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

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

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Speaker 1: This week, we're very pleased to welcome Rob's Abel, global

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Speaker 1: head of liquid credit Strategies at Blackstone.

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Speaker 2: How are you, Rob, I'm great, Thanks for having me.

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Speaker 1: Thanks so much for joining us today. And we're also

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Speaker 1: delighted to welcome back on the show Lisa Lee, who

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Speaker 1: covers credit markets from London. Great to see you, Lisa,

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Speaker 1: thanks for having me. Also on the show, we're going

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Speaker 1: to be talking to David Haven's who covers non bank

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Speaker 1: lenders for Bloomberg Intelligence in New York. So do stay

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Speaker 1: with us. But first Rob's Abel with Blackstone. Great to

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Speaker 1: have you on the Credit Edge. You look at bonds, loans,

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Speaker 1: clos all the exciting stuff. Let's start though with an

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Speaker 1: easy one. It was supposed to be the year of

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Speaker 1: the bond, but most of the fixed income has been

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Speaker 1: hammered by rapidly rising yields. Meanwhile, higher funding costs and

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Speaker 1: an economic slowdown was supposed to cause a lot of

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Speaker 1: trouble for the riskiest companies, especially those with a lot

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Speaker 1: of debt, particularly if it was floating rate I leveraged loans,

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Speaker 1: and yet if you look at the returns bonds from

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Speaker 1: the worst rated companies and leverage loans have actually done

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Speaker 1: really well. What do you make of that, Rob? How

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Speaker 1: surprised are you by this outcome?

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Speaker 2: Sure? Well, I think what you described was is accurate.

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Speaker 2: The performance of the underlying fundamentals of the loans that

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Speaker 2: we're lending to has generally been very very good. The

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Speaker 2: performance going into this period of rising rates and the

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Speaker 2: growth trajectory was really strong, and so it's not surprising

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Speaker 2: that when you look at at most metrics, total return

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Speaker 2: for the loan as the classes is up over ten percent,

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Speaker 2: defaults are and continue to be pretty pretty minimal. So

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Speaker 2: the performance characteristics have been good. But the most important

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Speaker 2: thing to us, I think is that the underlying fundamentals

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Speaker 2: have been have been really strong and supportive of those

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Speaker 2: those metrics.

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Speaker 3: Rob, Do you think those fundamentals will keep onmb being

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Speaker 3: strong as we have a longer for higher for longer period.

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Speaker 2: Sure, I think it's a good It's a good question.

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Speaker 2: And for sure, you know our team, and I'm sure

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Speaker 2: most managers their teams are and continue to shock their

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Speaker 2: portfolios for different rate scenarios. But in a period of

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Speaker 2: rising rates, you know, in what we're seeing in our

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Speaker 2: companies is that the performance has been strong, but performance

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Speaker 2: has been slowing. As a credit investor, that's not necessarily

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Speaker 2: the worst thing in the world, but I think that

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Speaker 2: we should continue to see that performance, you know, continue

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Speaker 2: to moderate. And then the question is, oh case, so

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Speaker 2: so what what does that mean as a credit investor?

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Speaker 2: And I think the backdrop and where you started off,

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Speaker 2: is that the rate environment has made it such that

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Speaker 2: the yield profile of of really first lean protected assets,

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Speaker 2: whether it's in a COLO structure or just a broadly

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Speaker 2: syndicated loan or even a direct lending loan is basically

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Speaker 2: you know, a double digit a double digit yield. So

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Speaker 2: I think that the backdrop as a credit investor is

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Speaker 2: that performance has been slowing. On fundamentals, we don't necessarily

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Speaker 2: need double digit revenue growth for these companies. We just need,

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Speaker 2: you know, stability, and the yield profile of of these

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Speaker 2: companies given the rate and backdrop, has been really really attractive.

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Speaker 1: But are you not surprised there? Well, just going back

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Speaker 1: to my original point that you know, rates did really

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Speaker 1: jump very quickly and much further than anyone really expected

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Speaker 1: that these borrowers can actually keep up with the interest payment.

