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Speaker 1: Hello, Welcome to the Credit Edge, a weekly monkey's podcast.

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

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Speaker 2: And I'm Rob Schiffman, co head of US credit Research

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Speaker 2: and a senior analyst covering tech at Bloomberg Intelligence. This week,

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Speaker 2: we're very pleased to welcome Amanda line Hum, chief credit

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Speaker 2: strategist at Goldman Sachs. How are you, Amanda?

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Speaker 3: I am great. Thank you both for having me.

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Speaker 2: Oh so glad to have you here. Amanda returned to

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Speaker 2: Goldman earlier this year after a three year stint as

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Speaker 2: head of macro credit research at black Rock. She's also

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Speaker 2: been a longtime friend of Bloomberg, appearing regularly on our

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Speaker 2: TV and radio programs and our conferences, where she's known

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Speaker 2: for detailed market insight and clear forward looking views. Hopefully

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Speaker 2: as a Nova alum, you're rooting for Nicks this week,

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Speaker 2: along with tighter spreads.

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Speaker 4: That's right, although the spreads Foregas is a little nuanced,

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Speaker 4: but we're going to do it.

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Speaker 3: Yeah, but yes, absolutely to the mix.

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Speaker 1: So as you say, credit does look great at a

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Speaker 1: macro level. Spreads are about the titles they've ever been

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Speaker 1: that would just very little risk in the corporate debt market.

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Speaker 1: But is this as good as it gets, Amanda? I mean,

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Speaker 1: the outlook for the US economy is a lot tougher

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Speaker 1: than need in a few months ago. We're no longer

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Speaker 1: talking about rate cuts. If anything, the next move is

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Speaker 1: a hike. Plus there's a ton of debt issuance coming

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Speaker 1: to rebalance a market that's been technically undersupplied for years.

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Speaker 1: Where do we go from here?

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Speaker 3: That is right? So I think you've framed it well.

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Speaker 4: It feels as though were priced for perfection in credit

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Speaker 4: across most markets, not all. There are some laggards like

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Speaker 4: Triple c's and parts of European high yield that I

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Speaker 4: would kind of set to the side.

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Speaker 3: But I think you've said it well.

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Speaker 4: Spreads are tight to the pre war levels when the

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Speaker 4: facts on the ground have unquestionably become more challenging. And

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Speaker 4: I would say that combination of growth, inflation, and monetary

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Speaker 4: policy relative to the start of the year is more

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Speaker 4: of a headwind than I think many of us expected

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Speaker 4: coming into twenty twenty six, especially true in Europe, and

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Speaker 4: I think what gives us some pauses. We look at

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Speaker 4: valuations and in many instances they're tight or right around

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Speaker 4: the pre war levels, and so that is this uncomfortable

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Speaker 4: tension that we have in the credit market. Said another way,

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Speaker 4: it's kind of worth unpacking why are we at these

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Speaker 4: tight levels, And as we talked about in some of

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Speaker 4: our notes recently, we actually think this is in large

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Speaker 4: part due to the technical backdrop in credit, specifically the

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Speaker 4: demand from yield based in buyers buyers like pensions and

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Speaker 4: insurance companies.

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Speaker 3: And I think it's.

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Speaker 4: Always a challenging dynamic to hinge your relative value view

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Speaker 4: on technicals as opposed to fundamentals. But as you know,

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Speaker 4: in credit, the technicals are such a large part of

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Speaker 4: the story, and so that's I would say, a very

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Speaker 4: astute dynamic and relative value tension that we've been having

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Speaker 4: to navigate over the past few months. And I would

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Speaker 4: say it's really been in place in corporate credit, this

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Speaker 4: dynamic between tight spreads and wide yields or high yields

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Speaker 4: for a couple of years, but I think it's gained

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Speaker 4: more prominence recently because again a lot of market participants

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Speaker 4: that we speak to are expecting spreads to move wider,

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Speaker 4: and also the rate environment has recently repriced higher as well.

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Speaker 4: We're off the peaks in recent days, but that's also

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Speaker 4: inflected higher, and so it's brought this conversation back.

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Speaker 3: To the surface.

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Speaker 2: So how much tighter did you think we can run?

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Speaker 2: If we go back to the end of twenty twenty four.

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Speaker 2: I remember a lot of strategists calling for IG spreads

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Speaker 2: in the mid fifties, and the difference now, though fundamentals

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Speaker 2: might be pretty good and technicals might be better, but

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Speaker 2: we don't have this We didn't have the same inflationary environment,

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Speaker 2: we didn't have necessarily the same macro war style risk,

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Speaker 2: we didn't have the same energy problems. How much longer

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Speaker 2: can this technical run last?

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Speaker 4: Exactly well, So to be very clear, our spread forecasts

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Speaker 4: actually have us moving wider from here through midyear and

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Speaker 4: then a bit of recovery through the second half of

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Speaker 4: the year. But even our wider spreads only really put

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Speaker 4: credit around the three year averages. Again, because we're trying

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Speaker 4: to incorporate what is the solid fundamental starting point, plus

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Speaker 4: supportive technicals, and what I would characterize as a good.

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Speaker 3: Enough growth backdrop. So I had mentioned that the.

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Speaker 4: Growth, inflation and monetary policy mix has become more challenging

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Speaker 4: relative to the start of the year, but in the US,

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Speaker 4: for example, our economists are expecting two point one percent

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Speaker 4: real GDP growth That is below trend, but that's not

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Speaker 4: terrible for credit. To your point, I think it's really

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Speaker 4: difficult to see spreads moving materially tighter from here, because,

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Speaker 4: as you mentioned, we're trying to digest not just a

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Speaker 4: more challenging growth inflation monetary policy mix, but record supply.

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Speaker 4: Our call for supply this year in the USIG market

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Speaker 4: is two point one trillion, which unadjusted for inflation, would

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Speaker 4: be the highest on record in the post financial crisis era.

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Speaker 4: So that to us is a challenging dynamic. I would say,

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Speaker 4: really for credit investors, if you're allocating to this assa class,

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Speaker 4: we recommend allocating because of carry and income and yield,

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Speaker 4: not because there's material scope for spreads to move tighter

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Speaker 4: and boost total returns, and also because there's material scope

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Speaker 4: for rates to move lower in boosting total returns. And

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Speaker 4: I think that's been different relative to past times in

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Speaker 4: the cycle. I will say, though, and.

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Speaker 3: Rob you know this.

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Speaker 4: I mean, over the past few years we've had a

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Speaker 4: pretty constructive view on credit. And you use the twenty

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Speaker 4: twenty four example and kind of where folks were thinking

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Speaker 4: about where spreads could go. I think twenty twenty one

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Speaker 4: is actually a really good example. Back in twenty twenty one,

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Speaker 4: spreads were at the tight end of the range, and

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Speaker 4: the yield backdrop was much less supportive. So I think

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Speaker 4: that context is important. We've been here before. We've been

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Speaker 4: in these tight zip goes before, as you alluded to,

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Speaker 4: though in twenty twenty one, we were dealing with the

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Speaker 4: post pandemic reopening of the economy, significant inflection upwarding growth

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Speaker 4: and earnings, so the backdrop was different. But I do

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Speaker 4: think it kind of underscores the point that this yield backdrop,

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Speaker 4: being as supportive as it is, could cause spreads to stay.

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Speaker 3: In this tight range for a while.

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Speaker 4: I don't think there's a lot of scope for us

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Speaker 4: to move materially tighter, but I do think we could

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Speaker 4: kind of hang out in the zip code. But you know,

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Speaker 4: we're sticking with our spread forecast because I think absent

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Speaker 4: some near term concrete resolution in the geopolitical landscape to us,

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Speaker 4: just the path for inflation and growth appears more challenging

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Speaker 4: from here.

