WEBVTT - Oaktree Sees Private Credit Stress as Excitement Grows 0:00:18.239 --> 0:00:20.840 Hello, Welcome to The Credit Edge, a weekly markets podcast. 0:00:21.120 --> 0:00:23.720 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:24.160 --> 0:00:26.640 This week, we're very pleased to welcome Wayne Dahl from 0:00:26.680 --> 0:00:28.680 oak Tree. How are you Wayne, I'm great? 0:00:28.680 --> 0:00:29.000 How are you? 0:00:29.120 --> 0:00:29.640 James? 0:00:29.720 --> 0:00:30.080 Very good? 0:00:30.080 --> 0:00:30.280 Thank you. 0:00:30.360 --> 0:00:33.840 Wayne. It's co portfolio manager for oak Tree's global credit 0:00:33.920 --> 0:00:36.280 and investment grade solutions strategies. 0:00:36.440 --> 0:00:37.760 Thank you very much for having me. 0:00:38.080 --> 0:00:39.960 Thanks so much for joining us today. We're very excited 0:00:40.000 --> 0:00:42.479 to hear your views. Plus, we're also delighted to have 0:00:42.560 --> 0:00:45.960 back on the show Mike Holland with Bloomberg Intelligence. Hello, Mike, Hey, James. 0:00:46.040 --> 0:00:47.600 Great to be here. I'm Mike Colin. 0:00:47.680 --> 0:00:50.440 I'm a senior healthcare credit analyst here at Bloomberg, part 0:00:50.440 --> 0:00:53.440 of Bloomberg's research department of five hundred analysts and strategists. 0:00:53.880 --> 0:00:54.320 So great. 0:00:54.360 --> 0:00:56.120 So, just to set the scene a bit here, credit 0:00:56.160 --> 0:00:58.200 markets are struggling a bit, not really living up to 0:00:58.240 --> 0:01:01.320 their year of the bond bill. That's mostly because of 0:01:01.400 --> 0:01:04.560 rates which remain elevated, undermining total returns and also putting 0:01:04.560 --> 0:01:06.560 pressure on weak companies that have a lot of debt. 0:01:07.160 --> 0:01:10.000 Shorter duration assets like high yield and floating rate loans 0:01:10.000 --> 0:01:12.720 are doing okay, though nowhere near as good as equities. 0:01:13.040 --> 0:01:15.119 Debt spreads are very tight. You're not getting very much 0:01:15.120 --> 0:01:18.280 compensation for the risk of default or downgrade of corporate debt, 0:01:18.600 --> 0:01:21.240 and we've seen a ton of issuance. The ball case 0:01:21.360 --> 0:01:23.680 is supported by strength in the US economy, which is 0:01:23.720 --> 0:01:26.319 good for US companies, but credit markets in Europe and 0:01:26.360 --> 0:01:29.240 Asia are doing better than the US. There seems to 0:01:29.280 --> 0:01:31.520 be a fair amount of complacency. They're given all the 0:01:31.600 --> 0:01:37.520 risks debt defaults, bankruptcies, commercial real estate, stress, war, geopolitics, elections. 0:01:37.600 --> 0:01:40.320 Everybody's loaded up on US assets going into a very 0:01:40.360 --> 0:01:44.160 noisy presidential election. A recession cannot be ruled out, So 0:01:44.200 --> 0:01:46.560 I want to start there. When the first half of 0:01:46.560 --> 0:01:48.680 the year hasn't been that great for credit unless you 0:01:48.680 --> 0:01:51.600 are long Chinese junk bonds. There's a little bit of 0:01:51.600 --> 0:01:54.120 excess return though, but not really a stellar year. So 0:01:54.120 --> 0:01:55.960 what's your outlook for the second half? More of the 0:01:56.000 --> 0:01:58.240 same or maybe a big rally if we finally get 0:01:58.240 --> 0:02:01.040 those rates cuts. Everyone was home earlier this year. 0:02:01.800 --> 0:02:03.880 Yeah, James, I think you touched on a few things 0:02:03.880 --> 0:02:07.200 that are important to consider when looking at credit markets broadly. 