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Speaker 2: We're not surprised because again, I think we look at

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Speaker 2: it from a very mathematical perspective, and going into this

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Speaker 2: rising rate environment, we were modeling. We're modeling this what's

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Speaker 2: happened right now in terms of increasing base rates, and

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Speaker 2: then you can model out, Okay, what does that mean

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Speaker 2: for cash flow coverage for these companies? Going into this,

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Speaker 2: cash flow coverage was at all time highs. And so

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Speaker 2: even with so for moving up to where it is

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Speaker 2: right now, we're still steing very, very healthy cash flow

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Speaker 2: coverage from these companies. And I think we always get

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Speaker 2: to ask the question, well, are you worried that somehow

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Speaker 2: as rates go up, we're going to see more default

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Speaker 2: activity as a result. And my view is that for

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Speaker 2: a company that's otherwise a performing business has a higher

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Speaker 2: interest expense burden, I don't think that we ever see

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Speaker 2: those companies as being default candidates. I think that as

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Speaker 2: long as the business is performing, there's sponsors supportive capital

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Speaker 2: markets are supportive. I think for those businesses that already

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Speaker 2: have their own idiosyncratic issues. For sure, a slow growth

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Speaker 2: environment and a higher rate environment will be issues for

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Speaker 2: those companies, and we have seen defaults pick up this

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Speaker 2: year even though they're still basically in line with historical averages.

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Speaker 3: So the thought has been that there might be a

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Speaker 3: soft landing. But what if the Federal Reserve can't maneuver

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Speaker 3: that and we have a harder landing. How do you,

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Speaker 3: as a credit investor brace for that?

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Speaker 2: Sure, I think that a couple of things. One is

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Speaker 2: now more than ever. Credit selection is just absolutely critical.

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Speaker 2: Making sure that we're staying in Blackstone. We'd like to

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Speaker 2: talk about good neighborhoods, make sure that we're staying in

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Speaker 2: good neighborhoods, and make sure that we're lending to larger

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Speaker 2: companies that are more resilient and with good businesses and

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Speaker 2: good management teams. So I think, just like any other investor,

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Speaker 2: if we think that you know, we're concerned about the

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Speaker 2: fundamental backdop, making sure that we're positioned correctly, and I

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Speaker 2: think that the yield environment is more than compensating you

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Speaker 2: for that for that risk.

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Speaker 3: Rob, you're the global head and we're based right now.

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Speaker 3: You're in London, So I would love to hear your

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Speaker 3: take on the difference between what you see between us

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Speaker 3: and European credit at the moment.

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Speaker 2: Sure, it's a good question, and we've been spending a

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Speaker 2: lot of time looking at that as it relates to

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Speaker 2: actually the COLO market, and so looking at the underlying

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Speaker 2: positions in US clos VERSUS European clos, and both of

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Speaker 2: those markets do have their own nuances. The US market

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Speaker 2: tends to have greater diversity in the underlying collateral. The

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Speaker 2: European market has relatively less diversity, but there are quality

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Speaker 2: differences and biases in each of those portfolios. I would

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Speaker 2: say that in Europe what we've seen is also a

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Speaker 2: very very benign default environment. We've also tended to see

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Speaker 2: higher recoveries in the European market, which I think is interesting.

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Speaker 2: And so if you're looking at both structures, the US

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Speaker 2: market I think is benefits from greater trading liquidity. I

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Speaker 2: think if you look at Europe, you know, the fundamentals

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Speaker 2: from a default standpoint or even a triple C standpoint,

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Speaker 2: seem to be a bit better. Right now.

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Speaker 3: One of the hot topics this year has been private

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Speaker 3: credit clos. I know you do both regular way clos

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Speaker 3: and private credit clos. What's your thought on the growth

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Speaker 3: of the private credit CLO market, and do you think

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Speaker 3: there'll ever be one in Europe?

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Speaker 2: Well, starting with that last point, I think for sure,

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Speaker 2: I think it's an interesting topic. It's just it's showing

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Speaker 2: that the markets have continued to evolve. We've seen conversions

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Speaker 2: of of financing from on the large side, from the

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Speaker 2: BSL market they're probably syndicated loan market into the private

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Speaker 2: credit market. And now we're seeing that same convergence in

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Speaker 2: the COO side as we're basically lending to larger companies

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Speaker 2: and we're secured, we're using that same technology to secure

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Speaker 2: ties and finance those companies, and so I don't see

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Speaker 2: any reason why we wouldn't continue to see that evolution,

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Speaker 2: both from an asset perspective, but also from an investor

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Speaker 2: perspective and a geographical perspective as well.

