> 00:24:57,119
Speaker 2: area that has been that has been great for fixed

464
00:24:57,160 --> 00:24:58,240
Speaker 2: income portfolios.

465
00:24:59,000 --> 00:25:01,640
Speaker 1: Is it just sal were you also into consumer abs

466
00:25:01,720 --> 00:25:04,000
Speaker 1: or even real estate? What's what's what are the assets

467
00:25:04,000 --> 00:25:04,640
Speaker 1: are you looking at?

468
00:25:04,880 --> 00:25:07,920
Speaker 2: Yeah, I think all parts of securities have been good.

469
00:25:07,960 --> 00:25:10,720
Speaker 2: I mean residential real estate I think has been very

470
00:25:10,720 --> 00:25:13,879
Speaker 2: attractive over the last couple of years. You know a

471
00:25:13,920 --> 00:25:16,760
Speaker 2: lot of people still you know, think back to problems

472
00:25:16,800 --> 00:25:19,360
Speaker 2: in the mortgage market that happened in two thousand and eight,

473
00:25:20,080 --> 00:25:22,360
Speaker 2: and this market is very very different. If you think

474
00:25:22,400 --> 00:25:24,600
Speaker 2: back in kind of two thousand and six and seven,

475
00:25:25,160 --> 00:25:29,000
Speaker 2: loan to values were very high, FIGHTO scores were low,

476
00:25:29,240 --> 00:25:33,359
Speaker 2: in the non agency space today, you see the exact opposite.

477
00:25:34,080 --> 00:25:37,639
Speaker 2: You see FIGHTO scores, you know, above seven hundred, you

478
00:25:37,680 --> 00:25:41,399
Speaker 2: see loan to values near seventy percent, in some cases lower,

479
00:25:41,600 --> 00:25:45,000
Speaker 2: just given the boost in real estate prices. So you

480
00:25:45,040 --> 00:25:48,919
Speaker 2: could probably argue that, you know, mortgage or real estate prices,

481
00:25:49,760 --> 00:25:52,080
Speaker 2: you know, should maybe be a little bit lower. We

482
00:25:52,119 --> 00:25:55,160
Speaker 2: saw such a spike in mortgage rates, well, we had

483
00:25:55,160 --> 00:25:59,000
Speaker 2: to simultaneously rise in in house prices. But there's so

484
00:25:59,160 --> 00:26:02,480
Speaker 2: much cushion in the securities that you're very, very very

485
00:26:02,480 --> 00:26:06,320
Speaker 2: well protected. And the one thing I like about residential

486
00:26:06,359 --> 00:26:08,920
Speaker 2: mortgage backed securities, and I would say the same for

487
00:26:09,600 --> 00:26:13,560
Speaker 2: commercial and some others, is that, unlike a CLO that

488
00:26:13,920 --> 00:26:19,320
Speaker 2: when alone refinances in the collateral, the CLO reinvests, when

489
00:26:19,320 --> 00:26:22,040
Speaker 2: an R and B S security has a loan refinance,

490
00:26:22,720 --> 00:26:25,920
Speaker 2: the security de leverages and you actually kind of move

491
00:26:26,000 --> 00:26:30,080
Speaker 2: up in quality. So you have some double B issued,

492
00:26:30,440 --> 00:26:34,600
Speaker 2: you know, residential mortgage backed securities that look on a

493
00:26:35,040 --> 00:26:37,800
Speaker 2: kind of credit enhancement or risk basis more like a

494
00:26:37,840 --> 00:26:40,600
Speaker 2: triple B. So again it kind of goes to that

495
00:26:40,720 --> 00:26:45,160
Speaker 2: point of spreading out your sources of risk and diversifying

496
00:26:45,200 --> 00:26:48,479
Speaker 2: across I think a lot of pretty attractive areas in

497
00:26:48,520 --> 00:26:49,160
Speaker 2: the markets.

498
00:26:49,840 --> 00:26:52,560
Speaker 1: What about the commercial stuff that the offices, so you

499
00:26:52,840 --> 00:26:54,879
Speaker 1: taking into that, so a lot of our guests are

500
00:26:54,880 --> 00:26:57,160
Speaker 1: getting excited about that given how cheap it became.

501
00:26:57,920 --> 00:27:00,520
Speaker 2: I mean, look, I think office is an area that's

502
00:27:00,560 --> 00:27:04,160
Speaker 2: going to be you know, under stress or or under

503
00:27:04,200 --> 00:27:07,280
Speaker 2: some sort of repricing for you know, it could be

504
00:27:07,280 --> 00:27:10,320
Speaker 2: a number of years into the future. There's just not

505
00:27:10,480 --> 00:27:14,320
Speaker 2: a lot of transactions happening. You do see them one

506
00:27:14,440 --> 00:27:16,840
Speaker 2: off pop up here and there. Some are worse, some

507
00:27:16,960 --> 00:27:20,159
Speaker 2: are better. So it is an area I think in

508
00:27:20,760 --> 00:27:23,720
Speaker 2: a kind of performing or liquid credit strategy. It's it's

509
00:27:23,760 --> 00:27:27,640
Speaker 2: maybe difficult to to get too excited about right now

510
00:27:27,680 --> 00:27:31,280
Speaker 2: with the uncertainty. But that doesn't mean that there aren't

511
00:27:31,680 --> 00:27:35,680
Speaker 2: very attractive areas of commercial mortgage backed securities right now.