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Speaker 2: And why are technical so shry? I know you've talked

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Speaker 2: about index constituents with higher credit quality in the indices

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Speaker 2: now than there were a few years ago, but with

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Speaker 2: so much supply, you think it would be the other way,

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Speaker 2: that people would just be waiting to get larger new

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Speaker 2: issue concessions and backing off as all this historic supply

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Speaker 2: was coming.

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Speaker 4: Sure, So a couple of things. The technical that I

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Speaker 4: think is probably most relevant to the corporate credit universe

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Speaker 4: is on the demand side, this yield based buyer. And

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Speaker 4: so we did some work on this a couple of

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Speaker 4: weeks ago, kind of really trying to quantify how deep

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Speaker 4: is this bid and can it.

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Speaker 3: Persist from here.

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Speaker 4: So to answer the first question, let's use the US

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Speaker 4: corporate credit market as an example. We estimate that pension

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Speaker 4: and insurance holdings of US dollar corporate credit is upwards

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Speaker 4: of six point four trillion. That's around forty percent of

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Speaker 4: the market. And that number is probably understated because if

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Speaker 4: you think about insurance companies and pensions that are routing

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Speaker 4: their demand through asset managers that won't get picked up

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Speaker 4: as insurance and pension it would fall into the kind

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Speaker 4: of mutual fund etf bucket. So starting point is a

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Speaker 4: really sizeable buyer base that is almost spread agnostic and

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Speaker 4: really focused on book yield and income generation on top

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Speaker 4: of that, so we dug into okay, well, what could

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Speaker 4: cause the bond allocations within that bucket of yield based

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Speaker 4: investors to increase. So we'll take pensions first, corporate pensions

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Speaker 4: and this is using the Milliman one one hundred Pension index.

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Speaker 4: Corporate pensions are now at the most funded level that

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Speaker 4: they've been since two thousand and seven, which is pretty remarkable,

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Speaker 4: of course, driven by the backup in rates which increases

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Speaker 4: the discount rate and the strong investment performance. The typical

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Speaker 4: pension glide path would tell you that as your funded

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Speaker 4: ratio improves again worth the highest since two thousand and seven,

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Speaker 4: your fixed income allocation should also improve and increase, and

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Speaker 4: that would be inclusive of high quality corporate bonds because

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Speaker 4: that's typically the discount rate that pensions use. So you've

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Speaker 4: got you have a tailwind from the corporate pensions first

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Speaker 4: and foremost. The public pensions have also seen an improvement

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Speaker 4: in their funded ratios, although not to the same extent.

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Speaker 4: And then on the insurance side, what we found, and

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Speaker 4: this is data from a combination of the NAIC in

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Speaker 4: SNL or SMP capital IQ, is that corporate bond allocations

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Speaker 4: within or i should say fixed income allocations within insurance

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Speaker 4: companies are actually they're ten percentage points below the twenty

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Speaker 4: ten level, and you can think why in this kind

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Speaker 4: of lower rate environment that prevailed for much of the

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Speaker 4: period between the financial crisis and the pandemic, insurance companies

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Speaker 4: have increased their exposures to scheduled bassets, which includes alternatives

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Speaker 4: certain mortgage loans for property, casually insurance companies, common equities.

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Speaker 4: So it is our view that now that you have

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Speaker 4: the return of some pretty attractive yields and kind of

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Speaker 4: regular way high quality unsecured IG corporate bonds, it may

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Speaker 4: embolden insurance companies to kind of allocate more back to

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Speaker 4: that historical average for corporate bond allocations and perhaps pair

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Speaker 4: back on some of the more capital intensive exposures like

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Speaker 4: those scheduled bassets for example. So those are I think

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Speaker 4: really important dynamics to keep in mind in the context

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Speaker 4: of the buyer base. The notes that you mentioned, the

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Speaker 4: points you mentioned at the start, they're all very relevant.

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Speaker 4: The improvement and the quality of the high old index,

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Speaker 4: for example, has really been I think a paradigm shift,

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Speaker 4: and it's caused spreads to actually not be that comparable

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Speaker 4: to maybe ten or fifteen years ago. Right, If it's

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Speaker 4: a higher quality, shorter duration market, the spreads may not

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Speaker 4: appear as tight as they do on the surface. But

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Speaker 4: I actually really think it's the demand technical of the

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Speaker 4: yield based buyer that's been most relevant.

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Speaker 3: The other thing I will.

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Speaker 4: Note, also related to technicals on the supply side, is

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Speaker 4: that let's leave IG for a side, where supply has

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Speaker 4: been very robust in parts of the lev fin market,

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Speaker 4: we've had only modest amounts of net new issuance into

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Speaker 4: those universes like highield bonds and leverage loans, and so

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Speaker 4: while the growth and inflation and monetary policy fundamentals have

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Speaker 4: become more challenging, at the end of the day, there's

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Speaker 4: still just not a lot of new money to go around,

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Speaker 4: and so that's also been important. That's been especially true

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Speaker 4: in the leverage loan market, for example, where despite the

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Speaker 4: overhang on software, despite a mix of smaller borrowers, less

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Speaker 4: financially diverse spar wars, you've had very strong demand from

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Speaker 4: clos which has outpaced the supply.

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Speaker 1: On the IG side. Though I'm interested in your forecast

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Speaker 1: for net supply which is very high compared to others

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Speaker 1: I've seen him. It's eight hundred and fifty billion for

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Speaker 1: this year, highest ever ye for net. Does that not

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Speaker 1: push us back into balance and therefore push out spreads?

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Speaker 3: It hasn't yet.

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Speaker 4: I mean I would say part of that is driven

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Speaker 4: by and really twofold. So one pack, why then that

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Speaker 4: supply forecast is so high. One is we've seen a

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Speaker 4: lot of M and A actually on the strategic side

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Speaker 4: announced and at the same time, the share of all

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00:11:35,600 --> 00:11:39,760
Speaker 4: stock transactions is the lowest since twenty seventeen, So debt

221
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Speaker 4: is playing a larger role in the strategic MNA that

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Speaker 4: we are experiencing. So that's driving that higher net supply forecast.

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Speaker 4: The other key driver of the higher net supply forecast

224
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Speaker 4: is the AI related issuance, not just from the hyperscalers,

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Speaker 4: but across the broader ecosystem if you track it. Since

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Speaker 4: mid twenty twenty five, we've seen over four hundred and

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Speaker 4: twenty billion of issuance from that universe affirms so broadly

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Speaker 4: AI related across IG and high yield. So this is

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Speaker 4: a significant increase in the amount of supply hitting the

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Speaker 4: market so far, James, it's been well absorbed. Part of

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Speaker 4: that is that I would say, first of all, so

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Speaker 4: far May supply really did underwhelm. So May is historically

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Speaker 4: an active month for supply, as companies exit the one

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Speaker 4: Q earnings blackout and before the summer lull begins. We

235
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Speaker 4: just finished the month of May. We're recording this on

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Speaker 4: June first, and I would say supply for the month

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Speaker 4: of May did underwhelm a bit, especially when it was

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Speaker 4: adjusted for duration.

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Speaker 3: So that's been part of the story, is that the market.