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Speaker 1: What about the maturity will for leverage loans and junk

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Speaker 1: bonds that needs to be refinanced, it's going to be

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Speaker 1: much more expensive. Is that not going to be a

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Speaker 1: big problem coming up?

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Speaker 2: I'll give the same answer as I gave previously on

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Speaker 2: your question around interest expense. I think for companies that

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Speaker 2: are otherwise healthy, in performing companies, there is a pretty

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Speaker 2: active financing or refinancing market for those businesses, both in

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Speaker 2: the broadly syndicated loan market as well as in the

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Speaker 2: private or direct market. I think for businesses that are

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Speaker 2: already having their own issues, whatever those are, I think

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Speaker 2: for sure they're going to have difficulty refinancing. And I

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Speaker 2: think when you look at kind of default activity right now,

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Speaker 2: it's basically those businesses. It's not a big part of

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Speaker 2: the market, but I think that that's what basically characterizes

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Speaker 2: that that tawer risk of the market. But if you're

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Speaker 2: talking about a company that's otherwise performing, interest expenses higher

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Speaker 2: or the cost of capital is higher, those companies I

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Speaker 2: think pretty easily get refinanced in either the BSL market

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Speaker 2: or the direct lending market.

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Speaker 3: Do you think it's a problem that COLO issuance has

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Speaker 3: been less than robust and you look at resets, Your

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Speaker 3: forty percent of colos are going to go out of

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Speaker 3: the reinvestment periods by the end of the year. What

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Speaker 3: does that do to this ability for issue as to refinance.

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Speaker 2: Sure? So I think the answer, sure, unfortunately is a

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Speaker 2: bit nuanced. And so you're pointing out a data point

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Speaker 2: that by the end of this year, we think that

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Speaker 2: forty percent of the market will go out of reinvestment period.

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Speaker 2: I think that that number ebbs and flows with arbitrage.

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Speaker 2: As the arbitrage looks more interesting, which is really a

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Speaker 2: function of triple A levels, many of those transactions get

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Speaker 2: refined and reset even though at this moment they're not.

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Speaker 2: And I think that for companies that are or for

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Speaker 2: loans that are in those structures, many of those structures

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Speaker 2: have the ability to actually extend or refinance in those

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Speaker 2: within within the COLO, even if the CLO is out

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Speaker 2: of the the reinvestment period. And I think it all

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Speaker 2: just comes down to where we started this conversation, which

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Speaker 2: is what's the view of the underlying company and the

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Speaker 2: underlying fundamentals of those companies. And for those companies that

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Speaker 2: are performing, whether they're in a CLO that's in reinvestment

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Speaker 2: or out of reinvestment, there'll be a capital markets or

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Speaker 2: there is a capital market's takeout for them, both in

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Speaker 2: the BSL side and the direct side.

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Speaker 1: When we look at the default risk, you know, we're

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Speaker 1: talking a lot about the recession risk well than anything.

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Speaker 1: You know, it has continued to be delayed economies. I

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Speaker 1: think expects a recession starting later this year. In that case,

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Speaker 1: defaults and spreads should be much much higher, shouldn't they.

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Speaker 2: I think when we look at the default environment right now,

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Speaker 2: we're sort of mid two's in the US, and if

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Speaker 2: you that's for the index, if you look at manager's

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Speaker 2: default records, I think that's on average below one percent

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Speaker 2: right now, depending on what bank estimate you look at.

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Speaker 2: I think we think that the default rate in the

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Speaker 2: US probably goes somewhere into the threes, which is again,

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Speaker 2: I think, essentially align with long term averages, and Europe

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Speaker 2: is probably similar. So I think we are focused on

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Speaker 2: the tail risk of the market and tail risk of portfolios,

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Speaker 2: and making sure that we're positioned with the best companies

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Speaker 2: and best borrowers and the best industries that we can be.

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Speaker 2: I think that the direction of travel for default rate

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Speaker 2: is probably north from here, but I also think that's still,

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Speaker 2: you know, a low single digit type of number.