512
00:27:36,320 --> 00:27:41,720
Speaker 2: Commercial real estate clos again look quite attractive with good yields,

513
00:27:41,800 --> 00:27:45,720
Speaker 2: good levels of protection. You even have new kind of

514
00:27:45,760 --> 00:27:49,440
Speaker 2: areas into the market, data centers, for example. I mean,

515
00:27:49,760 --> 00:27:52,480
Speaker 2: I think data centers are very interesting. The AI kind

516
00:27:52,480 --> 00:27:56,000
Speaker 2: of boom from a from a credit perspective, it's you

517
00:27:56,000 --> 00:27:59,119
Speaker 2: you get so many different areas that that touch. As

518
00:27:59,160 --> 00:28:02,240
Speaker 2: we mentioned the power space, whether that's in a loan

519
00:28:02,480 --> 00:28:06,560
Speaker 2: or whether that's in a bond. You have CMBs for

520
00:28:06,600 --> 00:28:10,960
Speaker 2: the data center itself. You have fiber issued ABS which

521
00:28:11,040 --> 00:28:13,800
Speaker 2: is coming into those data centers. So you know, kind

522
00:28:13,840 --> 00:28:16,680
Speaker 2: of secular shifts like that can give you a lot

523
00:28:16,680 --> 00:28:18,720
Speaker 2: of opportunity in many different markets.

524
00:28:19,440 --> 00:28:21,840
Speaker 4: So stepping back a little bit from the securitization, you know,

525
00:28:21,920 --> 00:28:25,679
Speaker 4: talking about risk management. You know, we talk about the

526
00:28:25,720 --> 00:28:28,159
Speaker 4: growth and private credit and you know, I'm not sure

527
00:28:28,200 --> 00:28:29,840
Speaker 4: if we're still in the golden age this week, but

528
00:28:30,800 --> 00:28:33,760
Speaker 4: you know, you think about risk management there versus the

529
00:28:33,800 --> 00:28:37,359
Speaker 4: clo market, versus the bond market. I mean, having grown

530
00:28:37,440 --> 00:28:39,600
Speaker 4: up in Loanland, I know what a you know, a

531
00:28:39,760 --> 00:28:42,120
Speaker 4: matrix colo matrix is and wharf and weight to average

532
00:28:42,120 --> 00:28:46,680
Speaker 4: spread and managing to the matrix and there's robust, you know,

533
00:28:48,200 --> 00:28:52,600
Speaker 4: strictures in place to keep in underwriting standards in line.

534
00:28:53,080 --> 00:28:56,040
Speaker 4: I wonder as the banks are no longer agenting so

535
00:28:56,120 --> 00:28:58,320
Speaker 4: many deals and you're looking at some of these bigger

536
00:28:58,400 --> 00:29:03,280
Speaker 4: private credit shops actually deals and the blurring of syndicated

537
00:29:03,320 --> 00:29:06,280
Speaker 4: loans with private credit, you know, how does that affect

538
00:29:06,400 --> 00:29:10,920
Speaker 4: risk risk management going forward? You know, do you see

539
00:29:11,000 --> 00:29:13,480
Speaker 4: I mean I'm sure not all private credit operators out

540
00:29:13,480 --> 00:29:16,320
Speaker 4: there are as rigorous as oak Tree has been for

541
00:29:16,400 --> 00:29:20,000
Speaker 4: decades and underwriting, and I wonder do you see risks

542
00:29:20,040 --> 00:29:21,800
Speaker 4: on the horizon there and how does that how would

543
00:29:22,120 --> 00:29:25,280
Speaker 4: potential fall out if there were to be some you know,

544
00:29:25,320 --> 00:29:28,480
Speaker 4: how do you see that sort of materializing if we

545
00:29:28,520 --> 00:29:30,040
Speaker 4: play along with my hypothetical here.

546
00:29:30,640 --> 00:29:33,600
Speaker 2: Yeah, no, you're right, Mike, And I would just quickly

547
00:29:33,680 --> 00:29:35,960
Speaker 2: touch on something you you know, kind of alluded to

548
00:29:36,040 --> 00:29:39,800
Speaker 2: in your your breakdown of securitizations and and you know,

549
00:29:39,920 --> 00:29:43,600
Speaker 2: clos in particular. I mean, those are the reasons that

550
00:29:43,720 --> 00:29:47,000
Speaker 2: I think also kind of make clos relatively attractive and

551
00:29:47,080 --> 00:29:50,440
Speaker 2: securitizations and those those are the reasons why I think

552
00:29:50,520 --> 00:29:54,840
Speaker 2: ultimately default rates in those various tranches of various ratings

553
00:29:54,840 --> 00:29:58,800
Speaker 2: has remained quite low because there are those kind of

554
00:29:59,120 --> 00:30:01,240
Speaker 2: you know, stand or it's almost that you could call

555
00:30:01,280 --> 00:30:03,840
Speaker 2: them that the market does adhere to. And you're right,

556
00:30:04,680 --> 00:30:07,880
Speaker 2: private credit certainly doesn't have those, and it's a growing

557
00:30:07,960 --> 00:30:10,760
Speaker 2: market and and you know, I think one of the

558
00:30:10,840 --> 00:30:15,080
Speaker 2: keys for private credit is is flexibility. You know, you

559
00:30:15,240 --> 00:30:17,600
Speaker 2: need to be able to you know, kind of pick

560
00:30:17,640 --> 00:30:20,520
Speaker 2: your spots and where you want to invest. At one moment,

561
00:30:21,400 --> 00:30:24,040
Speaker 2: you know, a large cap you know, sponsor back private

562
00:30:24,080 --> 00:30:27,040
Speaker 2: credit deal might be the most attractive area in the market.