0:02:08.080 --> 0:02:12.160 You mentioned the fixed versus floating. Floating has done better 0:02:12.200 --> 0:02:17.200 with rates. Higher fixed has done Okay, higher yielding fixed 0:02:17.280 --> 0:02:21.800 rate has done better just given the higher yields, where lower, 0:02:22.639 --> 0:02:26.640 higher quality fixed rate has has tended to underperform given 0:02:26.680 --> 0:02:32.760 its slightly longer duration and lower coupons. But I think 0:02:32.880 --> 0:02:36.560 the key is that you need to be diversified. There 0:02:36.560 --> 0:02:39.760 are trade offs across all these different markets. So if 0:02:39.760 --> 0:02:42.400 you can have the opportunity to have a portfolio that 0:02:42.440 --> 0:02:46.000 can you know, touch each of these areas and kind 0:02:46.000 --> 0:02:49.600 of balance out your exposure, you've done. You've done quite well. 0:02:49.880 --> 0:02:53.400 And you know you did. Mention equity markets, Yes, the 0:02:53.520 --> 0:02:56.760 S and P five hundred, Yes the NASDAC are both 0:02:56.960 --> 0:02:59.120 up very well. But if you look at small caps 0:02:59.160 --> 0:03:03.160 in general, they've largely underperformed high old bonds or broadly 0:03:03.200 --> 0:03:06.519 syndicated loans. Even the Dow Jones is, you know, maybe 0:03:06.600 --> 0:03:08.639 kind of in line with high old bonds through the 0:03:08.680 --> 0:03:11.359 first half of the year. So I don't think it's 0:03:11.400 --> 0:03:14.200 a stretch to you know, expect a similar outcome in 0:03:14.240 --> 0:03:17.320 the second half of the year. Income has been your 0:03:17.360 --> 0:03:20.920 friend for the last several months. I think that's going 0:03:20.960 --> 0:03:23.080 to continue to be the case. The one thing that 0:03:23.120 --> 0:03:27.679 we've seen with focusing on these income, high income generating 0:03:27.720 --> 0:03:30.880 assets is they do have a way of protecting you 0:03:30.960 --> 0:03:34.280 against some of the market volatility, which, as you alluded to, 0:03:34.360 --> 0:03:37.520 we could certainly see in the second half with US 0:03:37.520 --> 0:03:40.520 elections and other events that we're facing today. 0:03:41.080 --> 0:03:44.920 Hey, this is Mike Collins Wayne. Looking at the ag 0:03:45.000 --> 0:03:48.040 right now. We're about five percent, you know on ig 0:03:48.600 --> 0:03:50.840 credit and five point seven on triple b's if you're 0:03:50.840 --> 0:03:53.440 looking at the index on Bloomberg and six point six 0:03:53.480 --> 0:03:57.040 for double B seven point seven for single bees. You know, 0:03:57.520 --> 0:04:00.720 last year, two years ago, we're looking at Yould bond 0:04:00.720 --> 0:04:04.800 paper coming below four percent. As you look forward to 0:04:04.840 --> 0:04:06.440 the end of this year and next year, where do 0:04:06.480 --> 0:04:10.040 you see that vaul driving spreads and yields? 0:04:10.920 --> 0:04:13.680 Yeah, I mean I think you've you've definitely touched on 0:04:13.760 --> 0:04:16.520 some interesting things, Mike. I mean, and I think that's 0:04:16.560 --> 0:04:19.440 been the trade off for investors these days. Is is 0:04:19.480 --> 0:04:22.960 it fair to focus only on yield and ignore spread 0:04:23.080 --> 0:04:28.680 or should I solely focus on spread? I definitely see 0:04:28.680 --> 0:04:31.160 a situation where we could you know, kind of continue 0:04:31.200 --> 0:04:34.360 along these lines where spreads kind of stay where they 0:04:34.400 --> 0:04:37.320 are and you're kind of beholden to where to where 0:04:37.440 --> 0:04:39.960 rates go. I think you've seen a bit of a 0:04:40.000 --> 0:04:45.520 trade off there. Where As spreads have gone tighter in 0:04:45.600 --> 0:04:49.000 most cases, that has meant the interest rates have gone higher. 0:04:49.040 --> 0:04:52.960 So the yield, especially in high yield, has stayed relatively 0:04:53.040 --> 0:04:55.760 flat for the last couple of years, in a bit 0:04:55.800 --> 0:04:59.120 this year. So I think if you see a situation where, 0:04:59.240 --> 0:05:03.200 you know, what spreads wider at this point, it probably 0:05:03.279 --> 0:05:06.880 is some form of you know, negativity around the economy. 