WEBVTT - Hedge Funds Are Diving Into CLOs; AT1s Revitalize 0:00:12.320 --> 0:00:15.360 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:15.680 --> 0:00:18.239 My name is James Crumby. I'm a senior editor at Bloomberg. 0:00:18.800 --> 0:00:20.759 This week, we're very pleased to have back on the 0:00:20.800 --> 0:00:23.600 show Lisa Lee, who covers all things credit for Bloomberg 0:00:23.680 --> 0:00:26.200 News in London. How are you, Lisa fine? 0:00:26.280 --> 0:00:28.680 Thank you, Thank you for having me. It's actually a 0:00:28.800 --> 0:00:30.640 very warm day in London, very unusual. 0:00:31.480 --> 0:00:33.720 Great well, very excited to get your take on the markets. 0:00:33.720 --> 0:00:36.360 Thanks very much for joining us. We're also delighted to 0:00:36.400 --> 0:00:40.839 see Urun Julius, a credit analys with Bloomberg Intelligence in London. 0:00:41.400 --> 0:00:43.960 We'll be coming back to Urun a bit later to 0:00:44.040 --> 0:00:47.880 talk about banks and eighty one's and the aftermath of 0:00:47.920 --> 0:00:50.239 the credit Swiss collapse. So do to stay with us. 0:00:51.159 --> 0:00:54.320 But first, Lisa Lee with Bloomberg News, you're our global 0:00:54.440 --> 0:00:57.720 guru on clos, which we've talked about quite a lot 0:00:57.760 --> 0:01:00.760 on this show. But let's start with it an easy one. 0:01:00.960 --> 0:01:03.480 What is a clo, how do they work? 0:01:03.560 --> 0:01:08.640 And why do we care so colos buy up lavish loans? 0:01:08.680 --> 0:01:11.080 What are leverage loans? First of all, you ask, those 0:01:11.160 --> 0:01:15.440 are debt loans of junk rated companies. So those on 0:01:15.480 --> 0:01:19.319 the edge of bankruptcy, but nonetheless still can produce very 0:01:19.360 --> 0:01:25.560 good yield and usually back pees buyouts and companies like 0:01:25.640 --> 0:01:31.200 as wide ranging as American Airlines to Burger Kings and 0:01:31.600 --> 0:01:34.319 colos are the biggest buyers, and they buy them to 0:01:34.400 --> 0:01:37.720 turn them into bonds that they sell on to other investors. 0:01:38.760 --> 0:01:43.640 Okay, so issuance of clos hasn't been that active this year, 0:01:44.200 --> 0:01:47.080 but we have been kind of hearing about a revival 0:01:47.120 --> 0:01:49.720 potentially this month. Has that started yet? Are you seeing 0:01:49.720 --> 0:01:51.840 a big boom in COLO issues right now? 0:01:52.040 --> 0:01:54.240 I think what we're seeing is a lot of boom 0:01:54.240 --> 0:01:59.080 on COLO aspirations. So there's a lot of managers who 0:01:59.120 --> 0:02:03.160 are hoping to dos because as you said, there's issuance 0:02:03.240 --> 0:02:06.720 has been very weak. You look now we're in September. 0:02:06.920 --> 0:02:09.679 You've got really three and a half months to get 0:02:09.720 --> 0:02:12.320 deals done, and so people are hoping maybe we can 0:02:12.320 --> 0:02:14.800 get one deal done, two deals down before the end 0:02:14.800 --> 0:02:16.600 of the year and make something of this year. So 0:02:16.639 --> 0:02:19.519 it's not a total, sort of a really bad week year. 0:02:19.800 --> 0:02:23.079 The problem is everyone has the same thought. Everyone wants 0:02:23.120 --> 0:02:26.119 to do a deal right now, and the problem that's 0:02:26.160 --> 0:02:29.160 been riddling them all year long has now gone away, 0:02:29.720 --> 0:02:32.760 which is that they're just not as enough leverage loans 0:02:32.840 --> 0:02:35.880 to turn into bonds. And what is that has done 0:02:35.960 --> 0:02:39.160 is push leverage loan prices higher, too high for them 0:02:39.440 --> 0:02:43.799 to do a deal that pleases every investors in their 0:02:44.160 --> 0:02:46.520 capital stack. And as a COLO, you have to please 0:02:46.639 --> 0:02:51.279 every investor or, you're not going to really have a popular, economic, 0:02:51.639 --> 0:02:52.440 robust COLO. 0:02:53.600 --> 0:02:55.480 Interesting And at the same time, we're seeing a lot 0:02:55.520 --> 0:02:58.760 more hedge funds getting into clos. Who's jumping in and 0:02:58.800 --> 0:02:59.840 why are they getting in now? 0:03:00.560 --> 0:03:03.839 So hedge funds are getting in because you know, one 0:03:03.880 --> 0:03:06.799 thing you've noticed is hedge funds it's a great business. 