563
00:30:27,680 --> 00:30:29,960
Speaker 2: At the next moment, maybe the better parts of the

564
00:30:29,960 --> 00:30:33,120
Speaker 2: private credit market could be something in the non sponsor space,

565
00:30:33,160 --> 00:30:36,040
Speaker 2: something where you have a little bit more control and

566
00:30:36,440 --> 00:30:40,640
Speaker 2: negotiating leverage within those structures. I think there's just a

567
00:30:40,680 --> 00:30:43,880
Speaker 2: lot of uncertainty that we're going to see in the

568
00:30:43,880 --> 00:30:47,080
Speaker 2: private credit market. And again as I as I said before,

569
00:30:48,200 --> 00:30:51,440
Speaker 2: it's difficult to always kind of get that full picture

570
00:30:51,520 --> 00:30:55,760
Speaker 2: of exactly what's going on in that market. So yes,

571
00:30:55,920 --> 00:31:00,560
Speaker 2: I think focusing on risk management, focusing on underwriting, and

572
00:31:00,760 --> 00:31:03,720
Speaker 2: you know, to the best you can, you know, trying

573
00:31:03,760 --> 00:31:06,600
Speaker 2: to make sure that the positions you're investing in are

574
00:31:06,640 --> 00:31:10,840
Speaker 2: built to you know, work through a period that is

575
00:31:11,080 --> 00:31:14,560
Speaker 2: that could be facing us with again higher rates for

576
00:31:14,680 --> 00:31:17,480
Speaker 2: longer probably being one of the big ones. And then

577
00:31:17,520 --> 00:31:20,640
Speaker 2: also being you know, kind of thinking ahead to what

578
00:31:20,720 --> 00:31:23,520
Speaker 2: does some of the workout plans look like in these

579
00:31:23,600 --> 00:31:28,000
Speaker 2: kind of deals, Where where can new capital potentially come

580
00:31:28,040 --> 00:31:31,320
Speaker 2: in to you know, fix some of these broken problems

581
00:31:31,800 --> 00:31:33,760
Speaker 2: and are we in a position to be able to

582
00:31:33,800 --> 00:31:34,680
Speaker 2: take advantage of that.

583
00:31:35,400 --> 00:31:38,120
Speaker 1: So most stress when in private credit. I mean, people

584
00:31:38,160 --> 00:31:40,760
Speaker 1: are quite right about how quickly it grew. And some

585
00:31:40,800 --> 00:31:43,560
Speaker 1: people say that the tourist money coming in may may

586
00:31:43,680 --> 00:31:46,400
Speaker 1: result in some blow ups, But do you expect more

587
00:31:46,760 --> 00:31:49,120
Speaker 1: even if we can see them defaults, more sort of

588
00:31:49,200 --> 00:31:50,479
Speaker 1: general stress in that market.

589
00:31:51,360 --> 00:31:55,000
Speaker 2: I think there will be you know, some some general stress. Again,

590
00:31:55,320 --> 00:31:57,600
Speaker 2: I think part of it depends on, you know, again

591
00:31:57,680 --> 00:32:00,840
Speaker 2: the path of interest rates. A lot of markets that

592
00:32:00,880 --> 00:32:04,680
Speaker 2: are undergoing stress where certainly, you know, very excited at

593
00:32:04,680 --> 00:32:07,800
Speaker 2: the beginning of the year when the market anticipated some

594
00:32:07,960 --> 00:32:11,360
Speaker 2: very quick cuts and interest rates that that didn't that

595
00:32:11,400 --> 00:32:17,200
Speaker 2: didn't emerge. But you know, I think those are just

596
00:32:17,320 --> 00:32:20,760
Speaker 2: some of the some of the things that that investors

597
00:32:20,840 --> 00:32:23,239
Speaker 2: need to think about when they're making these kind of

598
00:32:23,240 --> 00:32:26,160
Speaker 2: investments where their capital is locked up and and you

599
00:32:26,240 --> 00:32:29,680
Speaker 2: do mention tourists. I mean, you can only have so

600
00:32:29,800 --> 00:32:33,480
Speaker 2: many tourists in that kind of market because the majority

601
00:32:33,480 --> 00:32:36,520
Speaker 2: of the capital is still in a place where you're

602
00:32:36,520 --> 00:32:38,920
Speaker 2: going to be locked up, You're going to be committed,

603
00:32:39,560 --> 00:32:42,440
Speaker 2: and so you know, as as end investors, you don't

604
00:32:42,480 --> 00:32:46,120
Speaker 2: have that same fear of your capital walking away as

605
00:32:46,120 --> 00:32:48,080
Speaker 2: soon as you have to. You know, kind of think

606
00:32:48,120 --> 00:32:51,480
Speaker 2: about think about or restructuring so that that will definitely,

607
00:32:51,520 --> 00:32:54,400
Speaker 2: I think, kind of ease some of the pressure or