0:05:07.600 --> 0:05:10.840 And you know, I think most investors would anticipate that 0:05:10.839 --> 0:05:13.560 that could come with some rate cuts. So you know, 0:05:13.640 --> 0:05:16.400 do you get some sort of offset there where maybe 0:05:16.400 --> 0:05:19.560 a little bit of spread widening you know, is offset 0:05:19.600 --> 0:05:22.880 by some rate tightening and again kind of net net, 0:05:22.960 --> 0:05:26.560 the yield stays kind of similar and which which again 0:05:26.600 --> 0:05:28.560 would kind of benefit those who are in it for 0:05:28.640 --> 0:05:31.680 the for the carry and the long haul on. 0:05:31.640 --> 0:05:33.640 The economy way and that do you expect a recession 0:05:33.680 --> 0:05:35.760 and do you expect a deep recession? What it's your 0:05:35.839 --> 0:05:39.520 vial on that and also interested in your rates outlook, 0:05:39.560 --> 0:05:40.839 when do we expect to see cuts? 0:05:41.520 --> 0:05:44.440 Yeah, I mean, I think the recession backdrop is is 0:05:44.440 --> 0:05:47.520 an interesting one, and I think it's one that has 0:05:48.240 --> 0:05:50.359 I don't know if i'd say confused the market, but 0:05:50.520 --> 0:05:53.919 is maybe you know, colored the market view over the 0:05:53.960 --> 0:05:56.479 last couple of years, there's been so much talk about 0:05:56.480 --> 0:06:00.120 a recession and one hasn't materialized. And I think that 0:06:00.000 --> 0:06:02.120 that is why you hear a lot of the talk 0:06:02.200 --> 0:06:05.120 of spreads are too tight, spreads are too tight. If 0:06:05.240 --> 0:06:08.640 if we never had this conversation about a recession, would 0:06:08.680 --> 0:06:12.080 we feel the same way about spreads? I mean, going 0:06:12.160 --> 0:06:15.520 forward from here, it's it's difficult to see, you know, 0:06:15.560 --> 0:06:18.560 where where a recession would come from, the economy seems 0:06:18.600 --> 0:06:21.880 to be doing well, consumers seem to be doing well. 0:06:22.240 --> 0:06:24.960 Things are definitely slowing, but are they slowing enough for 0:06:25.040 --> 0:06:27.960 a recession. I think it's very, very hard to predict. 0:06:28.040 --> 0:06:31.080 And if you invest with you know, a very very 0:06:31.480 --> 0:06:34.560 you know, strongly defined base case of a recession will 0:06:34.640 --> 0:06:37.800 happen in three months or six months or nine months. 0:06:37.839 --> 0:06:40.320 I think that's led to, you know, a path of 0:06:40.360 --> 0:06:43.960 disappointment over the last uh, you know, several months. 0:06:45.160 --> 0:06:48.960 You know, I listened to your lots of podcasts back 0:06:49.000 --> 0:06:51.680 in I believe it was September, and you talked about 0:06:51.880 --> 0:06:55.320 you know, we're both risk focused, you know, folks that 0:06:55.400 --> 0:06:58.640 have looking for downside versus upside on you know, be 0:06:58.680 --> 0:07:00.800 given that we're in credit and I wonder, you know, 0:07:00.839 --> 0:07:03.400 do we even need a recession when you have all this. 0:07:03.480 --> 0:07:05.200 Uncertainty that keeps ramping up? 0:07:05.240 --> 0:07:07.719 I mean I looked to last week and the Chevron 0:07:07.760 --> 0:07:10.120 doctrine the Supreme Court coming out talking about that. There's 0:07:10.480 --> 0:07:14.720 there's so many moving parts to this broader economic story 0:07:14.720 --> 0:07:17.440 and stuff that's happening around the edges. I wonder have 0:07:17.520 --> 0:07:19.800 you guys even focused on this Chevron doctrine. 0:07:19.800 --> 0:07:21.600 I mean, that was something that came out yesterday or 0:07:21.640 --> 0:07:22.240 on Friday. 0:07:22.920 --> 0:07:25.320 And as it relates to healthcare, I mean, we're thinking 0:07:25.320 --> 0:07:30.640 about legislative and regulatory uncertainty ramping up, and we clearly 0:07:30.720 --> 0:07:31.800 just had this conversation. 0:07:31.920 --> 0:07:33.160 It's just in early stages. 0:07:33.200 --> 0:07:36.080 But you know, how do you think about uncertainty on 0:07:36.120 --> 0:07:39.080 the edges versus you know, does it have to be 0:07:39.360 --> 0:07:42.040 you know, a binary recession or not? And how does 0:07:42.080 --> 0:07:44.600 that affect credit spreads and yields going forward? 