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Speaker 3: Are you worried about worried at all about the recovery levels?

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Speaker 3: The recovery levels this year's haven't been great, but there's

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Speaker 3: some argument that maybe they will pick up because the

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Speaker 3: worst companies go first, or is it something that we're

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Speaker 3: seeing a secular shift?

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Speaker 2: Well, I think that's definitely true, Lisa, and I'm glad

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Speaker 2: that you said that, because I think so often there's

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Speaker 2: a recovery rate at a trough period of time is

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Speaker 2: then compared to a long term average and we say, okay, well,

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Speaker 2: recovery rates are low this year in this period of stress,

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Speaker 2: whatever the period of stress is, whether it's the GFC

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Speaker 2: or COVID, and then they're compared to a twenty year

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Speaker 2: long term average. And so I do think that you

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Speaker 2: need to look at that point in time exactly is

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Speaker 2: the way that you you articulate it. But I would

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Speaker 2: also say that particularly in the US, the LME liability

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Speaker 2: management exercises that we have seen, even though the number

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Speaker 2: of those situations has been relatively small, I think for

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Speaker 2: sure that hasn't had an impact on recoveries. And as

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Speaker 2: I said before, we haven't really seen that dynamic in Europe,

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Speaker 2: which I think is pretty interesting.

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Speaker 1: So, just to wrap it up before we talk to

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Speaker 1: David Haven's a Bloombak Intelligence, you seem very optimistic, you know,

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Speaker 1: the outlook seems very benign, but again, rates do keep rising,

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Speaker 1: the earnings are under pressure the recession. You know, maybe

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Speaker 1: that doesn't happen immediately, but it is coming. Do we

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Speaker 1: not really you know?

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Speaker 3: Is it?

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Speaker 1: Is it not to to rosy in this in this environment,

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Speaker 1: I mean, surely we expect more bankruptcy and distress at

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Speaker 1: some point.

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Speaker 2: Well, I think Lisa, who knows me, knows that I'm

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Speaker 2: not normally a rosy person. But I will say this

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Speaker 2: backdrop in credit is, you know, we haven't seen anything

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Speaker 2: like this from an opportunity set in in quite some time.

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Speaker 2: From a yield perspective and return perspective, I agree. I think,

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Speaker 2: you know, in a rising rate environment, that is going

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Speaker 2: to translate to slower growth for the companies that we're

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Speaker 2: lending to. I think that favors credit selection and sector selection,

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Speaker 2: as we talked about, and I think default rates tick

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Speaker 2: up mildly. But I think that all of that is

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Speaker 2: is you know, mitigated again by selection, and I think

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Speaker 2: relative to the opportunity set, it's it's you know, it's

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Speaker 2: it's actually a pretty interesting time. And also, you know,

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Speaker 2: and we look back at the history of volatility, I

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Speaker 2: think some of that those periods have really been our best,

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Speaker 2: our best moments for credit opportunity, and we expect that

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Speaker 2: we'll continue to see those periods and we're you know,

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Speaker 2: from a buying an investment perspective. Again, as long as

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Speaker 2: you're making good credit selection, those are great opportunities.

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Speaker 1: Great stuff. Rob's Abel, Global head of Liquid credit Strategies

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Speaker 1: at Blackstone. Thank you so much for joining us. Thanks

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Speaker 1: for having me and Lisa Lee with Bloomberg News in London.

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Speaker 1: Brilliant to see you again.

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Speaker 3: Cheers, great, Thank you so much for having me. Bye bye.

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Speaker 1: So, as I mentioned earlier, we're joined by David Havens

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Speaker 1: with Bloomberg Intelligence in New York. Besides being highly knowledgeable

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Speaker 1: about non bank lenders, he's a football fan who used

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Speaker 1: to be a DJ. So this will be good. How's

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Speaker 1: it going, David?

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Speaker 4: Very good? Thank you great.

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Speaker 1: So we're here to talk about middle market lending and

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Speaker 1: private credit. It's a rapidly growing market, tons of excitement

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Speaker 1: about it at the moment. All the big asset managers

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Speaker 1: are in chasing fat returns. It's the golden age, or

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Speaker 1: so they say. But break it down for us, David,

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Speaker 1: Why all the hype right now?