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Speaker 4: Went into May with very high expectations. The duration profile

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Speaker 4: did tend to skew a bit shorter in duration, and

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Speaker 4: so it was a bit easily absorbed. The deals that

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Speaker 4: we saw had very modest new issue concessions. We're talking

244
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Speaker 4: single digits, mid single digits or even lower, and the

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Speaker 4: apply was easily absorbed. I think as the year progresses,

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Speaker 4: it remains to be seen whether or not supply on

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Speaker 4: its own will be the catalyst for spreads. My inclination

248
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Speaker 4: is that it will take more than just supply. I

249
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Speaker 4: think that it will take a real, I think visible

250
00:13:18,000 --> 00:13:21,560
Speaker 4: implication of this ongoing geopolitical conflict. I think one of

251
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Speaker 4: the key questions that our commodity strategists continue to address

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Speaker 4: in their research is yes, commodity prices are elevated, but

253
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Speaker 4: they're actually not as high as many market participants would

254
00:13:32,120 --> 00:13:34,240
Speaker 4: have expected them to be given how long the straight

255
00:13:34,280 --> 00:13:37,839
Speaker 4: of Hormovez, for example, is closed. That has implications for

256
00:13:38,080 --> 00:13:41,480
Speaker 4: our market, cost of goods sold, for companies, profit margins,

257
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Speaker 4: the growth and inflation mix that we talked about earlier.

258
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Speaker 4: So I think there needs to be some sort of

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Speaker 4: deterioration I think in the fundamental backdrop, alongside perhaps a

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Speaker 4: technical headwind for supply to really cause us sustained widening

261
00:13:53,960 --> 00:13:56,319
Speaker 4: and spreads. So far, the widening that we've seen has

262
00:13:56,360 --> 00:13:59,440
Speaker 4: been short lived and quickly bought. So I think the

263
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Speaker 4: technicals on their own aren't enough to derail that. Right.

264
00:14:02,000 --> 00:14:03,800
Speaker 1: I'm just wondering whether all of this, you know, eight p.

265
00:14:03,920 --> 00:14:07,400
Speaker 1: Fifty in which we've never seen before, gets absorbed that easy,

266
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Speaker 1: particularly at the time when you might start to question

267
00:14:09,720 --> 00:14:12,560
Speaker 1: some of the demand dynamics for from the foreign investor

268
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Speaker 1: side and from also the retail total return investor side,

269
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Speaker 1: when total returns, you know, maybe get hit by rising rates.

270
00:14:19,040 --> 00:14:21,040
Speaker 4: Yeah, and I think this is exactly kind of what

271
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Speaker 4: you started with. At the beginning, which I agree with it.

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Speaker 4: We're priced for perfection at a point when we are absorbed,

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Speaker 4: we are expecting to absorbo a wave of supply. Again

274
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Speaker 4: part of the reason why our spread forecasts have us

275
00:14:31,600 --> 00:14:35,880
Speaker 4: moving modestly wider. I think we've been surprised about the

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Speaker 4: resilience both on the economic backdrop to navigate this, as

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Speaker 4: well as on the corporate side. You know, I was

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Speaker 4: actually having a conversation with a colleague earlier, and for once,

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Speaker 4: it feels as though the equity market sentiment is moving credit,

280
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Speaker 4: and so it's really hard for credit investors to be

281
00:14:51,800 --> 00:14:53,800
Speaker 4: really negative in this environment when there's a lot of

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Speaker 4: optimism around the earning.

283
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Speaker 3: Season that just passed.

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Speaker 4: But again in many instances as well, it feels like

285
00:14:59,320 --> 00:15:02,400
Speaker 4: the sentiment are around. The yield based buyer is really

286
00:15:02,400 --> 00:15:04,440
Speaker 4: in the driver's seat at the moment, and so I think, what,

287
00:15:04,560 --> 00:15:07,000
Speaker 4: Maybe you didn't ask the question, but maybe what could

288
00:15:07,040 --> 00:15:11,040
Speaker 4: cause it to change. In periods where the rate volatility

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00:15:11,120 --> 00:15:15,400
Speaker 4: seems disorderly, that has been when the yield based investors

290
00:15:15,400 --> 00:15:17,760
Speaker 4: step back because they don't have a lot of confidence

291
00:15:17,760 --> 00:15:22,000
Speaker 4: in deploying, even though mathematically the yield figures look attractive.

292
00:15:22,200 --> 00:15:24,440
Speaker 4: That could also be something to watch. We haven't seen

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00:15:24,480 --> 00:15:26,360
Speaker 4: that really yet, but that would be something.

294
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Speaker 2: What are your capital markets people telling you about the

295
00:15:29,200 --> 00:15:31,160
Speaker 2: second half of the year in terms of issuance, because

296
00:15:31,200 --> 00:15:34,040
Speaker 2: typically the second half of the year is much lower, right,

297
00:15:34,120 --> 00:15:36,560
Speaker 2: so you think technicals would be getting better. And it

298
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Speaker 2: seems like with all these sort of alternatives, whether it's

299
00:15:40,240 --> 00:15:45,520
Speaker 2: private credit or asset backed AI style deals or even

300
00:15:45,800 --> 00:15:49,280
Speaker 2: a foreign currency did for many of these same names,

301
00:15:49,440 --> 00:15:55,520
Speaker 2: that maybe there's actually less traditional IG and high yield

302
00:15:55,560 --> 00:15:58,480
Speaker 2: corporate supply than what people thought they were going to be,

303
00:15:58,640 --> 00:16:03,160
Speaker 2: even though it's at records and that maybe has a

304
00:16:03,320 --> 00:16:08,200
Speaker 2: longer tail ones behind it until at least twenty twenty seven.

305
00:16:08,240 --> 00:16:11,360
Speaker 2: That maybe could get us tighter. Why don't you think

306
00:16:11,400 --> 00:16:14,320
Speaker 2: that we could challenge, you know, another fifteen or twenty

307
00:16:14,320 --> 00:16:15,520
Speaker 2: basis points for sure.

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00:16:15,600 --> 00:16:18,680
Speaker 4: So taking those questions in turn, you're right. I think

309
00:16:18,880 --> 00:16:22,200
Speaker 4: some of the slowest months for seasonal supply do end

310
00:16:22,280 --> 00:16:24,680
Speaker 4: up in the second half of the year, but September

311
00:16:24,840 --> 00:16:28,200
Speaker 4: is a pretty active year, so that's on our radar.

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Speaker 3: I would offer two points though that kind of counter.

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00:16:31,520 --> 00:16:34,160
Speaker 4: Why seasonals might not be as relevant this time around.

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00:16:34,200 --> 00:16:36,520
Speaker 4: The first is the m and A supply that I mentioned,

315
00:16:37,600 --> 00:16:40,920
Speaker 4: the strategic MNA in particular, has been the announcements have

316
00:16:40,960 --> 00:16:44,440
Speaker 4: been really robust, and again we've seen the lowest share

317
00:16:44,480 --> 00:16:47,240
Speaker 4: of all stock deals in several years, and so that

318
00:16:47,400 --> 00:16:49,640
Speaker 4: suggests that M and A related issuance will play a

319
00:16:49,680 --> 00:16:53,080
Speaker 4: larger role that typically doesn't follow the seasonal pattern. I

320
00:16:53,080 --> 00:16:55,880
Speaker 4: think that's prudent. CFOs and treasurers will issue when they

321
00:16:55,920 --> 00:16:59,200
Speaker 4: can when the windows are amenable, not necessarily tied to

322
00:16:59,200 --> 00:17:01,840
Speaker 4: a seasonal pattern. So that's kind of one aspect that's

323
00:17:01,880 --> 00:17:03,600
Speaker 4: in the back of our mind. The second is this

324
00:17:03,640 --> 00:17:07,240
Speaker 4: AI related financing. This isn't coming from our capital markets, folks,

325
00:17:07,280 --> 00:17:10,840
Speaker 4: It's just our view is that we've observed that this

326
00:17:11,160 --> 00:17:14,120
Speaker 4: sort of issuance is less dependent upon the seasonal patterns

327
00:17:14,160 --> 00:17:17,160
Speaker 4: as well. Again, we've seen four hundred and twenty billions

328
00:17:17,200 --> 00:17:19,919
Speaker 4: so far of AI related supply. That's just in the

329
00:17:20,040 --> 00:17:22,760
Speaker 4: US IG and high yield markets. We've also seen a

330
00:17:22,760 --> 00:17:26,800
Speaker 4: significant wave of financing across other currencies. Right now, I

331
00:17:26,840 --> 00:17:29,920
Speaker 4: think the environment is very amenable. Spreads are tight, as

332
00:17:29,920 --> 00:17:32,880
Speaker 4: you noted, and yields are still elevated, and so there

333
00:17:32,920 --> 00:17:36,439
Speaker 4: is strong demand from the investor community for the supply.