0:07:45.280 --> 0:07:45.480 Yeah? 0:07:45.560 --> 0:07:47.800 No, I think you make a great point, Mike. And 0:07:48.560 --> 0:07:51.520 I think the one thing too, you know, kind of 0:07:51.600 --> 0:07:54.640 look at there is you're right, do you need a 0:07:54.720 --> 0:07:58.040 recession to have stress in certain parts of the market 0:07:58.680 --> 0:08:01.560 you mentioned healthcare. Health Care has been an area, especially 0:08:01.560 --> 0:08:05.320 in the leverage finance space where you have a lot 0:08:05.320 --> 0:08:09.480 of private equity involvement there, levered balance sheets. They have 0:08:09.520 --> 0:08:13.480 come under pressure, they've seen default rates tick higher as 0:08:13.520 --> 0:08:16.920 you've as you've seen some you know, whether it's regulation 0:08:17.080 --> 0:08:20.559 kind of shifting and changing on the state and federal level, 0:08:21.200 --> 0:08:24.280 where you've had some labor stress given you know the 0:08:24.440 --> 0:08:28.239 results of COVID and and you know wage pressures in 0:08:28.240 --> 0:08:31.920 in the healthcare space. So I think you're absolutely right 0:08:32.000 --> 0:08:36.319 that on a sector bi sector basis, you're you're going 0:08:36.360 --> 0:08:39.679 to see and continue to see. I think some pressure 0:08:39.720 --> 0:08:43.880 build in certain parts of the the credit markets. Now 0:08:44.600 --> 0:08:47.560 that doesn't mean that you should avoid the credit markets completely. 0:08:47.600 --> 0:08:50.040 I think it means that to have a kind of 0:08:50.080 --> 0:08:53.760 bottom up, fundamental approach to how you're thinking about investments 0:08:54.120 --> 0:08:57.360 and not just trying to own the entire index is 0:08:57.800 --> 0:08:59.920 the right approach. I mean, many people refer to that 0:09:00.320 --> 0:09:03.240 this period as a credit pickers market, and I think 0:09:03.240 --> 0:09:05.960 what they mean by that is exactly what you alluded to. 0:09:06.880 --> 0:09:11.440 You can avoid some of these broader challenges and take 0:09:11.480 --> 0:09:15.720 advantage of these very attractive yields, which again, if you 0:09:15.840 --> 0:09:19.360 can avoid those defaults in areas of stress, I think 0:09:19.440 --> 0:09:22.320 they serve a very good need for portfolios today. 0:09:23.200 --> 0:09:26.920 Just the point earlier on spreads, when you know, we've 0:09:26.920 --> 0:09:30.079 talked about them being very very tight, and then when 0:09:30.120 --> 0:09:31.840 we talk about that and people just say, well, look 0:09:31.840 --> 0:09:34.160 at the yield, it's so big that it doesn't really matter. 0:09:34.720 --> 0:09:37.720 But the textbook would tell us that we should worry 0:09:37.800 --> 0:09:40.800 about the spread, and it seems that would only take 0:09:40.800 --> 0:09:43.199 a little bit of volatility to come back to actually 0:09:43.240 --> 0:09:45.319 push those a lot wider than where they are right now, 0:09:45.320 --> 0:09:49.400 which would presumably mean losses. I mean, are we just 0:09:49.720 --> 0:09:51.679 focusing on the wrong thing here? Should should we just 0:09:51.880 --> 0:09:53.720 not be looking at the index and we should be 0:09:53.720 --> 0:09:55.880 looking at as a dispersion, We should be looking at 0:09:56.080 --> 0:09:59.240 individual bonds much more closely instead of the index. 0:10:00.080 --> 0:10:02.000 I do think there is an argument to be made 0:10:02.040 --> 0:10:05.520 to to look a little more closely at at individual 0:10:05.600 --> 0:10:08.520 bonds rather than just trying to take a take a 0:10:08.559 --> 0:10:11.520 market approach. I mean, and you can see this so 0:10:11.679 --> 0:10:14.320 far in in some of the performance data. If you 0:10:14.360 --> 0:10:16.839 look at the you know what, I would call the 0:10:17.400 --> 0:10:21.640 non tradable high yield indices that are out there relative 0:10:21.720 --> 0:10:24.040 to say ETFs in the first half of the year, 0:10:25.000 --> 0:10:27.640 you know, especially in this in this most recent quarter, 0:10:28.640 --> 0:10:34.760 you've seen some underperformance in UH in those ETFs relative 0:10:34.800 --> 0:10:37.120 to to the index. So again, I think just trying 0:10:37.160 --> 