0:03:06.800 --> 0:03:09.280 It can make so much money. It's two and twenty 0:03:09.919 --> 0:03:13.240 and so there's a lot of volatility in hedge funds. 0:03:13.360 --> 0:03:15.320 You make tons of money, but you can also lose 0:03:15.360 --> 0:03:18.920 a lot of money colos as a manager. As a 0:03:18.960 --> 0:03:22.520 manager of colos, which is versus an investor who buys 0:03:22.520 --> 0:03:25.400 the bond, but one who buys the loans, packages them 0:03:25.480 --> 0:03:29.239 up and then sells them. It's a very steady fee business. 0:03:29.520 --> 0:03:31.960 And if you're a hedge fund already that has a 0:03:31.960 --> 0:03:35.400 lot of credit focus. For instance, Arini is a hedge 0:03:35.400 --> 0:03:40.680 fund by this very famous former credit Swiss corporate trader. 0:03:41.480 --> 0:03:44.840 He knows corporate debt and so that's his hedge fund. 0:03:44.880 --> 0:03:47.560 And so to move into COLO is a very easy 0:03:47.600 --> 0:03:51.840 ancillary business and it provides a steadiness that perhaps, I mean, 0:03:51.840 --> 0:03:55.240 hedge funds don't have. And and I think why now, 0:03:55.480 --> 0:03:58.080 there's always people are always thinking like there's always a 0:03:58.120 --> 0:04:01.360 good time for steady business, and you're thinking about this 0:04:01.960 --> 0:04:05.360 for a long term platform, not just for this moment. 0:04:05.680 --> 0:04:08.080 And so we're seeing a bunch of them, not just Areni, 0:04:08.160 --> 0:04:11.680 but surround Carvel. A number of hedge funds are trying 0:04:11.680 --> 0:04:14.520 to get in. And remember remember there's already a number 0:04:14.560 --> 0:04:19.360 of hedge funds who have COLO platforms, like King Street 0:04:19.400 --> 0:04:20.159 and Anchorage. 0:04:20.400 --> 0:04:22.880 Sorry, that fund you mentioned is Irene Arenis. 0:04:23.120 --> 0:04:26.440 He is an Arene's the word for parrot, and he's 0:04:26.480 --> 0:04:27.680 a big fan of parrots. 0:04:28.080 --> 0:04:30.200 Great, okay. And so these hedge funds that are coming 0:04:30.200 --> 0:04:32.680 in new to the asset class, are they doing big 0:04:32.720 --> 0:04:34.680 deals or just kind of testing the waters right now? 0:04:34.760 --> 0:04:36.280 I think what they're going to do is to just 0:04:36.360 --> 0:04:38.960 get their first deal done. Usually, if you want to 0:04:39.000 --> 0:04:42.280 start a COLO business, regardless of whether you're a hedge 0:04:42.279 --> 0:04:45.480 fund or an asset manager. You have to hire a 0:04:45.680 --> 0:04:50.719 very well known, well regarded COLO manager that's experienced for 0:04:50.800 --> 0:04:53.360 the market to trust you. So they've all done that. 0:04:53.800 --> 0:04:57.719 They've all hired a COLO manager, and now they're meeting 0:04:57.760 --> 0:04:59.760 many of them are meeting with investors, trying to pitch 0:04:59.760 --> 0:05:01.720 how they are different and trying to see if they 0:05:01.720 --> 0:05:02.960 will be interested in their deals. 0:05:04.080 --> 0:05:05.599 I've got to ask, and I know we've talked about 0:05:05.640 --> 0:05:08.360 this before, but hedge fronts clos I mean, it all 0:05:08.400 --> 0:05:12.279 sounds like a risky business to me. Why should we 0:05:12.360 --> 0:05:13.080 not worry about this? 0:05:14.120 --> 0:05:16.080 Well, I don't think we should not worry about this. 0:05:16.160 --> 0:05:19.600 I mean there are systemic risks involved with these kind 0:05:19.640 --> 0:05:24.480 of of securitized products, and the Bank of England and 0:05:24.600 --> 0:05:28.000 the Treasury and the IMF have warned that corporate dead 0:05:28.040 --> 0:05:30.480 could be an area of systemic risks, so we should worry. 