334
00:17:36,600 --> 00:17:39,280
Speaker 4: So if I'm a CFO or a treasurer, it would

335
00:17:39,280 --> 00:17:42,280
Speaker 4: feel like a pretty opportune time to issue. And if

336
00:17:42,320 --> 00:17:44,080
Speaker 4: that persists in the second half of the year, I

337
00:17:44,119 --> 00:17:46,840
Speaker 4: see no reason why an issue where we're kind of

338
00:17:46,880 --> 00:17:48,680
Speaker 4: back off just because of seasonal patterns.

339
00:17:48,680 --> 00:17:50,720
Speaker 3: I think that they could move through.

340
00:17:51,000 --> 00:17:54,040
Speaker 4: To your question on why why you know we're not

341
00:17:54,160 --> 00:17:56,760
Speaker 4: baking in tighter spreads and why we're baking in modestly

342
00:17:56,800 --> 00:18:01,480
Speaker 4: wider spreads. Its kind of just this fact pattern of

343
00:18:01,520 --> 00:18:04,000
Speaker 4: the facts on the ground in our view, have just

344
00:18:04,040 --> 00:18:06,720
Speaker 4: become a bit more challenging, and so I think it's

345
00:18:06,720 --> 00:18:09,919
Speaker 4: hard for us to justify valuations.

346
00:18:09,160 --> 00:18:11,960
Speaker 3: That are tight to the again to the pre.

347
00:18:11,920 --> 00:18:14,600
Speaker 4: War levels when we don't have a resolution on a

348
00:18:14,640 --> 00:18:18,119
Speaker 4: lot of these geopolitical concerns. Our economists have flag that

349
00:18:18,119 --> 00:18:22,359
Speaker 4: consumer spending actually turned negative after the most recent inflation print.

350
00:18:22,400 --> 00:18:25,639
Speaker 4: They are expecting an uptick in the unemployment rate in

351
00:18:25,680 --> 00:18:28,159
Speaker 4: the US through it's modest but through the rest of

352
00:18:28,200 --> 00:18:31,119
Speaker 4: the year, and we have a FED that you know

353
00:18:31,359 --> 00:18:34,359
Speaker 4: is now likely not going to be able to cut

354
00:18:34,440 --> 00:18:37,240
Speaker 4: until December, per our economists forecast, and actually will be

355
00:18:37,320 --> 00:18:40,840
Speaker 4: hiking twice in Europe, so I think just the combination

356
00:18:40,920 --> 00:18:43,320
Speaker 4: of all of these things that you know, a lot

357
00:18:43,359 --> 00:18:46,720
Speaker 4: of our conversations with corporate credit investors basically boiled down

358
00:18:46,760 --> 00:18:48,840
Speaker 4: to the fact that it's too tight to chase, but

359
00:18:48,880 --> 00:18:50,760
Speaker 4: it's not bad enough to sell. And I think that's

360
00:18:50,840 --> 00:18:53,280
Speaker 4: kind of where we are in this environment. Maybe the

361
00:18:53,280 --> 00:18:55,959
Speaker 4: one thing that is probably important to emphasize is that

362
00:18:56,000 --> 00:18:59,640
Speaker 4: we do have a more negative view towards Europe relative

363
00:18:59,680 --> 00:19:03,040
Speaker 4: to the US, and I think that's also important to emphasize,

364
00:19:03,080 --> 00:19:05,800
Speaker 4: and kind of the relative value view. Our forecast in

365
00:19:05,840 --> 00:19:09,719
Speaker 4: Europe incorporate a wider peak in spreads and a slower recovery,

366
00:19:10,640 --> 00:19:14,080
Speaker 4: and I think there it makes sense the region is

367
00:19:14,080 --> 00:19:17,840
Speaker 4: more dependent upon energy imports, it doesn't have kind of

368
00:19:17,840 --> 00:19:22,080
Speaker 4: the same momentum behind the AI earnings build out as

369
00:19:22,119 --> 00:19:23,680
Speaker 4: you know, as as the US does. And so that's

370
00:19:23,720 --> 00:19:26,399
Speaker 4: also important to know is that our credit spread forecasts

371
00:19:26,400 --> 00:19:28,440
Speaker 4: aren't created equal across these asset classes.

372
00:19:28,520 --> 00:19:30,480
Speaker 1: What does modest the wide mean that in the US?

373
00:19:30,560 --> 00:19:33,840
Speaker 4: I gumples, so for example, using the Bloomberg, Barclays and Nix,

374
00:19:33,880 --> 00:19:36,119
Speaker 4: that would take it to the low nineties by mayor,

375
00:19:36,520 --> 00:19:38,840
Speaker 4: which feels wide, which feels wide relative to where we

376
00:19:38,880 --> 00:19:41,200
Speaker 4: are now, but in the grand scheme of things is

377
00:19:41,240 --> 00:19:43,520
Speaker 4: actually just around the three year average.

378
00:19:43,119 --> 00:19:45,439
Speaker 1: Still very tight. And I'm learning, you know, just to

379
00:19:45,600 --> 00:19:48,360
Speaker 1: kind of you know, zoom rights out. For second, are

380
00:19:48,359 --> 00:19:51,560
Speaker 1: we kidding ourselves about, you know, buying yield not looking

381
00:19:51,560 --> 00:19:54,240
Speaker 1: at the spread, and you know, why not just t

382
00:19:54,400 --> 00:19:56,919
Speaker 1: build and chill as they say, if if really you're

383
00:19:56,960 --> 00:20:01,520
Speaker 1: not getting very much compensation for the for downgrade, for macro,

384
00:20:01,760 --> 00:20:04,120
Speaker 1: for you know, liquidity, all the other stuff. I mean,

385
00:20:04,280 --> 00:20:07,480
Speaker 1: why with such skimpee compensation, why do it?

386
00:20:07,560 --> 00:20:10,679
Speaker 3: Yeah? I mean I do think undiversification, Yeah, I mean

387
00:20:10,800 --> 00:20:13,199
Speaker 3: I think you hit it exactly. The market segmentation is

388
00:20:13,280 --> 00:20:13,680
Speaker 3: very real.