0:10:40.920 to you know, own that kind of most liquid, higher 0:10:41.000 --> 0:10:43.640 quality part of the market has has proven a little 0:10:43.720 --> 0:10:47.560 more challenging from a from a return perspective. But you know, 0:10:47.679 --> 0:10:50.800 the other thing to consider as well, and I think 0:10:50.800 --> 0:10:53.840 it's it's something to think about for high yield is 0:10:54.920 --> 0:10:56.720 we like to look at spreads and we like to 0:10:56.760 --> 0:10:59.560 look at them across time and compare them. Well, the 0:10:59.559 --> 0:11:03.200 index was you know, three hundred and fifty basis points today, 0:11:03.280 --> 0:11:06.320 it was three hundred and fifty basis points back in 0:11:06.400 --> 0:11:09.640 twenty eighteen. But you know, at the same time, for 0:11:09.720 --> 0:11:12.480 those who want to maybe get a little bit more 0:11:12.559 --> 0:11:15.719 what i'll call nerdy in the high yield space, you've 0:11:15.760 --> 0:11:20.400 seen a pretty significant drop in duration. And duration is 0:11:20.480 --> 0:11:24.040 that kind of measure of sensitivity to interest rates or 0:11:24.120 --> 0:11:28.640 credit spread. So with that number a lot shorter, then 0:11:28.960 --> 0:11:31.080 you know, I think you do have an easier time 0:11:31.160 --> 0:11:34.320 kind of looking at that market today, where again, your 0:11:34.360 --> 0:11:38.560 your sensitivity against those moves in rates or credit spreads 0:11:39.200 --> 0:11:41.880 give you give you a little bit you know, better 0:11:42.040 --> 0:11:45.400 return when it comes to thinking about how much can 0:11:45.640 --> 0:11:49.240 I lose and then most importantly how long does it 0:11:49.280 --> 0:11:51.640 take me to earn that back through the current yield? 0:11:51.760 --> 0:11:56.720 So higher current yield, lower duration, I think overall it 0:11:56.760 --> 0:11:58.720 is less sensitive. So again, if you can kind of 0:11:58.720 --> 0:12:02.120 pick those good credits, I think you're you're again going 0:12:02.200 --> 0:12:04.920 to benefit from what is a great opportunity to earn 0:12:04.920 --> 0:12:05.640 a higher yield. 0:12:06.520 --> 0:12:09.080 We tilked about twenty eighteen and I had a chance 0:12:09.120 --> 0:12:10.880 to check the spreads on that, and the spreads did 0:12:10.880 --> 0:12:12.840 actually blow out at the end of twenty eighteen on 0:12:12.880 --> 0:12:15.120 how yield. Maybe that was completely you know, for the 0:12:15.240 --> 0:12:18.400 reasons that you know will not happen again. But it 0:12:18.600 --> 0:12:22.760 just seems to me that things too priced to perfection, 0:12:22.840 --> 0:12:25.760 that all of the risks that we see just being 0:12:25.800 --> 0:12:28.200 underpriced at the moment. Do you not feel the same way. 0:12:28.920 --> 0:12:32.440 Look, I mean there's no doubt that you know spreads 0:12:32.440 --> 0:12:35.640 are tighter, and that you know people are kind of 0:12:35.640 --> 0:12:39.199 pricing things for perfection, as you say, and you're right, 0:12:39.240 --> 0:12:41.640 I mean, spreads did blow out at the end of 0:12:41.640 --> 0:12:45.240 twenty eighteen. Remember twenty eighteen was was a hiking cycle. 0:12:46.120 --> 0:12:49.520 The hiking cycle ended in December twenty eighteen, and that 0:12:49.640 --> 0:12:52.680 fourth quarter where spreads went wider. I mean, in a way, 0:12:52.760 --> 0:12:56.000 you could relate that fourth quarter move of twenty eighteen 0:12:56.040 --> 0:12:59.160 to something more like what we saw in twenty twenty two, 0:12:59.280 --> 0:13:02.440 where spreads definitely moved wider as rates went higher. But 0:13:03.080 --> 0:13:05.679 you know, today in the US, we've we've passed that 0:13:05.800 --> 0:13:08.920 period and I think everyone would agree, although there is 0:13:08.960 --> 0:13:11.640 probably a you know, a tail risk out there that 0:13:11.760 --> 0:13:15.160 rates could go higher again, that we're most likely going 0:13:15.200 --> 0:13:18.360 to see the next move in rates being lower. So again, 