0:05:30.760 --> 0:05:34.719 At the moment, we're seeing fairly low default rates. But 0:05:34.839 --> 0:05:37.440 one area of real concern is low. Default rates are 0:05:37.440 --> 0:05:39.400 fairly low, but we don't know whether they will stay 0:05:39.440 --> 0:05:42.120 that way. And the defaults are of the leverage loans 0:05:42.120 --> 0:05:45.640 that they repackage. And what one thing that I've been 0:05:45.640 --> 0:05:49.040 reporting on is how low recovery levels are so defaults 0:05:49.040 --> 0:05:54.240 are like when a company goes perhaps goes bankrupt. Recovery 0:05:54.320 --> 0:05:59.479 is how much money investors lenders get back when something 0:05:59.520 --> 0:06:04.600 goes back. So it's so for a investor, it's not 0:06:04.760 --> 0:06:09.400 just default rate bankruptcy numbers, it's also times that with 0:06:09.520 --> 0:06:11.960 how much money they get back, and the recovery levers 0:06:12.000 --> 0:06:16.680 have been astonishingly low, historically low. So usually colos got 0:06:16.760 --> 0:06:20.360 seventy eighty cents back after a company went bankrupt. Now 0:06:20.480 --> 0:06:22.880 they're looking at more like twenty five cents, So that 0:06:23.000 --> 0:06:26.520 is really changing how they have to think about their 0:06:26.560 --> 0:06:29.800 investment at the moment. I don't think they're pricing this in, 0:06:30.080 --> 0:06:32.240 but people are getting more and more concerned. So one 0:06:32.240 --> 0:06:36.520 thing you've seen in Europe is some brigade capital management retool. 0:06:36.640 --> 0:06:39.520 There exists two of their existing colos so they can 0:06:39.560 --> 0:06:42.240 better fight off what some people have been calling lender 0:06:42.279 --> 0:06:44.600 on lender of violence or credit or on credit of violence, 0:06:44.640 --> 0:06:47.960 where maybe a aggressive hedge fund comes in, puts in 0:06:48.000 --> 0:06:54.080 new money and pushes other investors other lenders down the 0:06:54.080 --> 0:06:57.480 priority line. And because of this kind of maneuver, some 0:06:58.160 --> 0:07:02.360 bankruptcies have produced zero for for first lean lenders. 0:07:03.000 --> 0:07:04.760 So you raise a lot of issues at least, I mean, 0:07:04.800 --> 0:07:07.040 I've got to start trying to unpack some of them. 0:07:07.040 --> 0:07:11.720 But you're talking about hedge funds getting into clos At 0:07:11.720 --> 0:07:14.680 the same time, some of the risky maneuvers that they're 0:07:14.840 --> 0:07:19.040 they're doing are what we have called creditor on credited 0:07:19.120 --> 0:07:23.800 violence some clos in response to trying to rework their 0:07:24.400 --> 0:07:27.440 their rules to make it tougher to to pull those 0:07:27.480 --> 0:07:32.120 things off. It all just sounds like a total, total mess. 0:07:32.120 --> 0:07:33.520 I mean, and then and then at the same time, 0:07:33.760 --> 0:07:37.120 because of these aggressive strategies, the recoveries when you go 0:07:37.200 --> 0:07:40.280 through a default are much lower for for investors. I mean, 0:07:40.480 --> 0:07:43.520 what's the takeaway here? I mean, it's this market just 0:07:43.560 --> 0:07:46.280 becoming a total scrap. And I mean, is it is 0:07:46.280 --> 0:07:47.640 it getting more risky as a result? 0:07:48.280 --> 0:07:50.240 Oh, I want to say it's having a total scrap. 0:07:50.280 --> 0:07:52.600 I think there's a lot of things to worry about 0:07:52.640 --> 0:07:55.240 and things to watch for. As of as of now, 0:07:56.360 --> 0:08:00.520 the faults are still low. As of now, recoveries are low, 0:08:00.800 --> 0:08:04.440 but they could go higher as of now. But it 0:08:04.520 --> 0:08:07.560 also sort of depends on the broader economy if how 0:08:07.640 --> 0:08:10.440 interest rates go where if we have a recession or 0:08:10.480 --> 0:08:14.320 not if interest rate, if inflation picks up again, or 0:08:14.400 --> 0:08:16.960 if the FED doesn't manage a soft landing and we 0:08:17.040 --> 0:08:19.480 go into a recession, then I think that this becomes 0:08:19.560 --> 0:08:22.760 more and more of a worry because hedge funds, not 0:08:22.760 --> 0:08:26.239 the ones, even the ones we have have COLO shops, 0:08:26.360 --> 0:08:29.240 have raised a lot of money for distressed situations, and 0:08:29.280 --> 0:08:32.400 they have pools of capital ready to put to do 0:08:32.520 --> 0:08:37.560 these aggressive tactics, and they could really leave the COLO 0:08:37.679 --> 0:08:40.800 and levision role market in a lot of damage. 