389
00:20:13,720 --> 00:20:15,159
Speaker 4: I mean one of the questions that we get a

390
00:20:15,160 --> 00:20:18,000
Speaker 4: lot from, I would say non credit dedicated investors is

391
00:20:18,440 --> 00:20:20,320
Speaker 4: if the risk free rate is doing a lot of

392
00:20:20,320 --> 00:20:22,520
Speaker 4: the heavy lifting of the all in yield, why buy

393
00:20:22,960 --> 00:20:27,119
Speaker 4: why bother buying corporates? I think, first, the market segmentation

394
00:20:27,320 --> 00:20:31,480
Speaker 4: is very real. And second, and maybe this is something

395
00:20:31,520 --> 00:20:35,959
Speaker 4: that is underappreciated, But for even though the spread pickup

396
00:20:36,040 --> 00:20:41,760
Speaker 4: is modest scaled over time across sizable insurance and pension portfolios,

397
00:20:41,840 --> 00:20:44,520
Speaker 4: that's real earnings power, right, that's real carry that you're

398
00:20:44,560 --> 00:20:47,720
Speaker 4: giving up. And then, of course in periods of time

399
00:20:47,760 --> 00:20:49,920
Speaker 4: where we haven't had one of them in a few years,

400
00:20:49,960 --> 00:20:53,800
Speaker 4: but in periods of time of exceptional rates volatility, you

401
00:20:53,840 --> 00:20:57,760
Speaker 4: know that extra spread from credit can actually buffer your

402
00:20:57,800 --> 00:21:00,760
Speaker 4: total returns a bit, especially if rates are selling off.

403
00:21:00,800 --> 00:21:04,680
Speaker 4: And so I tend to think that that allocation decision

404
00:21:04,760 --> 00:21:07,600
Speaker 4: is a lot more slow moving than many market participants

405
00:21:07,600 --> 00:21:10,560
Speaker 4: at face value might suggest. And even though the spread

406
00:21:10,680 --> 00:21:13,560
Speaker 4: is tighter versus historical standards, you know, Rob you mentioned

407
00:21:13,560 --> 00:21:15,639
Speaker 4: there in some parts there are real reasons for that,

408
00:21:16,200 --> 00:21:18,840
Speaker 4: but it's money that I think investors don't want to

409
00:21:18,960 --> 00:21:22,520
Speaker 4: leave on the table. I think on your other point

410
00:21:22,560 --> 00:21:26,440
Speaker 4: about kind of still making the reference that even our

411
00:21:26,520 --> 00:21:30,000
Speaker 4: wider spread forecasts are not that wide. Something that's important

412
00:21:30,000 --> 00:21:32,479
Speaker 4: to mention is that a big reason for this is

413
00:21:32,520 --> 00:21:34,879
Speaker 4: we believe that we have already seen the peak in

414
00:21:35,000 --> 00:21:39,200
Speaker 4: default activity for this cycle. So growth is below trend

415
00:21:39,200 --> 00:21:42,080
Speaker 4: per our economist's forecast, but it's good enough for credit,

416
00:21:42,680 --> 00:21:47,359
Speaker 4: and we've had a bit of a flush in default activity. Really,

417
00:21:47,400 --> 00:21:49,359
Speaker 4: the peak was in late twenty twenty four in the

418
00:21:49,480 --> 00:21:52,080
Speaker 4: US and the spring of twenty twenty four in Europe.

419
00:21:52,400 --> 00:21:55,080
Speaker 4: As a direct reflection of the fits rate hiking cycle.

420
00:21:55,400 --> 00:21:57,439
Speaker 4: So the market has been cleaned up a bit. We

421
00:21:57,560 --> 00:22:00,520
Speaker 4: have seen I'll use the leverage loan example market as

422
00:22:00,560 --> 00:22:05,000
Speaker 4: an example. We saw leverage loan issuer weighted defaults touch

423
00:22:05,080 --> 00:22:07,840
Speaker 4: almost eight percent in November of twenty twenty four. That's

424
00:22:07,840 --> 00:22:10,800
Speaker 4: a pretty elevated level considering what the risk appetite was

425
00:22:10,840 --> 00:22:11,320
Speaker 4: at that time.

426
00:22:11,359 --> 00:22:12,320
Speaker 3: It was pretty solid.

427
00:22:13,160 --> 00:22:16,800
Speaker 4: So absent some sort of sharp downturn and growth which

428
00:22:16,840 --> 00:22:19,960
Speaker 4: would catalyze another default cycle, it's hard to see again

429
00:22:20,000 --> 00:22:23,720
Speaker 4: a sustained repricing wider and spreads. And I think that's

430
00:22:23,760 --> 00:22:25,920
Speaker 4: what a lot of institutional investors have in the back

431
00:22:25,920 --> 00:22:29,159
Speaker 4: of their mind, where they could sit out participating in

432
00:22:29,160 --> 00:22:32,159
Speaker 4: the corporate credit market, but absent and obvious catalysts for

433
00:22:32,200 --> 00:22:35,560
Speaker 4: material widening, I think it's hard to justify. And then

434
00:22:35,640 --> 00:22:38,040
Speaker 4: the experience over the past few years has shown us

435
00:22:38,560 --> 00:22:41,480
Speaker 4: that these episodes of widening are short lived and tend

436
00:22:41,520 --> 00:22:43,280
Speaker 4: to get bought very quickly on default.

437
00:22:43,280 --> 00:22:45,200
Speaker 1: So there is this big chunk of the market triple

438
00:22:45,240 --> 00:22:47,640
Speaker 1: C and you know, i'd argue single be as well

439
00:22:47,760 --> 00:22:51,119
Speaker 1: that is strained and current. You know, Macro also is

440
00:22:51,119 --> 00:22:54,560
Speaker 1: paying a lot higher rates to refinance. Maybe it can't refinance,

441
00:22:54,600 --> 00:22:57,200
Speaker 1: Maybe the private markets have shut down on them. Maybe

442
00:22:57,240 --> 00:22:58,480
Speaker 1: there are a whole lot of other risks. You know,

443
00:22:58,480 --> 00:23:01,639
Speaker 1: you talked about the consumer, which kind of worries me

444
00:23:01,680 --> 00:23:04,960
Speaker 1: as well. Given there's concentration in we could borrow is,

445
00:23:05,640 --> 00:23:08,000
Speaker 1: how do you reconcile that with the low default rate.

446
00:23:08,160 --> 00:23:11,879
Speaker 4: I think it's in a point. Just because we're not

447
00:23:11,960 --> 00:23:15,480
Speaker 4: expecting a new peak in defaults, to your point, doesn't

448
00:23:15,480 --> 00:23:18,040
Speaker 4: mean that there aren't trends under the surface that weren't watching.

449
00:23:18,560 --> 00:23:21,359
Speaker 4: One of the clear ones that we've really emphasized is

450
00:23:21,720 --> 00:23:25,320
Speaker 4: this pattern of elevated repeat defaulters, which we believe is

451
00:23:25,400 --> 00:23:29,720
Speaker 4: directly related to the use of distressed exchanges as kind

452
00:23:29,720 --> 00:23:32,719
Speaker 4: of the preferred avenue for default activity as opposed to

453
00:23:32,760 --> 00:23:36,160
Speaker 4: the traditional Chapter eleven. And what we found with distressed

454
00:23:36,200 --> 00:23:38,919
Speaker 4: exchanges is that for these troubled borrowers that might just

455
00:23:38,960 --> 00:23:41,280
Speaker 4: be kicking the can down the road, maybe they never

456
00:23:41,320 --> 00:23:44,600
Speaker 4: really grew into their debt capital structure post the ultra

457
00:23:44,640 --> 00:23:48,160
Speaker 4: low rate environment of the pandemic, the distressed exchanges haven't

458
00:23:48,160 --> 00:23:50,159
Speaker 4: given them the balance sheet relief that they need, so

459
00:23:50,160 --> 00:23:53,320
Speaker 4: they end up coming back to do another distressed exchange

460
00:23:53,480 --> 00:23:57,879
Speaker 4: or a Chapter eleven, and so that has eroded recovery values.

461
00:23:58,320 --> 00:24:00,160
Speaker 3: It should largely be priced.