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Speaker 4: Well, it's been one of the fastest growing areas of

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Speaker 4: finance for a couple of years. We've seen this sector

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Speaker 4: come out of about come from almost nothing not too

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Speaker 4: long ago to over trillion dollars in total assets. We've

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Speaker 4: also seen the sector perform quite well versus a number

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Speaker 4: of different investment sectors. Private credit so far has had

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Speaker 4: relatively low volatility and above average return, So it's opened

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Speaker 4: a lot of eyes and a lot of people have

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Speaker 4: been drawn to it, particularly when rates were extremely low

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Speaker 4: and yields are very hard to come by.

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Speaker 1: But just so everyone knows what we're talking about, because

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Speaker 1: there is I think quite a lot of confusion what

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Speaker 1: exactly do we mean by private credit? And also middle

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Speaker 1: market lending? What are we talking about here?

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Speaker 4: Yeah, so middle market lending is lending to mid sized

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Speaker 4: business is just like what it sounds like. It's not

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Speaker 4: lending to the fortune five hundred. It's lending to the

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Speaker 4: next echelon of companies below that. So you're talking about

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Speaker 4: companies and might have five hundred million to a billion

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Speaker 4: dollars of total revenues or earnings, however you want to

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Speaker 4: measure that. And that area is an area that was

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Speaker 4: as a result of some of the changing the bank regulations,

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Speaker 4: has sort of fallen between the cracks. Banks aren't really

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Speaker 4: being are actually kind of being disincentivized from lending to

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Speaker 4: those businesses, and into that vacuum you've gotten some private

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Speaker 4: lenders come in, You've gotten business development companies. And it's

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Speaker 4: kind of a wide array what private credit really means.

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Speaker 4: A lot of it has to do with funding private

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Speaker 4: equity deals, and other aspects of it have to do

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Speaker 4: with funding regular standalone companies, family businesses, things like that, and.

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Speaker 1: The private nature of it. I mean, it sounds all

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Speaker 1: a bit shady, but you're just going into a dog

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Speaker 1: room somewhere and we're just negotiating why is it private?

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Speaker 1: It sounds why the would so.

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Speaker 4: The differentiation is really, rather than going to a broad

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Speaker 4: audience of public bondholders, the company that's borrowing the money

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Speaker 4: is going directly to a lender or several lenders to

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Speaker 4: get the financing in place. It's what you would have

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Speaker 4: thought of as being traditional corporate bank lending twenty thirty

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Speaker 4: years ago.

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Speaker 1: I mean, we've both been doing this a while. It

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Speaker 1: sounds like old school just loans to me. But let's

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Speaker 1: talk about BBC's business development corporations. Are they how are

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Speaker 1: they structured? Why are they so hot?

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Speaker 3: Yeah?

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Speaker 4: So, business development companies, I think achieve a couple of things.

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Speaker 4: First off, there's a degree of tax benefit associated with

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Speaker 4: business development companies that aren't necessarily available to some other

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Speaker 4: funds like Reeds. Business development companies, which actually came about

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Speaker 4: at about the same time under US tax codes and

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Speaker 4: investment regulations, don't pay income taxes. The income from these

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Speaker 4: entities gets pass through directly to the investors, who then

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Speaker 4: pay the taxes on the earnings. And I think that

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Speaker 4: what we've seen recently is business development companies have come

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Speaker 4: out of the shadows a bit as private equity concerns

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Speaker 4: and alter alternative asset managers like Blackstone, kkar Areas and

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Speaker 4: others have found sort of a niche where they can

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Speaker 4: operate with these business development companies that make sense for

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Speaker 4: a group of new investors that they're courting a largely

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Speaker 4: retail audience.

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Speaker 1: And the BBC is essentially they borrowing in let's say

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Speaker 1: public markets they were shing bonds and they're lending to

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Speaker 1: smaller companies, middle market companies privately directly bilaterally. Is that right?