0:08:41.640 --> 0:08:43.280 But let's get back to where you started with the 0:08:43.280 --> 0:08:45.560 hedge funds getting in and they're getting into this business 0:08:45.600 --> 0:08:49.760 because it is a stable fee generating business. At the 0:08:49.800 --> 0:08:51.800 same time we're saying that it's it's under a lot 0:08:51.880 --> 0:08:54.880 of pressure and there is getting more volatile. I mean, 0:08:54.920 --> 0:08:56.160 how do we square that circle? 0:08:56.320 --> 0:09:00.439 Because the manager is not up for the law. So 0:09:00.480 --> 0:09:03.319 remember I told you the manager sells the bonds. The 0:09:03.360 --> 0:09:05.640 people who get hurt are the bonds, the people who 0:09:05.640 --> 0:09:08.280 bought the bonds, not the managers who sold the bonds. 0:09:08.840 --> 0:09:16.160 So getting into the steady fee business, you've hopefully, hopefully 0:09:17.120 --> 0:09:20.160 put off the risk to somebody else. Now, the problem 0:09:20.120 --> 0:09:23.280 oftentimes with any kind of financial crisis that you think 0:09:23.280 --> 0:09:26.240 you've sold off the risk, you haven't. But in this situation, 0:09:26.520 --> 0:09:28.560 it really does seem like they've sold off the risk. 0:09:28.800 --> 0:09:32.600 But it doesn't mean that that risk goes somewhere. It's 0:09:32.760 --> 0:09:36.240 never it never disappears. I think that's the kernel of 0:09:36.320 --> 0:09:38.880 truth and finances. You can move away risk, but you 0:09:38.920 --> 0:09:43.120 can't make risk disappear. So it's just in other people's 0:09:43.160 --> 0:09:46.800 pockets that this problem exists, and. 0:09:46.800 --> 0:09:50.720 It may take a while for that problem to show up. Yes, okay, 0:09:50.960 --> 0:09:53.560 so let's just go back to the rule changes that 0:09:53.600 --> 0:09:56.520 we're talking about in some of these clos to try 0:09:56.559 --> 0:10:00.200 and fend off these attacks by aggressive hedge funds. Will 0:10:00.240 --> 0:10:02.120 these amendments become an industry standard? 0:10:02.120 --> 0:10:05.280 Do we think in the US they become. They're more 0:10:05.320 --> 0:10:09.360 standard than in Europe. But I've talked to managers and 0:10:09.480 --> 0:10:12.360 lawyers and they definitely think that this will pick up, 0:10:12.640 --> 0:10:15.600 that there is great interest in doing them. Doesn't take 0:10:15.640 --> 0:10:19.280 that much effort. They've like sort of innovated them to 0:10:19.320 --> 0:10:21.360 the point that it doesn't cost too much to do 0:10:21.679 --> 0:10:24.480 and there's only benefit to have it, and there isn't 0:10:24.559 --> 0:10:29.560 much of a downside to not having them. So I 0:10:29.600 --> 0:10:31.760 do think it's going to become more of an industry norm. 0:10:31.760 --> 0:10:34.800 But we'll see sometimes people can get really complacent. 0:10:35.400 --> 0:10:37.960 And so let's just go back to the original point 0:10:37.960 --> 0:10:41.560 about clos. You know that they are basically repackaging loans 0:10:41.600 --> 0:10:47.120 to pretty you know, stable, you know, large companies that 0:10:47.160 --> 0:10:52.199 are household names. Does that make them more or less risky? 0:10:52.240 --> 0:10:54.640 And what's their performance being over time? I mean, is 0:10:54.880 --> 0:10:57.920 this something like the CDOs that are really very dangerous 0:10:58.160 --> 0:11:00.800 or has it been a long term performer? 