608
00:32:54,440 --> 00:32:57,480
Speaker 2: at least kind of help this market get through. The

609
00:32:57,520 --> 00:33:00,600
Speaker 2: bigger challenge with with private credit is probably probably that

610
00:33:01,760 --> 00:33:03,800
Speaker 2: you know, in some of these kind of non traded

611
00:33:03,840 --> 00:33:07,440
Speaker 2: products which have some form of semi liquidity, but I

612
00:33:07,480 --> 00:33:11,400
Speaker 2: would primarily consider them relatively a liquid you don't always

613
00:33:11,480 --> 00:33:15,680
Speaker 2: align those inflows with the opportunity. So when people get excited,

614
00:33:16,120 --> 00:33:19,320
Speaker 2: they put money in the end investor has no choice

615
00:33:19,400 --> 00:33:22,600
Speaker 2: but to invest that, and therefore you'll, you know, maybe

616
00:33:22,600 --> 00:33:25,760
Speaker 2: see spreads compress a little bit more then then would

617
00:33:25,760 --> 00:33:28,160
Speaker 2: otherwise be warranted if you didn't have that kind of

618
00:33:28,200 --> 00:33:30,080
Speaker 2: surge in demand.

619
00:33:31,360 --> 00:33:33,640
Speaker 1: To what extent if there are problems in private credit,

620
00:33:33,640 --> 00:33:35,080
Speaker 1: do they spill over to other markets?

621
00:33:35,680 --> 00:33:38,360
Speaker 2: Yeah, I mean, I think the one thing is that

622
00:33:39,200 --> 00:33:41,200
Speaker 2: you know, you do have that kind of nature of

623
00:33:41,280 --> 00:33:44,560
Speaker 2: locked up capital in there. So if you have you

624
00:33:44,600 --> 00:33:46,720
Speaker 2: know a lot of capital that's kind of trapped in

625
00:33:46,760 --> 00:33:50,760
Speaker 2: a certain area, then you do kind of see challenges

626
00:33:50,800 --> 00:33:53,240
Speaker 2: in other markets. We did experience that, I think a

627
00:33:53,240 --> 00:33:56,160
Speaker 2: little bit after twenty twenty two, where you know a

628
00:33:56,200 --> 00:33:59,800
Speaker 2: lot of investors in in various kind of private markets

629
00:34:00,440 --> 00:34:03,840
Speaker 2: that were used to some level of distribution and using

630
00:34:03,880 --> 00:34:08,959
Speaker 2: those distributions to redeploy into other areas. You definitely saw

631
00:34:09,000 --> 00:34:12,279
Speaker 2: those decrease. So, you know, I think yields in high

632
00:34:12,360 --> 00:34:15,799
Speaker 2: yield loans and some of these public markets did stay

633
00:34:15,840 --> 00:34:18,680
Speaker 2: a little bit higher for longer than maybe people expected

634
00:34:18,719 --> 00:34:21,560
Speaker 2: because I think some of the capital that probably would have,

635
00:34:22,000 --> 00:34:24,560
Speaker 2: you know, kind of come into those markets for that

636
00:34:24,680 --> 00:34:29,040
Speaker 2: opportunity were constrained somewhat just given the kind of locked

637
00:34:29,120 --> 00:34:32,840
Speaker 2: up nature of more and more capital today.

638
00:34:33,400 --> 00:34:34,960
Speaker 4: I think you bring up and it makes me think

639
00:34:34,960 --> 00:34:37,560
Speaker 4: about an interesting point. As you know, we talk about

640
00:34:37,680 --> 00:34:42,640
Speaker 4: risk kind of getting diffused across more shops basically instead

641
00:34:42,680 --> 00:34:45,279
Speaker 4: of being held on balance sheet at banks, you know,

642
00:34:45,400 --> 00:34:48,319
Speaker 4: does that I mean a lot of folks in the

643
00:34:48,360 --> 00:34:50,799
Speaker 4: media and regulatory agencies look at that as you know,

644
00:34:50,920 --> 00:34:54,360
Speaker 4: increasing systemic risk. But if the banks that are providing

645
00:34:54,400 --> 00:34:56,640
Speaker 4: commercial lending and you know, are doing everything else that

646
00:34:56,680 --> 00:34:59,560
Speaker 4: they're doing cash management are no longer holding I mean,

647
00:34:59,719 --> 00:35:01,839
Speaker 4: I think back to two thousand and seven when there

648
00:35:01,880 --> 00:35:04,839
Speaker 4: were a lot of deals like Leman but you know Archstones,

649
00:35:05,040 --> 00:35:07,960
Speaker 4: the Archstone Archstone was a Tishman spare deal. A lot

650
00:35:07,960 --> 00:35:10,640
Speaker 4: of these hung deals that got hung back then actually

651
00:35:10,800 --> 00:35:13,880
Speaker 4: impacted the banks more broadly because the corporate credit was

652
00:35:13,960 --> 00:35:17,160
Speaker 4: dragging capital and whatever impacts ahead and ultimately defaults. But

653
00:35:17,680 --> 00:35:20,680
Speaker 4: were we safer now if Blue Owl or you know,

654
00:35:21,000 --> 00:35:24,000
Speaker 4: oak Trees agenting a deal, is it a safer environment

655
00:35:24,360 --> 00:35:25,160
Speaker 4: for the economy?