0:13:18.440 --> 0:13:21.600 as a high yield investor, if I think, well, you 0:13:21.600 --> 0:13:24.000 know what's going to cause those spreads to go higher, 0:13:24.679 --> 0:13:27.840 A lot of those scenarios are also most likely going 0:13:27.880 --> 0:13:30.920 to drive interest rates to come tighter. So there is 0:13:30.960 --> 0:13:33.720 a bit of an offsetting effect. And again, when I 0:13:33.800 --> 0:13:36.040 don't know the timing of that, what I want to 0:13:36.040 --> 0:13:38.680 do is make sure I'm in good companies that will 0:13:39.200 --> 0:13:42.400 accrue that yield in my favor while i'm you know, 0:13:42.480 --> 0:13:45.120 call it waiting for that for that event to hit. 0:13:45.880 --> 0:13:48.680 Wan One of the sectors. Of the very subsectors in 0:13:48.720 --> 0:13:51.920 healthcare that I cover, obviously payers and if you look 0:13:51.920 --> 0:13:54.360 at where payer spreads are now today, you know, look 0:13:54.559 --> 0:13:58.440 United and SIGNA and out of vants ECBs kind of 0:13:58.480 --> 0:13:59.720 wider on the margin. 0:14:00.720 --> 0:14:01.600 Price to perfection. 0:14:01.920 --> 0:14:05.760 Meanwhile, Congress is talking about, you know, regulating PBMs and 0:14:06.320 --> 0:14:10.360 you know, maybe causing some changes to the way the 0:14:10.480 --> 0:14:14.520 payers operate. You see that spreads haven't gapped out at all. 0:14:14.559 --> 0:14:17.480 And I wonder, I mean, do you have do you 0:14:17.520 --> 0:14:20.160 have to have an incident to happen. 0:14:20.040 --> 0:14:22.000 First before spreads widen? 0:14:22.760 --> 0:14:27.640 And I'm talking regulatory pushback against payers and making acquisitions 0:14:27.680 --> 0:14:32.680 outside of their normal payer side regulated revenue. I wonder 0:14:32.800 --> 0:14:34.600 you know that that's something that I see as a risk. 0:14:34.640 --> 0:14:37.160 And I wonder you know across sectors. You know, obviously 0:14:37.240 --> 0:14:39.920 healthcare is very regulated. Are there any other sectors that 0:14:39.960 --> 0:14:42.720 you're interested in right now from a long or short 0:14:42.760 --> 0:14:46.440 perspective where you see trends favorable or unfavorable? 0:14:47.240 --> 0:14:50.080 Yeah, I mean, you're you're right for sure, Mike, that 0:14:50.720 --> 0:14:54.440 you know, I think you will probably you know, people 0:14:54.480 --> 0:14:56.520 will try and hold on maybe for as long as 0:14:56.520 --> 0:14:58.520 they can. And again, I think that does speak to 0:14:58.600 --> 0:15:03.160 the power of you know, kind of active management versus 0:15:03.200 --> 0:15:06.480 passive management. And that's one thing that we have focused 0:15:06.520 --> 0:15:09.080 on over the last you know, call it year plus, 0:15:09.200 --> 0:15:11.680 is you know, looking across the market and looking at 0:15:11.680 --> 0:15:15.840 opportunities in various sectors where you have a chance to 0:15:16.080 --> 0:15:19.200 rotate into something that you may view as a little 0:15:19.240 --> 0:15:23.440 bit more defensive at you know, similar spreads and yields, 0:15:24.560 --> 0:15:27.200 which again, I mean you have to make those moves early. 0:15:27.280 --> 0:15:29.920 You can't. You can't wait and kind of after the 0:15:29.960 --> 0:15:31.880 fact is as you said in your example, you know, 0:15:31.920 --> 0:15:35.480 maybe a regulation does change spreads, move at that point 0:15:35.520 --> 0:15:39.040 it's too late. So you know, there certainly are are 0:15:39.120 --> 0:15:42.600 some parts of the market where there there's maybe things 0:15:42.600 --> 0:15:45.960 a little bit more attractive i mean food and beverage, 0:15:46.160 --> 0:15:48.760 you know, certainly a bit more on the staple front. 