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Speaker 4: That's right? And the basically what they're doing is they're

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Speaker 4: doing some spread arbitrage. They're leveraging their business somewhat, so

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Speaker 4: you generally have about two dollars of loans for every

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Speaker 4: dollar of equity at a business development company. The business

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Speaker 4: development company goes to a group of banks, it goes

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Speaker 4: to public bondholders to borrow money. It borrows money at X,

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Speaker 4: and then it finds customers. Borrowers them elves come to

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Speaker 4: the business development company for loans and rather than paying X,

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Speaker 4: they play they generally pay X plus six hundred basis

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Speaker 4: points six percent or so.

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Speaker 1: So the bonds of the BDC's how are they trading

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Speaker 1: against similar debt? Is there some relative value the I.

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Speaker 4: Think there's definitely relative value, no question about that. If

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Speaker 4: you look at where the investment grade business development companies trade,

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Speaker 4: they're generally triple B issuers. Where they trade relative to

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Speaker 4: triple B financials. Overall, there's several hundred basis points of

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Speaker 4: excess spread at business development companies. I think that that

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Speaker 4: probably reflects a couple of different things. One, I think

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Speaker 4: that there's some trepidation in the market regarding private credit.

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Speaker 4: It does sound a little bit scary, I think, as

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Speaker 4: you mentioned before, and then the second thing is that

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Speaker 4: we've seen this over the years, is that some investors

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Speaker 4: view business development companies and their alternative asset manager advisors

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Speaker 4: as de facto competitors, and there's a reluctance to fund

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Speaker 4: some of those competitors. And then finally, the economy is

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Speaker 4: a little bit soft. Interest rates have been going up,

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Speaker 4: You're beginning to see coverage ratios at the borrower level decline.

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Speaker 4: So there's concern that there's going to be an increased

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Speaker 4: level of default rate activity from very low levels within

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Speaker 4: the portfolios.

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Speaker 1: So yeah, let's talk about the scary parts of it.

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Speaker 1: I mean, high yield lending in the shadows. We don't

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Speaker 1: really know what the risks are. We can't see them,

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Speaker 1: you know, the transparency issues. I mean, how worried do

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Speaker 1: you think we should be. Let's say we are heading

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Speaker 1: into sorry, a recession, how worried should we be about

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Speaker 1: a big increase in defaults?

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Speaker 4: I think it's definitely going to be coming down the pike,

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Speaker 4: and you can look at you know, and you don't

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Speaker 4: have to depend on me. Moody's came out with a

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Speaker 4: report back in May where they estimate that the default

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Speaker 4: rate activity on single B rated credits the sort of

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Speaker 4: things that you'd find at a business development company. Expect

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Speaker 4: that to go up to about five point six percent

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Speaker 4: from three percent over the next year. Our own my

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Speaker 4: own equity colleagues here estimate that you're going to see

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Speaker 4: BDC portfolio default rates non accrural rates go from a

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Speaker 4: less than two percent to three point four percent in

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Speaker 4: the next year. So there's definitely going to be or

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Speaker 4: there's definitely the expectation that there's going to be deterioration. However,

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Speaker 4: it's important to put all of this into context. Like

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Speaker 4: I said earlier, there's two dollars of loans for every

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Speaker 4: dollar of equity at these business development companies. So if

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Speaker 4: you see let's say a four percent default rate, and

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Speaker 4: you have a fifty percent loss on each one of

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Speaker 4: those loans that defaults, you're only talking a couple of

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Speaker 4: percentage points of the business development company's equity capital cushion.

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Speaker 4: So these companies have the ability to actually manage these

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Speaker 4: losses and probably quite a few more losses. And then

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Speaker 4: you can compare that to other lenders. Banks, for example,

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Speaker 4: probably have I don't know eight or ten dollars of

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Speaker 4: investments or assets for every dollar of equity, so there

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Speaker 4: are more highly leveraged business You see that at life

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Speaker 4: insurance companies as well, So these are not highly leveraged

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Speaker 4: entities of business development companies. They do lend to leverage borrowers,

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Speaker 4: but the BDCs themselves are not highly leveraged.

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Speaker 1: So is the risk? Then you mentioned that the triple

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Speaker 1: B right, which is the lowest tier of investment grade,

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Speaker 1: is the risk? Then more like that they would be

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Speaker 1: cut to junk at some point.

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Speaker 4: Yeah, I think that you'd probably have to have a

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Speaker 4: very severe recession in order to see the business development

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Speaker 4: companies see their ratings get reduced into the double B category.