462
00:24:00,000 --> 00:24:03,120
Speaker 4: Because and again many of these troubled borrowers are well

463
00:24:03,160 --> 00:24:06,120
Speaker 4: known to the market. They've been trading as such. So

464
00:24:06,119 --> 00:24:08,840
Speaker 4: that's not to say that there isn't default activity under

465
00:24:08,840 --> 00:24:11,480
Speaker 4: the surface. There absolutely is in pockets of the market.

466
00:24:11,760 --> 00:24:15,040
Speaker 4: But is it enough for us to retest the peaks.

467
00:24:15,600 --> 00:24:18,480
Speaker 4: Not not at this point. And I and I would

468
00:24:18,480 --> 00:24:21,520
Speaker 4: say even in the triple sea bucket like, it's very bifurcated,

469
00:24:22,040 --> 00:24:24,440
Speaker 4: right in terms of you have triple c that are

470
00:24:24,640 --> 00:24:27,840
Speaker 4: that are generally performing, you have ones that are very stressed, right,

471
00:24:28,040 --> 00:24:30,600
Speaker 4: So the high old market is very bifurcated in that way.

472
00:24:30,600 --> 00:24:33,600
Speaker 4: But your point is exactly right, is that there's a

473
00:24:33,640 --> 00:24:36,240
Speaker 4: lot of dispersion under the surface in many of these

474
00:24:36,280 --> 00:24:40,160
Speaker 4: markets that is worth watching. I think the key point

475
00:24:40,200 --> 00:24:42,879
Speaker 4: that we are emphasizing, though, is it really goes back

476
00:24:42,920 --> 00:24:46,199
Speaker 4: to the growth backdrop, is that if you have an

477
00:24:46,280 --> 00:24:49,600
Speaker 4: environment of trend or slightly below trend growth, that's generally

478
00:24:49,600 --> 00:24:52,560
Speaker 4: an okay backdrop for corporate credits so long as the

479
00:24:52,600 --> 00:24:55,520
Speaker 4: fund financing markets remain open. If you have a sharp

480
00:24:55,560 --> 00:24:59,800
Speaker 4: downturn in growth. That is a much more challenging backdrop

481
00:24:59,840 --> 00:25:03,359
Speaker 4: for especially if inflation remains sticky and input costs remains sticky.

482
00:25:03,400 --> 00:25:05,719
Speaker 4: So that would be the key signpost that we are

483
00:25:05,760 --> 00:25:06,480
Speaker 4: watching for sure.

484
00:25:07,359 --> 00:25:10,399
Speaker 1: Do you assign a reasonable probability of that happening as

485
00:25:10,520 --> 00:25:11,560
Speaker 1: sort of stagflationary?

486
00:25:11,800 --> 00:25:14,359
Speaker 4: I think I would separate the term stagflation from what

487
00:25:14,520 --> 00:25:17,600
Speaker 4: is just sticky inflation and then more challenging growth backdrop.

488
00:25:17,640 --> 00:25:20,000
Speaker 4: I would reserve stagflation for kind of the double digit

489
00:25:20,040 --> 00:25:22,680
Speaker 4: inflation and the double digit unemployment rates that we've seen

490
00:25:22,680 --> 00:25:23,600
Speaker 4: in decades past.

491
00:25:24,680 --> 00:25:26,320
Speaker 3: I would say corporates have shown in.

492
00:25:26,320 --> 00:25:29,240
Speaker 4: Ability over the past several years to really navigate a

493
00:25:29,320 --> 00:25:33,600
Speaker 4: variety of shocks, whether it's the pandemic or geopolitical or tariffs.

494
00:25:34,240 --> 00:25:37,040
Speaker 4: So I'm hesitant to underestimate the corporate backdrop, just like

495
00:25:37,080 --> 00:25:40,119
Speaker 4: I'm hesitant to underestimate the US consumer. But again it

496
00:25:40,160 --> 00:25:44,560
Speaker 4: goes back to is the pricing. Is the pricing kind

497
00:25:44,600 --> 00:25:46,800
Speaker 4: of setting us up for pricing for perfection or are

498
00:25:46,800 --> 00:25:49,480
Speaker 4: we baking in a bit more risk premium. I don't

499
00:25:49,520 --> 00:25:52,399
Speaker 4: think that we are baking in a significant amount of

500
00:25:52,400 --> 00:25:53,520
Speaker 4: for suspremium at current levels.

501
00:25:53,840 --> 00:25:56,159
Speaker 1: There are concerns about private credit, and I wouldn't say

502
00:25:56,200 --> 00:25:57,880
Speaker 1: it's going away. No one thinks it is. But where

503
00:25:57,880 --> 00:26:00,800
Speaker 1: do you think we stand regarding private credit right now

504
00:26:00,840 --> 00:26:01,640
Speaker 1: as an investment.

505
00:26:01,800 --> 00:26:03,479
Speaker 4: Yeah, so we actually have the benefit of the one

506
00:26:03,520 --> 00:26:06,760
Speaker 4: Q data which was released about a week ago. And

507
00:26:06,800 --> 00:26:09,440
Speaker 4: again I'm using the Cliff Water Index as a proxy

508
00:26:09,480 --> 00:26:11,879
Speaker 4: here for the US direct lending market, which is that

509
00:26:12,000 --> 00:26:14,480
Speaker 4: North America is the largest region for private credit and

510
00:26:14,520 --> 00:26:16,960
Speaker 4: direct lending is the largest strategy, and again that's a

511
00:26:17,000 --> 00:26:20,040
Speaker 4: five hundred and fifty billion universal firms. What we find

512
00:26:20,119 --> 00:26:23,359
Speaker 4: is a general continuation of the full year twenty twenty

513
00:26:23,359 --> 00:26:25,639
Speaker 4: five trend, which is we're seeing a bit of a

514
00:26:25,720 --> 00:26:29,440
Speaker 4: normalization and credit metrics, so a slight uptick in non accruals,

515
00:26:30,200 --> 00:26:33,919
Speaker 4: but realized losses are actually below trend. You've seen a

516
00:26:33,920 --> 00:26:36,640
Speaker 4: little bit of an elktick in net unrealized losses, which

517
00:26:36,680 --> 00:26:40,080
Speaker 4: I think is appropriate given the volatility that we've seen

518
00:26:40,080 --> 00:26:41,720
Speaker 4: in the syndicated market, but.

519
00:26:41,720 --> 00:26:43,720
Speaker 3: It is far short of a.

520
00:26:43,720 --> 00:26:47,800
Speaker 4: Widespread fundamental deterioration, and I think that's important to acknowledge.

521
00:26:48,160 --> 00:26:51,440
Speaker 4: We also track it through another third party provider that

522
00:26:51,520 --> 00:26:56,240
Speaker 4: we follow that provides valuations on private credit and there too,

523
00:26:56,320 --> 00:27:00,320
Speaker 4: we actually see some stability and pick we see some

524
00:27:00,359 --> 00:27:04,359
Speaker 4: stability and covenant defaults. So for the past few years,

525
00:27:04,480 --> 00:27:06,520
Speaker 4: you know, I've actually thought about this as really a

526
00:27:06,560 --> 00:27:08,919
Speaker 4: catalyst for dispersion in private credit. You know, there are

527
00:27:08,960 --> 00:27:11,520
Speaker 4: certain vintages that are under pressure. Twenty twenty one is

528
00:27:11,520 --> 00:27:14,280
Speaker 4: a great example, formed in a low rate environment before

529
00:27:14,359 --> 00:27:17,280
Speaker 4: AI disruption was really as top of mind.

530
00:27:17,119 --> 00:27:17,640
Speaker 3: As it is.

531
00:27:18,080 --> 00:27:20,720
Speaker 4: New entrants in private credit have been struggling for a while.