0:11:01.200 --> 0:11:04.640 First, for the longest time, clos were one of the 0:11:04.720 --> 0:11:08.920 areas in the securitization market that performed fairly well during 0:11:08.920 --> 0:11:11.880 the financial crisis, which is the reason why they came 0:11:11.960 --> 0:11:15.960 back post crisis. So CE deals never came back. CBOs 0:11:15.960 --> 0:11:18.560 never came back in the way they were. So they 0:11:18.600 --> 0:11:21.240 did come back, they did perform well. But past is 0:11:21.320 --> 0:11:23.839 not pro blogs to the future, and the markets changed 0:11:23.840 --> 0:11:25.559 a great deal, so it's not to say that that 0:11:25.760 --> 0:11:29.679 can't cause issues in the future. But history has shown 0:11:29.720 --> 0:11:32.160 them to be pretty sturdy, and they've worked to become 0:11:32.200 --> 0:11:36.959 more sturdy. But it's hard to know given all the 0:11:37.679 --> 0:11:40.600 changed market and the way hedge funds behave now and 0:11:40.640 --> 0:11:43.920 how restructures are going a lot of it will depend 0:11:44.200 --> 0:11:46.760 on how bad a recession there is and how bad 0:11:46.960 --> 0:11:50.079 and how high inflation is and how high interest rates are. 0:11:51.040 --> 0:11:52.920 So on that point, and before we talk to your 0:11:52.920 --> 0:11:57.040 own Julius Bloomberg intelligence about the banks, what else is 0:11:57.080 --> 0:11:59.520 on your radar? I mean, as you say, the economy 0:11:59.720 --> 0:12:03.640 in Europe particularly doesn't look great. Should we be worried 0:12:03.640 --> 0:12:05.720 about risk assets here? You've also been writing a lot 0:12:05.720 --> 0:12:10.120 about private credit. Is you know, bigger and bigger deals, 0:12:10.160 --> 0:12:12.719 more and more fundraising. Is it all rosy over there 0:12:12.720 --> 0:12:13.120 as well? 0:12:13.559 --> 0:12:17.280 No, I think there's Well, it depends on who you're 0:12:17.320 --> 0:12:19.520 talking to. The private credit mandre just having a great 0:12:19.520 --> 0:12:23.000 time raising money. And since we started with clos, they're 0:12:23.000 --> 0:12:26.000 looking a little worried because private credit is taking away 0:12:26.040 --> 0:12:29.880 a lot of the loans that they used to repackage. 0:12:30.120 --> 0:12:33.920 So they're worried there. And a big topic right now 0:12:34.000 --> 0:12:37.520 is private credit clos So should we more move more 0:12:37.559 --> 0:12:40.920 to private credit clos? Should we securitize this? Private credit 0:12:41.160 --> 0:12:44.520 in the US is already happening, and it's picking up 0:12:44.600 --> 0:12:46.680 and it's booming. It's actually the one area of the 0:12:46.720 --> 0:12:51.440 clo market that's booming and Europeans managers were wondering whether 0:12:51.480 --> 0:12:54.200 they can get into the action as well. So in 0:12:54.240 --> 0:12:58.000 one so there's they're worries about how much private credit 0:12:58.080 --> 0:13:01.160 is taking away from the leveraged loanwark gets as high 0:13:01.240 --> 0:13:04.400 yield and lavish loan and private credit sort of converges, 0:13:04.800 --> 0:13:06.839 and the same time people are all thinking about, okay, 0:13:06.880 --> 0:13:09.680 well then what's the opportunity next, Well, how can I 0:13:09.720 --> 0:13:11.360 still make money? 0:13:12.280 --> 0:13:14.280 So we really will be working very close at your 0:13:14.280 --> 0:13:16.640 coverage to kind of figure out what's going on, why 0:13:16.679 --> 0:13:19.920 it's happening, and what are the risks. It's a really 0:13:20.000 --> 0:13:23.600 fascinating one to watch. Great stuff. Lisa Lee from Bloomberg News, 0:13:23.679 --> 0:13:24.880 thank you so much for joining us. 0:13:25.040 --> 0:13:26.560 Thank you for having me. It's been a pleasure. 0:13:26.640 --> 0:13:29.960 As always, read all of Lisa's scoops on the Bloomberg 0:13:30.040 --> 0:13:33.160 terminal and of course at Bloomberg dot com. Moving on 0:13:33.200 --> 0:13:36.080 to another big topic. As I mentioned earlier, we are 0:13:36.200 --> 0:13:38.800 very fortunate to have with us Urun Julius, who covers 0:13:38.960 --> 0:13:41.640 credit for Bloomberg Intelligence based in London, and it's focused 0:13:41.679 --> 0:13:43.559 on the banks. How's it going over there? 0:13:43.679 --> 0:13:43.920 Urun? 0:13:44.200 --> 0:13:46.520 All good? Thank you very much, s James, and thank 0:13:46.559 --> 0:13:48.880 you for having me on the podcast. 