656
00:35:26,000 --> 00:35:28,600
Speaker 2: Well? Yeah, I mean, I think I think you bring

657
00:35:28,719 --> 00:35:31,319
Speaker 2: up a good point as it relates to the kind

658
00:35:31,360 --> 00:35:34,720
Speaker 2: of broader economy and really for banks to be able

659
00:35:34,760 --> 00:35:38,799
Speaker 2: to you know, kind of cover the wide remit that

660
00:35:38,840 --> 00:35:42,000
Speaker 2: they have, which is a lot it is, you know,

661
00:35:42,040 --> 00:35:46,399
Speaker 2: providing financing to companies, but it's also providing financing to consumers,

662
00:35:47,040 --> 00:35:50,560
Speaker 2: whether that's through mortgages and other forms of borrowing. And

663
00:35:50,560 --> 00:35:53,560
Speaker 2: and yes, I think it's a you know, it's a

664
00:35:53,560 --> 00:35:56,120
Speaker 2: good point that you know, you won't see that kind

665
00:35:56,160 --> 00:35:59,720
Speaker 2: of same risk of kind of locking up the entire

666
00:35:59,800 --> 00:36:04,160
Speaker 2: system in a situation where more and more of this

667
00:36:04,840 --> 00:36:08,520
Speaker 2: these kind of let's call them almost riskier activities have

668
00:36:08,719 --> 00:36:12,239
Speaker 2: been you know, pushed off into into people who have

669
00:36:12,360 --> 00:36:16,839
Speaker 2: maybe the right you know, asset liability mix. Again, it's

670
00:36:16,880 --> 00:36:18,960
Speaker 2: one thing if people can walk away from these kind

671
00:36:19,000 --> 00:36:21,640
Speaker 2: of private credit deals in the middle. If they can't

672
00:36:21,680 --> 00:36:24,279
Speaker 2: they're locked in, they will have to kind of work

673
00:36:24,320 --> 00:36:26,800
Speaker 2: them out. A bank doesn't have to worry about capital

674
00:36:26,880 --> 00:36:30,040
Speaker 2: tied up in those areas. Again, as I mentioned, at

675
00:36:30,080 --> 00:36:34,000
Speaker 2: periods where you could see reserves start to decline in

676
00:36:34,160 --> 00:36:38,920
Speaker 2: ratios adjust. So yes, I think you're right that, you know,

677
00:36:38,960 --> 00:36:42,640
Speaker 2: from a broader kind of economic standpoint, banks should be

678
00:36:42,680 --> 00:36:46,160
Speaker 2: able to continue to provide the servicing that they need

679
00:36:46,200 --> 00:36:47,560
Speaker 2: to for the broader economy.

680
00:36:48,400 --> 00:36:48,760
Speaker 3: Yeah.

681
00:36:48,880 --> 00:36:50,359
Speaker 4: I spent a lot of time in a loan group

682
00:36:50,360 --> 00:36:52,880
Speaker 4: at Credit Swiss, and we you know, we had exposure

683
00:36:52,920 --> 00:36:55,799
Speaker 4: from IG to high yield and distressed and we did

684
00:36:55,800 --> 00:36:58,359
Speaker 4: a lot of hedging, you know, single name ultimately single

685
00:36:58,440 --> 00:37:03,480
Speaker 4: name CDs hedging there was uh became two cost prohibitive

686
00:37:03,520 --> 00:37:06,560
Speaker 4: and we started you know, payers and put options on

687
00:37:06,600 --> 00:37:09,920
Speaker 4: the index and hedging that way. And you know, the

688
00:37:09,960 --> 00:37:13,520
Speaker 4: hedging strategy always evolved. And I wonder for private credit,

689
00:37:14,040 --> 00:37:15,120
Speaker 4: how do you hedge that?

690
00:37:15,920 --> 00:37:19,480
Speaker 2: Yeah, I mean that you're right. I mean everything you

691
00:37:19,560 --> 00:37:22,239
Speaker 2: just mentioned about hedging, you know, whether it's whether it's

692
00:37:22,239 --> 00:37:24,920
Speaker 2: an index or whether it's an option. You know, there

693
00:37:25,200 --> 00:37:27,200
Speaker 2: is an element of well, my hedge is going to

694
00:37:27,280 --> 00:37:31,440
Speaker 2: benefit because I have some pick up in volatility, whether

695
00:37:31,480 --> 00:37:34,560
Speaker 2: that impacts just purely volatility, the price of the option

696
00:37:34,680 --> 00:37:37,480
Speaker 2: or volatility drives that kind of widening in credit spread.

697
00:37:37,520 --> 00:37:40,760
Speaker 2: So I think when you look at that private credit market,

698
00:37:40,800 --> 00:37:43,239
Speaker 2: and as you know, I mean from those days of

699
00:37:43,320 --> 00:37:46,160
Speaker 2: credit Swiss and anyone out there who's you know, tried

700
00:37:46,200 --> 00:37:49,120
Speaker 2: to hedge even a high yo bond or loan or

701
00:37:49,239 --> 00:37:53,160
Speaker 2: CLO credit portfolio with credit derivatives, that there is a

702
00:37:53,160 --> 00:37:56,520
Speaker 2: pretty significant basis risk one can move without the other,

703
00:37:56,719 --> 00:38:00,560
Speaker 2: and you know, private credit obviously just kind of draws