0:15:49.360 --> 0:15:51.400 You know, things like that are are good. I mean 0:15:51.560 --> 0:15:54.440 power is an area that that in certain parts of 0:15:54.480 --> 0:15:56.800 the market you've seen an increased demand for There's a 0:15:56.800 --> 0:15:59.760 lot of talk around you know, data centers and AI 0:16:00.080 --> 0:16:03.360 and their kind of demand for more power and maybe 0:16:03.400 --> 0:16:07.560 we're kind of underappreciating or underpricing the need for that 0:16:08.160 --> 0:16:11.840 to grow. You've also seen some pretty good strength in 0:16:12.680 --> 0:16:16.640 the various insurance sectors. So you know, there are parts 0:16:16.640 --> 0:16:19.400 of the market that I think when you kind of 0:16:19.440 --> 0:16:22.600 look at the landscape and think, you know, do I 0:16:22.720 --> 0:16:25.120 want to maybe give up a few basis points of 0:16:25.880 --> 0:16:28.920 yield or spread and lock into something which, again I 0:16:28.920 --> 0:16:31.720 think to your point has maybe less of that tail 0:16:31.840 --> 0:16:32.400 risk in it. 0:16:33.160 --> 0:16:35.080 Yeah, that's helpful. 0:16:35.240 --> 0:16:37.960 I think, you know, our food and beverage team on 0:16:37.960 --> 0:16:40.320 the credit side do have some interesting views. 0:16:40.320 --> 0:16:40.760 For sure. 0:16:40.880 --> 0:16:43.320 They've been talking a lot about GLP ones and potential 0:16:43.400 --> 0:16:46.680 impacts there, which we think will be a longer term trend. 0:16:46.720 --> 0:16:50.160 But I think stepping back, I mean, Bloomberg is Bloomberg 0:16:50.200 --> 0:16:53.400 Intelligence here has put out twenty years or twenty I'm sorry, 0:16:53.600 --> 0:16:57.080 twenty years twenty editions of our bi credit medians, and 0:16:57.080 --> 0:16:59.880 we're looking at trends recently for the last several quarters. 0:17:00.160 --> 0:17:01.560 You know, Joe Lovington's the head of. 0:17:01.520 --> 0:17:04.000 Our team, and he put this out last week basically 0:17:04.040 --> 0:17:08.440 showing you know, the sequential uptick and leverage across ratings classes, 0:17:08.560 --> 0:17:11.080 you know, from A to triple BB and you know 0:17:11.440 --> 0:17:15.320 approaching you know, higher levels that we've seen since you know, 0:17:15.640 --> 0:17:19.040 post COVID. What what are your views on broad sector 0:17:19.200 --> 0:17:22.280 trends and how that could and leverage trends and coverage 0:17:22.280 --> 0:17:26.200 trends which are clearly getting more coverage is declining, leverages rising. 0:17:26.240 --> 0:17:28.600 Do you think that we're on a glide path towards 0:17:28.600 --> 0:17:31.680 something you know, more negative or on the corporate side, 0:17:31.720 --> 0:17:33.720 or what signals are you seeing over at oak Tree, 0:17:34.119 --> 0:17:37.800 across the across the spectrum in terms of leverage and 0:17:37.880 --> 0:17:38.840 should that be a concern. 0:17:39.880 --> 0:17:42.280 Yeah, I mean, I think you're right. I mean, leverage 0:17:42.320 --> 0:17:45.280 has certainly ticked up from from those lows. But if 0:17:45.320 --> 0:17:47.520 you kind of take a step back and look and 0:17:47.560 --> 0:17:50.199 go back a little bit further into the into the 0:17:50.240 --> 0:17:53.119 pre COVID days, you'll see that, you know, leverage for 0:17:53.160 --> 0:17:57.000 the most part, whether it's loans, whether it's bonds, it's 0:17:57.200 --> 0:17:59.679 you know, kind of at the median or below the median, 0:17:59.720 --> 0:18:02.560 below the average in many cases. So you know, it 0:18:02.640 --> 0:18:06.200 certainly shows you that companies have not been what I 0:18:06.240 --> 0:18:10.000 would call irresponsible over this most recent time period. They've 0:18:10.000 --> 0:18:15.320 been pretty measured in their cases for increasing leverage, whether 0:18:15.400 --> 0:18:20.400 that's through acquisitions or you know, large capital expenditures which 0:18:20.400 --> 0:18:24.040 would require the issuance of new debt packing on leverage. 