0:13:49.400 --> 0:13:52.560 Thanks for joining us. And last time we spoke, Credit Suisse, 0:13:52.840 --> 0:13:55.320 which was deemed at the time to be a global 0:13:55.400 --> 0:13:59.760 systemically important bank, collapsed. That was in March. How has 0:13:59.800 --> 0:14:03.079 that impacted the European banking sector? What was the fallout there? 0:14:05.120 --> 0:14:09.760 Well, I think it may have done some permanent damage 0:14:10.040 --> 0:14:17.120 to Switzerland's reputation of calmness and predictability, But the impact 0:14:17.240 --> 0:14:22.400 on the wider European banking market and more specifically on 0:14:22.440 --> 0:14:26.480 the eighty one market, I think is more nuanced. I 0:14:26.520 --> 0:14:30.000 think most eighty one investors have concluded that there is 0:14:30.120 --> 0:14:34.760 no readacross between Switzerland and some of the other jurisdictions 0:14:36.000 --> 0:14:40.040 EU and UK regulates that came out quite strongly in 0:14:40.400 --> 0:14:44.800 back in March in support of respecting the claims hierarchy 0:14:45.360 --> 0:14:48.760 in case of a bank failure, and I think most 0:14:48.840 --> 0:14:51.720 eighty one investors have also concluded that there's no reta 0:14:51.760 --> 0:14:56.920 cross between credits Feeze and other European banks. If you 0:14:56.920 --> 0:14:59.560 look at the banks credit fundamentals, you know these have 0:15:00.680 --> 0:15:04.400 quite quite resilient and judging from their second quarter results. 0:15:04.960 --> 0:15:07.680 Okay, so let me start you there. You mentioned eighty 0:15:07.800 --> 0:15:11.320 one's which stands for additional tier one. It's a type 0:15:11.320 --> 0:15:14.120 of risky bank debt. But before we get into the 0:15:14.160 --> 0:15:15.760 sort of details of what's going on there, can I 0:15:15.760 --> 0:15:18.840 ask you just to please describe what those are, how 0:15:18.840 --> 0:15:20.920 they work for those that aren't aware. 0:15:21.560 --> 0:15:25.320 Yes, So these are the most junior type of instruments 0:15:25.360 --> 0:15:30.080 that banks can issue, mostly in Europe, but also in 0:15:30.360 --> 0:15:33.640 a lot of other jurisdictions outside of the United States. 0:15:34.640 --> 0:15:38.920 And they see just above common equity, and they share 0:15:39.200 --> 0:15:44.080 with common equity a number of characteristics. They are perpetual instruments, 0:15:44.560 --> 0:15:48.080 so they do not have a fixed maturity date. They 0:15:48.080 --> 0:15:52.360 do have an issue a call date and if not 0:15:52.520 --> 0:15:57.280 called subsequent issuer call dates, but no fixed maturity debt. 0:15:57.760 --> 0:16:02.960 That's the first characteristic. In addition to that, they have 0:16:04.360 --> 0:16:10.760 discretionary coupon cancelation language, so that means that the issuer 0:16:10.840 --> 0:16:15.200 can decide to issue a coupon whenever it wants to 0:16:15.240 --> 0:16:20.880 do so. And then lastly, embedded in the eighty one 0:16:20.920 --> 0:16:28.320 structure is principal laws mechanism, and that means that if 0:16:28.320 --> 0:16:34.080 a certain capital trigger is hit that the part value 0:16:34.240 --> 0:16:40.920 of those instruments will either be written down temporarily or 0:16:41.120 --> 0:16:44.640 as was the case with the credit suis eighty one's 0:16:44.680 --> 0:16:49.760 permanently all they are. They are converted into common. 0:16:49.520 --> 0:16:52.640 Equity, so the eighty one one they're also known as 0:16:52.640 --> 0:16:56.640 contingent convertibles. They help banks comply with capital requirements as well, 0:16:56.640 --> 0:16:58.920 and they were created after the financial crisis as a 0:16:58.920 --> 0:17:02.720 way to imp losses on creditors without using taxpayer money, right, 0:17:02.760 --> 0:17:03.640 and that's how they kind. 0:17:03.480 --> 0:17:07.040 Of that's the history, that's right, yes, yeah, yeah, Okay, So. 0:17:07.280 --> 0:17:10.760 As you mentioned in the credit Swiss collapse that we 0:17:10.800 --> 0:17:14.720 saw earlier this year, the eighty one bonds were fully 0:17:14.760 --> 0:17:16.760 written down, which was I think a bit of a 0:17:16.800 --> 0:17:20.720 shock to some people and canceled by the Swiss authorities. 