532
00:27:20,800 --> 00:27:23,360
Speaker 4: They haven't been as successful in fundraising as the more

533
00:27:23,400 --> 00:27:26,680
Speaker 4: experienced managers with multiple vintages under their belt have been.

534
00:27:26,760 --> 00:27:29,679
Speaker 4: So there's a concern that perhaps they're taking business that

535
00:27:30,200 --> 00:27:32,600
Speaker 4: many of the other private credit lenders might have passed on.

536
00:27:32,880 --> 00:27:36,360
Speaker 4: So there's absolutely dispersion under the surface. But a lot

537
00:27:36,400 --> 00:27:40,399
Speaker 4: of those widely reported defaults from late twenty twenty five,

538
00:27:40,720 --> 00:27:43,000
Speaker 4: some of them weren't even in the private credit market.

539
00:27:44,080 --> 00:27:47,960
Speaker 4: And when you look at the fundamentals again, you're seeing normalization.

540
00:27:48,040 --> 00:27:50,919
Speaker 4: We were running at very low levels for non accruals, for

541
00:27:51,000 --> 00:27:53,960
Speaker 4: realized losses, there's some moderation there. You're also seeing that

542
00:27:54,000 --> 00:27:56,560
Speaker 4: in the liquid credit market as well. Right, So even

543
00:27:56,600 --> 00:27:58,800
Speaker 4: though we don't expect to retest the peaks and defaults.

544
00:27:58,800 --> 00:28:00,840
Speaker 4: That doesn't mean that the default isn't going up a

545
00:28:00,880 --> 00:28:04,320
Speaker 4: little bit, so to me, that is all very consistent.

546
00:28:04,600 --> 00:28:07,359
Speaker 4: I think the bears of private credit. I'm not one,

547
00:28:07,440 --> 00:28:09,600
Speaker 4: but the bears will say, well, that's backward looking data.

548
00:28:09,640 --> 00:28:11,800
Speaker 4: We haven't seen the disruption yet, and you know that's fair.

549
00:28:11,840 --> 00:28:14,879
Speaker 4: It remains to be seen again. The software disruption narrative

550
00:28:14,960 --> 00:28:18,359
Speaker 4: is hard to prove, but I actually think absent to

551
00:28:18,400 --> 00:28:21,800
Speaker 4: sharp downturn in growth, it's hard for me to see

552
00:28:21,880 --> 00:28:25,520
Speaker 4: realize losses in either liquid credit or private credit meaningfully

553
00:28:25,960 --> 00:28:29,200
Speaker 4: deteriorating and deviating from the longer term average. I think

554
00:28:29,280 --> 00:28:31,439
Speaker 4: more generally you have a bit of a normalization and

555
00:28:31,440 --> 00:28:33,600
Speaker 4: credit losses. The other important thing to say in private

556
00:28:33,600 --> 00:28:36,760
Speaker 4: credit is I do feel that the noise around the

557
00:28:36,800 --> 00:28:39,640
Speaker 4: retail redemptions has slowed down a bit, but we expect

558
00:28:39,640 --> 00:28:41,880
Speaker 4: that to resurface back in June. Our equity analysts have

559
00:28:41,880 --> 00:28:44,840
Speaker 4: been very clear about this. The next redemption window opens

560
00:28:44,880 --> 00:28:48,080
Speaker 4: in June, we should expect more noise around redemptions, but

561
00:28:48,120 --> 00:28:52,040
Speaker 4: that's on a conservative estimate around fifteen percent of the

562
00:28:52,040 --> 00:28:55,560
Speaker 4: private credit aum. The important point to make is that

563
00:28:55,800 --> 00:28:58,160
Speaker 4: we do not expect that same redemption activity in the

564
00:28:58,240 --> 00:29:02,680
Speaker 4: retail vehicles to translate an institutional because institutional doesn't have

565
00:29:02,720 --> 00:29:05,680
Speaker 4: the redemption capabilities in the first place, which is an

566
00:29:05,680 --> 00:29:08,080
Speaker 4: important point. So I think really that I would put

567
00:29:08,080 --> 00:29:10,360
Speaker 4: redemptions is kind of a no known at this point,

568
00:29:10,400 --> 00:29:12,440
Speaker 4: and I would more be focusing on what does the

569
00:29:12,440 --> 00:29:15,200
Speaker 4: growth backtorup look like, and what ultimately happens in the

570
00:29:15,240 --> 00:29:16,160
Speaker 4: software disruption, and.

571
00:29:16,200 --> 00:29:18,440
Speaker 1: What about the relative value? Can you still get up

572
00:29:18,480 --> 00:29:19,880
Speaker 1: to three hunderd basis points.

573
00:29:19,960 --> 00:29:20,720
Speaker 3: The press for sure?

574
00:29:20,760 --> 00:29:23,320
Speaker 4: I mean so right now it's in the context of

575
00:29:23,320 --> 00:29:25,960
Speaker 4: one hundred and fifty plus give or take depending upon

576
00:29:26,000 --> 00:29:29,320
Speaker 4: the strategy. As spreads in liquid and private have come down,

577
00:29:30,280 --> 00:29:33,840
Speaker 4: you have preserved in illiquidity premium pick up in private credit,

578
00:29:33,880 --> 00:29:37,800
Speaker 4: but it has narrowed because the markets remain pretty open.

579
00:29:37,920 --> 00:29:39,640
Speaker 3: Where you have seen the most.

580
00:29:39,480 --> 00:29:43,719
Speaker 4: Differential in private credit and liquid credit spreads is in

581
00:29:43,760 --> 00:29:46,960
Speaker 4: periods of time where the syndicated markets are not receptive

582
00:29:46,960 --> 00:29:50,840
Speaker 4: to low rated borrowers, and there you have more issuers

583
00:29:50,880 --> 00:29:53,960
Speaker 4: tapping the private credit markets instead of the liquid credit markets.

584
00:29:54,040 --> 00:29:57,040
Speaker 4: But you're actually raising a really important point as well,

585
00:29:57,040 --> 00:29:59,360
Speaker 4: which is that there's just a lot more fluidity across

586
00:29:59,400 --> 00:30:03,880
Speaker 4: these markets. Now we've seen borrowers incorporate private credit into

587
00:30:03,920 --> 00:30:07,560
Speaker 4: their capital structures when they've already had demonstrated access to

588
00:30:07,600 --> 00:30:11,280
Speaker 4: the syndicated markets. We've seen borrowers move between the two

589
00:30:11,320 --> 00:30:15,280
Speaker 4: markets more freely, which is further underscores the point that

590
00:30:15,400 --> 00:30:18,160
Speaker 4: the syndicated market is willing to lend to the same

591
00:30:18,240 --> 00:30:21,200
Speaker 4: type of borrower that's utilizing private credit so long as

592
00:30:21,480 --> 00:30:24,640
Speaker 4: the technicals cooperate in that market like that Colo technical.

593
00:30:25,440 --> 00:30:27,719
Speaker 4: So similar to how I think the pandemic taught us

594
00:30:27,720 --> 00:30:30,400
Speaker 4: that there's a lot more fluidity across IG and high yield,

595
00:30:30,800 --> 00:30:32,960
Speaker 4: that the idea of being a fallen angel isn't as

596
00:30:32,960 --> 00:30:35,400
Speaker 4: detrimental as we thought it was pre pandemic, I think

597
00:30:35,400 --> 00:30:38,200
Speaker 4: there's a lot more fluidity across private and public credit

598
00:30:38,200 --> 00:30:38,520
Speaker 4: as well.