704
00:38:00,600 --> 00:38:04,280
Speaker 2: that basis risk even even greater. So I would almost

705
00:38:04,280 --> 00:38:06,480
Speaker 2: look at, you know, adding a hedge like that is

706
00:38:07,000 --> 00:38:10,399
Speaker 2: as almost like a second bet. It's difficult to kind

707
00:38:10,400 --> 00:38:13,000
Speaker 2: of put that in the category of a hedge when

708
00:38:13,040 --> 00:38:16,319
Speaker 2: one might move and one and one might not. But

709
00:38:16,320 --> 00:38:18,600
Speaker 2: but I understand where you're trying to get at. Maybe

710
00:38:18,640 --> 00:38:21,440
Speaker 2: you're willing to, you know, spend a little bit of

711
00:38:21,480 --> 00:38:24,200
Speaker 2: that excess you know, spread and put that in some

712
00:38:24,480 --> 00:38:28,319
Speaker 2: form of protection. But it's hard to say that your

713
00:38:28,360 --> 00:38:31,439
Speaker 2: hedge will definitely make money when your you know, your

714
00:38:31,480 --> 00:38:33,799
Speaker 2: other asset that you're hedging is losing money. I think

715
00:38:33,840 --> 00:38:36,239
Speaker 2: that's that's one of the risks and things that I'm

716
00:38:36,280 --> 00:38:41,000
Speaker 2: sure risk managers everywhere are struggling with right now, I want.

717
00:38:40,880 --> 00:38:43,000
Speaker 1: To flip to another risk that we mentioned at the

718
00:38:43,040 --> 00:38:47,279
Speaker 1: beginning of the show, when politics. Obviously we've seen a

719
00:38:47,320 --> 00:38:52,399
Speaker 1: lot of volatility around Mexico, around India, We're now going

720
00:38:52,400 --> 00:38:57,120
Speaker 1: into very volatility in France and and obviously the US

721
00:38:57,280 --> 00:39:01,240
Speaker 1: and you know even even Canada politics they were getting choppy.

722
00:39:02,520 --> 00:39:04,600
Speaker 1: What do you how do you position for that? And

723
00:39:04,680 --> 00:39:06,920
Speaker 1: you know, I mean again, Hedges, I mean, can you

724
00:39:06,960 --> 00:39:09,640
Speaker 1: can you Hedge? Can you can you position for any

725
00:39:09,680 --> 00:39:11,480
Speaker 1: of these things? I mean, that's that's just focus on

726
00:39:11,480 --> 00:39:15,800
Speaker 1: the US. The significant change is implied by a Trump

727
00:39:15,840 --> 00:39:16,920
Speaker 1: presidency for example.

728
00:39:17,760 --> 00:39:21,279
Speaker 2: Yeah, I mean obviously again for US, the focus is

729
00:39:21,320 --> 00:39:24,440
Speaker 2: always going to be on on credit. I mean, our

730
00:39:24,560 --> 00:39:28,080
Speaker 2: our cio Bruce Karsh always says, if you get the

731
00:39:28,120 --> 00:39:32,560
Speaker 2: credit right, nothing else matters, and he's right. It's another

732
00:39:32,640 --> 00:39:35,520
Speaker 2: way of saying, you know what, what our chairman Howard

733
00:39:35,560 --> 00:39:38,960
Speaker 2: Mark said in his December twenty twenty two memo on

734
00:39:39,000 --> 00:39:42,440
Speaker 2: the sea change. He spoke about these higher yields and

735
00:39:42,520 --> 00:39:46,239
Speaker 2: your ability to earn them only if you can avoid defaults.

736
00:39:46,239 --> 00:39:49,360
Speaker 2: So that really is kind of the first and foremost

737
00:39:49,440 --> 00:39:52,239
Speaker 2: is thinking about, you know, how do these various regimes

738
00:39:53,040 --> 00:39:56,920
Speaker 2: ultimately impact you know, our underlying barrowers' ability to pay.

739
00:39:56,960 --> 00:40:00,680
Speaker 2: And I think Trump versus Biden and the is an

740
00:40:00,719 --> 00:40:04,799
Speaker 2: interesting one. I mean, there are certainly some similarities. I

741
00:40:04,800 --> 00:40:08,600
Speaker 2: think both will have you know, a higher deficit, a

742
00:40:08,680 --> 00:40:13,120
Speaker 2: higher or you know, continued high deficits. That means that

743
00:40:13,640 --> 00:40:15,560
Speaker 2: you know, there's going to continue to be a lot

744
00:40:15,600 --> 00:40:19,720
Speaker 2: of issuance in the treasury market. Does that keep rates

745
00:40:19,800 --> 00:40:24,360
Speaker 2: higher for longer? Do the threat of you know, increased

746
00:40:24,400 --> 00:40:28,719
Speaker 2: tariffs maybe under a Trump presidency keep rates higher? I mean,

747
00:40:29,200 --> 00:40:31,719
Speaker 2: it does make you again kind of think about how

748
00:40:31,760 --> 00:40:35,040
Speaker 2: you position yourself and kind of maintaining that, you know,

749
00:40:35,200 --> 00:40:37,720
Speaker 2: kind of mix, not not putting all of your eggs

750
00:40:37,760 --> 00:40:40,480
Speaker 2: in one basket, which again I think a lot of

751
00:40:40,520 --> 00:40:43,439
Speaker 2: investors have made the mistake of in the last couple