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Speaker 4: When the rating agencies assign ratings to these entities, they

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Speaker 4: don't assign them on the basis that there's going to

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Speaker 4: be rainbows and unicorns in the economy forever. They assign

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Speaker 4: ratings based on a reasonable worst case scenario that would

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Speaker 4: factor in a fairly significant economic downturn.

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Speaker 1: So I just step back from the investors side, though,

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Speaker 1: I mean, you know, private credit, BBC's all this stuff.

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Speaker 1: They're obviously making a bit more return because they lend.

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Speaker 1: You know, you lose the transparency, you lose liquidity, you

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Speaker 1: get a bit more return. Is it really worth it

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Speaker 1: for most investors given that you know they can get

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Speaker 1: five percent now on a Treasury bond.

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Speaker 4: Well, that's that's actually a very good question.

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Speaker 3: Now.

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Speaker 4: Now, one of the reasons that you saw business development

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Speaker 4: companies and private credit grows so much during period of

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Speaker 4: zero interest rates is that rates certainly just weren't available.

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Speaker 4: So business development companies private credit was sort of an

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Speaker 4: oasis in the desert. You know, the desert has been

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Speaker 4: filled with water now in the form of higher interest rates.

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Speaker 4: But now you're contending with inflation. So if you want

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Speaker 4: to get a real return again, you have to look

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Speaker 4: to higher yielding sectors. Yes, you can get five percent

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Speaker 4: in a thirty you know, in a short term money

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Speaker 4: market fund or something, but you're matching inflation. If you

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Speaker 4: want to get a real return, then you have to

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Speaker 4: take on a little bit of risk in some way

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Speaker 4: or another.

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Speaker 1: So, just to wrap it up, David, give us your

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Speaker 1: outlook for the next let's say twelve months or so.

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Speaker 1: What are you most worried about and where do you

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Speaker 1: see the opportunity.

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Speaker 4: Yeah, I think the real concern is simply in the economy. Now,

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Speaker 4: the good news there is that we're beginning to see

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Speaker 4: the expectation of a recession. At least the consensus expects

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Speaker 4: a recession to be somewhat lower today than it was

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Speaker 4: a few months ago, but the economy continues to be

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Speaker 4: a little bit soft, the messages continue to be mixed.

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Speaker 4: Interest rates are applying pressure to the borrowers at private

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Speaker 4: credit lenders, and all of that is probably going to

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Speaker 4: result in an increased level of default rate activity. And

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Speaker 4: then I think we also have to turn our eyes

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Speaker 4: to the geopolitical situation, which is obviously getting interesting unfortunately,

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Speaker 4: and that could begin to, you know, sort of weigh

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Speaker 4: on overall market sentiment and things like that. Business development companies,

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Speaker 4: in the eyes of investors are probably a higher beta asset,

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Speaker 4: meaning that if the market moves by x basis points,

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Speaker 4: they might move a double that. So if there's some

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Speaker 4: downward of volatility in the markets, I would expect business

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Speaker 4: development companies to maybe get hurt. But you've got a

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Speaker 4: lot of cushion in the form of excess rates or

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Speaker 4: excess yields at the same time.

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Speaker 1: David Havens with Bloomberg Intelligence in New York, thank you

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Speaker 1: so much for joining us pleasure. We look forward to

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Speaker 1: having you back on the show very soon, and do

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Speaker 1: check out David's great analysis on the Bloomberg terminal. Thanks again.

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Speaker 1: Also to Rob Zabel, head of Liquid Credit and clos

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Speaker 1: at Blackstone, and Lisa Lee from Bloomberg News. Read all

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Speaker 1: of Lisa's great scoops on the Terminal and of course

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Speaker 1: at Bloomberg dot com. And please do subscribe wherever you

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Speaker 1: us a review, tell your friends, or email me directly

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Speaker 1: at jcrumb eight at Bloomberg dot net. That's J C

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Speaker 1: R O M B I E. As in my surname

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Speaker 1: and the number eight at Bloomberg dot net. I'm James Crombie.

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Speaker 1: It's been a pleasure having you join us again next

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Speaker 1: week on the Credit Edge