0:18:24.040 --> 0:18:27.000 I mean, I think I think companies have been pretty 0:18:27.040 --> 0:18:31.479 responsible and I think overall from a credit perspective, that 0:18:31.520 --> 0:18:35.920 should be good for investors. On the coverage front, it's 0:18:36.200 --> 0:18:38.600 it's interesting, I think over the last few months you're 0:18:38.640 --> 0:18:42.320 seeing coverage almost go in the opposite direction if you 0:18:42.320 --> 0:18:44.760 look at the high yield market versus the loan market, 0:18:44.760 --> 0:18:49.040 where high yield borrowers, because they've been fixed rate, they've 0:18:49.080 --> 0:18:51.800 been able to kind of live out this term of 0:18:51.880 --> 0:18:55.720 higher rates for longer than floating rate products where they've 0:18:55.760 --> 0:18:59.359 immediately felt that impact. High yeld bonds are now just 0:18:59.400 --> 0:19:03.080 starting to refinance and have started to refinance into higher rates. 0:19:03.119 --> 0:19:06.960 So yep, you're seeing coverage tickdown, but again tick down 0:19:07.000 --> 0:19:10.959 from very very high levels into areas that are still 0:19:11.200 --> 0:19:15.200 very very reasonable. And on the loan side, in this 0:19:15.400 --> 0:19:21.000 year of pretty significant refinancings, you've actually seen loan borrowers 0:19:21.040 --> 0:19:25.320 be able to improve their coverage metrics because that loan 0:19:25.359 --> 0:19:28.520 that they issued two years ago or eighteen months ago 0:19:29.080 --> 0:19:32.040 is now being refinanced at a fifty basis points spread 0:19:32.160 --> 0:19:36.119 roughly lower. So you are seeing a little bit of 0:19:36.160 --> 0:19:39.040 relief there, but it's certainly an area that you still 0:19:39.040 --> 0:19:42.879 have to watch out for in companies with excessive leverage 0:19:43.000 --> 0:19:46.199 are going to be the ones that continue to struggle. Again, 0:19:46.320 --> 0:19:50.040 kind of making that case for active management over just 0:19:50.080 --> 0:19:51.640 purely trying to own the market. 0:19:52.160 --> 0:19:56.760 A Now that really struggling end when there is increased 0:19:57.000 --> 0:20:02.359 incidence of liability management, which is coercive, it's violent, it's 0:20:02.720 --> 0:20:05.600 inflicting losses and a little of pain on investors. How 0:20:05.680 --> 0:20:08.800 much are you engaged in those sorts of transactions and 0:20:09.040 --> 0:20:11.120 what are you doing to fight back? 0:20:11.680 --> 0:20:14.160 I mean, you certainly have to pay very close attention 0:20:14.240 --> 0:20:17.480 to the capital structures that you know seem most likely 0:20:17.600 --> 0:20:20.560 to go through that kind of activity. And again, as 0:20:20.600 --> 0:20:23.280 I mentioned with the idea of you know, kind of 0:20:23.400 --> 0:20:27.160 rotating away from trouble sectors, you have to be prepared 0:20:27.160 --> 0:20:29.080 for that. You have to do that in advance. It's 0:20:29.160 --> 0:20:31.840 very similar here. You don't want to be you don't 0:20:31.840 --> 0:20:34.240 want to be surprised by one of these activities, and 0:20:34.280 --> 0:20:38.040 that might mean you know, speaking to other lenders, talking 0:20:38.119 --> 0:20:40.919 to other parties, and again kind of preparing it. And 0:20:40.960 --> 0:20:44.320 in some cases it might mean you know, leaving leaving 0:20:44.359 --> 0:20:47.640 a bit of return on the table and switching out 0:20:47.680 --> 0:20:49.879 from a name or a sector rather than kind of 0:20:49.880 --> 0:20:53.000 trying to squeeze out those last few basis points. 0:20:53.960 --> 0:20:56.680 In healthcare, there's been a couple of instances when where 0:20:56.760 --> 0:21:00.000 we've had just you know, discounted buybacks, but the agencies 0:21:00.240 --> 0:21:03.000 turned them opportunistic versus distressed. 0:21:03.440 --> 0:21:06.159 And I wonder is that something you guys have looked into? 0:21:07.240 --> 0:21:12.080 Meaning there are instances where liability management exercises are reducing 0:21:12.119 --> 0:21:15.879 PAR basically or haircut and par, but they're not getting 0:21:16.119 --> 0:21:19.160 you know, they're not being assessed as a distressed exchange. 0:21:19.240 --> 0:21:21.280 The company comes to mind as multiplan that I've been 0:21:21.400 --> 0:21:24.239 working on for many years, and they were they did 0:21:24.240 --> 0:21:26.080