752
00:40:43,480 --> 00:40:46,800
Speaker 2: of years getting a little too excited about the potential

753
00:40:46,840 --> 00:40:50,279
Speaker 2: for interest rates to fall, leaning very very hard into

754
00:40:50,400 --> 00:40:54,759
Speaker 2: duration assets, long duration assets, only to be disappointed. So

755
00:40:55,239 --> 00:40:57,080
Speaker 2: I think the best kind of hedge you can have

756
00:40:57,239 --> 00:41:01,560
Speaker 2: almost is to have a good diversified, you know, portfolio

757
00:41:01,680 --> 00:41:06,000
Speaker 2: of these various exposures, two bonds, two loans, two securities

758
00:41:06,040 --> 00:41:08,640
Speaker 2: that we talked about and making sure that you're not

759
00:41:08,719 --> 00:41:12,560
Speaker 2: you know, leaning into just one sole factor that that

760
00:41:12,600 --> 00:41:15,080
Speaker 2: you could easily get wrong. And I think nobody can

761
00:41:15,120 --> 00:41:16,200
Speaker 2: really predict.

762
00:41:16,800 --> 00:41:21,880
Speaker 1: But Trump risk, higher inflation, FED independence potentially undermined, lower taxes,

763
00:41:22,520 --> 00:41:26,120
Speaker 1: you know, demographic changes around immigration. How does that all

764
00:41:26,320 --> 00:41:28,520
Speaker 1: shake out in credit markets if let's say the FED

765
00:41:28,520 --> 00:41:30,240
Speaker 1: actually has to hike the next move.

766
00:41:30,960 --> 00:41:34,400
Speaker 2: Yeah, I mean a hike would definitely be a challenge

767
00:41:34,440 --> 00:41:37,480
Speaker 2: for credit markets. You know, I think a lot of

768
00:41:37,480 --> 00:41:40,800
Speaker 2: people are resigned to the fact that, you know, rates

769
00:41:40,840 --> 00:41:44,000
Speaker 2: have peaked and they might stay high for longer, but

770
00:41:44,080 --> 00:41:47,240
Speaker 2: at least we know the the next move is down.

771
00:41:47,280 --> 00:41:50,080
Speaker 2: And I think again you need to really look at

772
00:41:50,120 --> 00:41:53,080
Speaker 2: kind of where balance sheets are positioned today in which

773
00:41:53,200 --> 00:41:56,640
Speaker 2: areas you know are most at risk. Again, you know,

774
00:41:56,760 --> 00:41:59,400
Speaker 2: many of the things we've talked about today, and the

775
00:41:59,440 --> 00:42:01,719
Speaker 2: answer to a lot of your questions has been that

776
00:42:02,280 --> 00:42:05,480
Speaker 2: they're just there is no substitute for you know, digging

777
00:42:05,520 --> 00:42:08,640
Speaker 2: in doing your credit work. And we're probably going to

778
00:42:08,680 --> 00:42:10,960
Speaker 2: live in this kind of credit pickers market where we

779
00:42:11,080 --> 00:42:15,160
Speaker 2: have you know, idiosyncratic defaults, whether it's you know, maybe

780
00:42:15,160 --> 00:42:18,560
Speaker 2: idiosyncratic to a sector or an industry. As Mike mentioned,

781
00:42:18,600 --> 00:42:22,719
Speaker 2: that could be driven by by policy, but you you

782
00:42:22,840 --> 00:42:25,680
Speaker 2: really just have to be ready for for anything.

783
00:42:26,560 --> 00:42:29,080
Speaker 1: Other than that. The way and specifically in terms of

784
00:42:29,160 --> 00:42:32,279
Speaker 1: like one opportunity, what's your edge? How do you How

785
00:42:32,320 --> 00:42:34,520
Speaker 1: does oak Tree come out on top this year?

786
00:42:35,600 --> 00:42:37,680
Speaker 2: Well, I think the you know, one of the one

787
00:42:37,719 --> 00:42:39,120
Speaker 2: of the things for oak Tree is that we've been

788
00:42:39,160 --> 00:42:43,040
Speaker 2: a long time specialist in sub investment grade markets, and

789
00:42:43,200 --> 00:42:46,320
Speaker 2: sub investment grade markets do tend to have higher yields,

790
00:42:46,520 --> 00:42:48,920
Speaker 2: and I think, you know, being able to earn you know,

791
00:42:48,960 --> 00:42:52,160
Speaker 2: a high amount of income has been a big benefit.

792
00:42:52,920 --> 00:42:55,720
Speaker 2: The way I look at kind of higher yielding markets

793
00:42:55,800 --> 00:42:59,520
Speaker 2: right now, that sub investment grade market is it has

794
00:42:59,560 --> 00:43:03,160
Speaker 2: almost been a substitution for for equities. And you know,

795
00:43:03,200 --> 00:43:06,440
Speaker 2: at times we've mentioned the ability to earn equity like returns.