0:17:21.000 --> 0:17:23.800 How did this affect the eighty one market? Was their 0:17:23.840 --> 0:17:24.919 permanent damage? 0:17:27.520 --> 0:17:30.240 Well, most of the eighty one prizal lines that we 0:17:30.280 --> 0:17:35.200 saw back in March have now been reversed. Having said that, 0:17:35.560 --> 0:17:39.680 over the past few months, eighty one's have been more 0:17:39.760 --> 0:17:42.639 or less range bound at around ten percent yield to 0:17:42.680 --> 0:17:46.920 worst for Euro and dollar denominated the bonds, so eighty 0:17:46.960 --> 0:17:50.480 one yields they've they've basically reset to a higher level 0:17:50.520 --> 0:17:52.119 if you compare it with where we were back in 0:17:52.200 --> 0:17:58.800 January early February. This is mostly been due to higher 0:17:58.840 --> 0:18:04.280 rates rather than high spreads trading volumes in eighty one, 0:18:04.320 --> 0:18:07.040 so they have come down from the highs that we 0:18:07.080 --> 0:18:10.560 saw back in March. Some of this is probably due 0:18:10.600 --> 0:18:14.160 to the absence of eighty one issues between March and June. 0:18:15.000 --> 0:18:18.000 Some of it may also be due to seasonality over 0:18:18.000 --> 0:18:20.919 the quieter summer months. But it may also be the 0:18:20.960 --> 0:18:25.159 case that some investors have decided to no longer be 0:18:25.359 --> 0:18:29.439 involved in the eighty one space given their volatility and 0:18:29.480 --> 0:18:33.399 the risk of impromptu rule changes by governments as we 0:18:33.440 --> 0:18:38.280 saw in Switzerland, and that may have heard demand technicals 0:18:38.280 --> 0:18:42.679 and liquidity, and may also have made eighty one prices 0:18:42.920 --> 0:18:49.560 potentially more volatile. But if you compare current trading levels 0:18:50.359 --> 0:18:54.679 with previous years, eighty one trading volumes actually don't look all. 0:18:54.600 --> 0:18:58.600 That bad, so not really a huge impact then, I mean, 0:18:58.640 --> 0:19:01.760 the disappearance of this mass of institution credit Swiss. Other 0:19:01.840 --> 0:19:04.720 than a kind of a slap to the Swiss reputation 0:19:04.840 --> 0:19:09.480 for for you know, safe hands and you know solid banking, 0:19:10.400 --> 0:19:14.400 there hasn't really been that much long term impact on 0:19:14.400 --> 0:19:15.600 on on the market. 0:19:16.480 --> 0:19:20.159 Well, you know, maybe it's too soon to say, but 0:19:21.760 --> 0:19:24.560 you know. I started that by saying that the reader 0:19:24.600 --> 0:19:30.160 cross between Switzerland and other jurisdictions is limited. The readacross 0:19:30.200 --> 0:19:34.240 between credit Swiss and other European banks is also limited. 0:19:36.400 --> 0:19:42.840 Valuations have recovered, Trading volumes are down, but not massively so, 0:19:42.840 --> 0:19:45.000 so you know, by the look of things, things have 0:19:45.320 --> 0:19:49.160 normalized fairly quickly. But look, a precedent has been said, 0:19:49.440 --> 0:19:57.600 and I think some investors may have decided that, you know, 0:19:57.640 --> 0:20:01.560 this is just too wild a right and no longer 0:20:01.640 --> 0:20:02.760 wanted to be evolved in it. 0:20:03.800 --> 0:20:05.520 But if you bought some of that stuff during the 0:20:05.560 --> 0:20:07.600 height of the panic earlier this year, you would have 0:20:07.600 --> 0:20:10.199 made a lot of money. Are there's still opportunities out there? 0:20:10.200 --> 0:20:13.960 Are they're still cheap eighty one bonds? 