796
00:43:06,520 --> 00:43:09,280
Speaker 2: Others have said the same thing, and I think people

797
00:43:09,320 --> 00:43:13,359
Speaker 2: confuse that sometimes by you know, implying that these these

798
00:43:13,400 --> 00:43:17,000
Speaker 2: fixed income investments are going to equal their return of

799
00:43:17,040 --> 00:43:19,360
Speaker 2: the S and P five hundred or the Nasdaq or

800
00:43:19,400 --> 00:43:23,319
Speaker 2: other equity markets. But really what it means is, you know,

801
00:43:23,440 --> 00:43:25,960
Speaker 2: where do these where do these investments have a place

802
00:43:25,960 --> 00:43:30,320
Speaker 2: in your portfolio? And four or five years ago, many

803
00:43:30,360 --> 00:43:33,040
Speaker 2: people were looking at equities to earn that kind of

804
00:43:33,120 --> 00:43:37,400
Speaker 2: high single low double digit type return, and that is

805
00:43:37,480 --> 00:43:39,960
Speaker 2: what you're getting today from these kind of higher yielding

806
00:43:40,040 --> 00:43:44,279
Speaker 2: sub investment grade assets. That that income. That inability to

807
00:43:44,400 --> 00:43:47,879
Speaker 2: time markets is really key in being able to kind

808
00:43:47,880 --> 00:43:51,880
Speaker 2: of maximize your income over that period while avoiding the

809
00:43:51,880 --> 00:43:54,520
Speaker 2: defaults and avoiding some of the trouble spots that we've

810
00:43:54,560 --> 00:43:57,040
Speaker 2: discussed today. I think really is a key, and I

811
00:43:57,080 --> 00:43:59,759
Speaker 2: think really is kind of where oak Tree has has

812
00:44:00,360 --> 00:44:03,640
Speaker 2: maintained and gained its reputation over the last thirty years.

813
00:44:04,520 --> 00:44:06,280
Speaker 1: Does that mean buying triple C bonds?

814
00:44:07,280 --> 00:44:10,200
Speaker 2: It doesn't necessarily mean buying triple C bonds. I mean,

815
00:44:10,239 --> 00:44:13,040
Speaker 2: if you look at the high yield market today, a

816
00:44:13,080 --> 00:44:15,680
Speaker 2: little over seventy percent of that market trades with a

817
00:44:15,719 --> 00:44:19,839
Speaker 2: spread below three hundred. Yeah, the index average is three

818
00:44:19,840 --> 00:44:23,040
Speaker 2: point fifty. So you know, there are certainly, you know

819
00:44:23,120 --> 00:44:26,840
Speaker 2: a number of single B rated bonds out there, single

820
00:44:26,880 --> 00:44:31,239
Speaker 2: B rated loans, other structured credit securitized assets that we

821
00:44:31,360 --> 00:44:33,560
Speaker 2: mentioned that can you know, kind of get you that

822
00:44:33,680 --> 00:44:35,920
Speaker 2: yield maybe a little bit below where a triple C.

823
00:44:36,120 --> 00:44:38,960
Speaker 2: But I don't think it's an environment where you do

824
00:44:39,040 --> 00:44:41,319
Speaker 2: have to kind of lean into the riskiest parts of

825
00:44:41,320 --> 00:44:43,880
Speaker 2: the market to earn that excess yield.

826
00:44:44,480 --> 00:44:46,319
Speaker 1: Great stuff, Wayne Doll, It's been a pleasure having you

827
00:44:46,360 --> 00:44:47,239
Speaker 1: on the Credit Edge, Manny.

828
00:44:47,280 --> 00:44:48,560
Speaker 2: Thanks, thank you very much.

829
00:44:48,880 --> 00:44:51,960
Speaker 1: Wayne is co portfolio manager for oak Tree Capital Managements

830
00:44:52,000 --> 00:44:55,200
Speaker 1: Global credit and investment grade solutions strategies. And of course

831
00:44:55,400 --> 00:44:57,920
Speaker 1: we're very grateful to Mike Hollin from Bloomberg Intelligence. Thank

832
00:44:57,960 --> 00:44:58,719
Speaker 1: you for joining us today.

833
00:44:58,760 --> 00:44:59,600
Speaker 3: Mike, great to be here.

834
00:45:00,040 --> 00:45:02,480
Speaker 1: For more credit analysis read all of Mike Hollins's work

835
00:45:02,520 --> 00:45:05,319
Speaker 1: on the Bloomberg Terminal. Bloomberg Intelligence is part of our

836
00:45:05,320 --> 00:45:08,400
Speaker 1: research department, with five hundred analysts and strategists working across

837
00:45:08,400 --> 00:45:12,040
Speaker 1: all markets. Coverage includes over two thousand equities and credits

838
00:45:12,040 --> 00:45:14,920
Speaker 1: and outlooks on more than ninety industries and one hundred

839
00:45:14,960 --> 00:45:19,040
Speaker 1: market industries, currencies and commodities. Please do subscribe to the

840
00:45:19,040 --> 00:45:21,240
Speaker 1: Credit Edge wherever you get your podcasts. We're on Apple,

841
00:45:21,320 --> 00:45:24,680
Speaker 1: Spotify and all other good podcast providers, including the Bloomberg

842
00:45:24,760 --> 00:45:28,160
Speaker 1: Terminal at b Podgo. Give us a review, tell your friends,

843
00:45:28,239 --> 00:45:31,719
Speaker 1: or email me directly at Jcrombieight at Bloomberg dot net.

844
00:45:32,239 --> 00:45:34,399
Speaker 1: I'm James Cromby, it's been a pleasure having you join

845
00:45:34,480 --> 00:45:53,040
Speaker 1: us again next week on the Credit edge.