0:20:14.960 --> 0:20:22.360 There are a few smaller issues, you know, issued by 0:20:23.000 --> 0:20:25.879 some smaller, more marginal banks that are trading at very 0:20:25.880 --> 0:20:30.360 wide levels, It's true. And then some of the Swiss 0:20:30.400 --> 0:20:35.040 Bank eighty one's I was away from ubs are also 0:20:35.200 --> 0:20:37.360 still trading at fairly wide levels. So I do think 0:20:37.359 --> 0:20:39.360 that there is a bit of a Swiss discount being 0:20:39.400 --> 0:20:43.440 applied to some of theirs. But some of those instruments, 0:20:43.480 --> 0:20:47.200 they are denominated in Swiss francs rather than in euros 0:20:47.640 --> 0:20:55.280 or dollars. So away from that, yeah, I think the 0:20:55.359 --> 0:20:57.960 large majority of the of the eighty one space has 0:20:58.080 --> 0:21:01.040 has has recovered quite quite nicely. 0:21:01.800 --> 0:21:04.480 Interesting, So let's talk about primary market issuance. You know, 0:21:04.600 --> 0:21:08.520 new debt sales in the US. The beginning of September, 0:21:08.560 --> 0:21:11.919 we kicked off with the busiest day in three years 0:21:12.000 --> 0:21:15.719 for primary high grade bond issuance. I mean that obviously 0:21:15.720 --> 0:21:18.360 includes debt of all types. But has the eighty one 0:21:18.520 --> 0:21:20.520 market also rebounded. 0:21:20.800 --> 0:21:23.920 Yeah, So the primary market in eighty one's was shot 0:21:24.000 --> 0:21:27.600 between March and to June. That has now reopened. We've 0:21:27.640 --> 0:21:33.320 seen i think seven banks issue mostly in euros, and 0:21:33.520 --> 0:21:36.879 all the newly issued eighty ones they are trading around 0:21:36.920 --> 0:21:40.200 bar or a little above it. So perhaps that could 0:21:40.200 --> 0:21:44.800 also be taken as an indication that the dust has settled, 0:21:44.840 --> 0:21:48.359 that you know, invested nerves have steadied, and eighty one 0:21:48.400 --> 0:21:50.680 issuers have also become a bit more confident. 0:21:51.880 --> 0:21:56.560 So let's talk about the calls your own the market has. 0:21:57.720 --> 0:22:00.919 According to Bloomberg News, there's about eighty four billion in 0:22:01.040 --> 0:22:04.440 notes that have calls over the next two years. Typically 0:22:05.000 --> 0:22:08.880 banks would call that debt and replace it with new debt, 0:22:08.920 --> 0:22:13.880 so that's you know, an issuance driver. But you've also 0:22:14.040 --> 0:22:16.000 noted non call risk. Can you talk a bit about 0:22:16.080 --> 0:22:18.520 the call and the non call risk and how that works. 0:22:19.840 --> 0:22:25.240 Yeah, So, until recently, there's always been expectation in Europe 0:22:25.520 --> 0:22:28.800 that eighty one bombs would get called at the first 0:22:28.840 --> 0:22:32.600 call date. Back in twenty twenty we saw the first 0:22:34.760 --> 0:22:38.640 cases of bombs North getting called a first call date 0:22:39.160 --> 0:22:41.679 something there was the first one but then decided to 0:22:41.720 --> 0:22:44.440 call later on, and then you had Deutsche Bank and Lloyd's. 0:22:46.119 --> 0:22:47.520 Since then, there have been a few others. In the 0:22:47.520 --> 0:22:50.960 fourth quarter of last year you had Rifis and Sabadel, 0:22:51.000 --> 0:22:53.960 but then Sabadel did a call later on, so there's 0:22:53.960 --> 0:22:56.960 been a few cases, had forth cases Going into this year, 0:22:59.160 --> 0:23:02.760 non core risks gone up because of the economics they've changed, 0:23:04.200 --> 0:23:09.080 you know, back end coopon reset indices, they have moved 0:23:09.119 --> 0:23:15.480 higher in line with higher rates, and as a result 0:23:15.520 --> 0:23:17.640 of that, you now have to be a bit more 0:23:17.680 --> 0:23:22.280 careful about this risk. You can no longer assume that 0:23:22.400 --> 0:23:27.520 every single eighty one bond will get called. The first 0:23:28.440 --> 0:23:30.720 thing you have to look at is the starting capital 0:23:30.720 --> 0:23:34.360 position of an issuer. If a bank is well capitalized, 0:23:34.400 --> 0:23:36.360 you know, then they have got discretion to do as 0:23:36.359 --> 0:23:39.199 they please. If that is not the case, then a 0:23:39.240 --> 0:23:45.120 bank will need to issue a replacement bond, and if 0:23:45.119 --> 0:23:47.919 it does so, then you have to look at the 0:23:48.000 --> 0:23:51.560