599
00:30:38,560 --> 00:30:40,360
Speaker 1: And where that seems most evident right now is in

600
00:30:40,400 --> 00:30:44,200
Speaker 1: the AI funding rush, which worries me a lot for

601
00:30:44,280 --> 00:30:47,040
Speaker 1: various reasons. We have a lot of people telling us that,

602
00:30:47,200 --> 00:30:50,200
Speaker 1: you know, they're already hitting limits in terms of the investors,

603
00:30:50,360 --> 00:30:52,520
Speaker 1: which you know, if you consider how early we are

604
00:30:52,560 --> 00:30:55,000
Speaker 1: on you know, rub has talked about a multi trillion

605
00:30:55,240 --> 00:31:00,520
Speaker 1: dollar fundraise for those industries. If we're only just getting started,

606
00:31:00,600 --> 00:31:04,240
Speaker 1: and we're already, to quote Invesco, reaching into the couch

607
00:31:04,240 --> 00:31:09,080
Speaker 1: cushions to find liquidity, and we're spreading it around every market.

608
00:31:09,560 --> 00:31:13,480
Speaker 1: And we're also PTENTI hitting some limits on concentration by

609
00:31:13,480 --> 00:31:15,960
Speaker 1: a name, by sex with all that stuff. What do

610
00:31:15,960 --> 00:31:17,480
Speaker 1: you make of that? What are the risks? Well, I

611
00:31:17,480 --> 00:31:19,080
Speaker 1: mean I can ask you both that because you're bus

612
00:31:19,080 --> 00:31:19,560
Speaker 1: sharing at this.

613
00:31:19,600 --> 00:31:22,040
Speaker 3: Yeah, I'd love to hear REVS on this too. So

614
00:31:22,160 --> 00:31:25,560
Speaker 3: our view is there are a couple parts to it.

615
00:31:25,640 --> 00:31:29,400
Speaker 4: So I would say one, the magnitude and scale and

616
00:31:29,440 --> 00:31:32,720
Speaker 4: scope of this financing is really unprecedented for the corporate

617
00:31:32,720 --> 00:31:35,640
Speaker 4: credit market. Just to give it some context, pre one

618
00:31:35,720 --> 00:31:39,480
Speaker 4: Q earnings, our equity analysts were expecting four and a

619
00:31:39,520 --> 00:31:42,880
Speaker 4: half trillion of CAPEX for the four largest hyperscalers from

620
00:31:42,920 --> 00:31:46,680
Speaker 4: twenty twenty five to twenty three. Post one Q earnings,

621
00:31:46,720 --> 00:31:49,400
Speaker 4: that number has jumped to five point three trillion. So,

622
00:31:50,040 --> 00:31:52,640
Speaker 4: as you well know the pace of upward revision in

623
00:31:52,680 --> 00:31:55,680
Speaker 4: this capex need, it was sizable to begin with, and

624
00:31:55,720 --> 00:31:59,520
Speaker 4: it's only moving higher Because of that. We expect a

625
00:31:59,640 --> 00:32:03,080
Speaker 4: variet if financing markets will ultimately be required to service this.

626
00:32:03,240 --> 00:32:06,640
Speaker 4: So this includes private and public markets. So in private

627
00:32:06,640 --> 00:32:10,280
Speaker 4: it would be infrastructure, private real estate. Public markets would

628
00:32:10,320 --> 00:32:13,959
Speaker 4: be the traditional IG and high healed bond markets, as

629
00:32:14,040 --> 00:32:16,880
Speaker 4: well as these new project financed jvs that are being

630
00:32:16,960 --> 00:32:19,800
Speaker 4: utilized in the USIG bond markets. And then we also

631
00:32:19,840 --> 00:32:22,200
Speaker 4: expect currencies to play a larger role. So we've already

632
00:32:22,240 --> 00:32:27,000
Speaker 4: seen a very swift acceleration in non US supply in

633
00:32:27,080 --> 00:32:29,760
Speaker 4: the IG bond market. Pretty notable that actually in the

634
00:32:29,800 --> 00:32:33,680
Speaker 4: European DOUBLEA Corporate Index, two of the hyperscalers are already

635
00:32:33,720 --> 00:32:37,400
Speaker 4: among the top five issuers, and so the pace.

636
00:32:37,200 --> 00:32:39,000
Speaker 3: Of this has been very swift.

637
00:32:39,040 --> 00:32:42,800
Speaker 4: As you noted, I am less concerned about ultimate access.

638
00:32:42,920 --> 00:32:44,800
Speaker 4: I think that the capital is there, and I think,

639
00:32:44,880 --> 00:32:48,959
Speaker 4: if anything, the private markets, given the significant dry powder

640
00:32:49,560 --> 00:32:53,440
Speaker 4: and ability and willingness to participate in this theme in

641
00:32:53,880 --> 00:32:56,080
Speaker 4: the coming years, could actually fill a large part of

642
00:32:56,120 --> 00:32:57,520
Speaker 4: this financing gap.

643
00:32:57,760 --> 00:32:59,640
Speaker 3: I think the thing that I am.

644
00:32:59,520 --> 00:33:02,400
Speaker 4: Most folks is done is that it seems like whether

645
00:33:02,520 --> 00:33:06,120
Speaker 4: or not issue work concentration limits and market saturation constraints

646
00:33:06,160 --> 00:33:09,440
Speaker 4: will be a binding constraint is still heavily debated by investors,

647
00:33:09,760 --> 00:33:12,000
Speaker 4: and I was having one conversation earlier this morning as

648
00:33:12,040 --> 00:33:14,000
Speaker 4: recently as this morning, where an investor said to me,

649
00:33:14,040 --> 00:33:16,840
Speaker 4: you know, yeah, I am actually very mindful of issue

650
00:33:16,840 --> 00:33:20,400
Speaker 4: work concentration limits in our portfolio. I have other investors

651
00:33:20,440 --> 00:33:23,720
Speaker 4: that we talk to that will say, actually, this is

652
00:33:23,760 --> 00:33:26,240
Speaker 4: an opportunity to be a liquidity provider and I'm happy

653
00:33:26,240 --> 00:33:29,040
Speaker 4: to take exposure to this theme. So it remains to

654
00:33:29,120 --> 00:33:31,640
Speaker 4: be seen in our view how binding of a constraint

655
00:33:31,640 --> 00:33:34,120
Speaker 4: this will be, but I do feel pretty confident that

656
00:33:34,640 --> 00:33:37,200
Speaker 4: in twenty twenty seven, twenty twenty eight there will be

657
00:33:37,200 --> 00:33:40,360
Speaker 4: a more nuanced conversation about where to take this exposure,

658
00:33:40,400 --> 00:33:43,400
Speaker 4: given all of the different avenues that I listed and

659
00:33:43,440 --> 00:33:45,719
Speaker 4: the price at which to do that. We've seen spreads

660
00:33:45,720 --> 00:33:47,640
Speaker 4: and tech move from tight to the index to wide

661
00:33:47,640 --> 00:33:49,800
Speaker 4: to the index. Keep in mind that a lot of

662
00:33:49,840 --> 00:33:53,480
Speaker 4: the investors in AI themes and credit also have exposure

663
00:33:53,480 --> 00:33:56,640
Speaker 4: in equities. So this is something that the corporate credit

664
00:33:56,680 --> 00:34:00,080
Speaker 4: market really hasn't seen because historically, when you see the

665
00:34:00,160 --> 00:34:03,880
Speaker 4: waves of debt capacity be utilized, it's usually for M

666
00:34:03,920 --> 00:34:07,600
Speaker 4: and A or bank recapitalization plans where there's an end

667
00:34:07,600 --> 00:34:10,200
Speaker 4: in sight or there's a deleveraging plan on the back

668
00:34:10,239 --> 00:34:13,400
Speaker 4: of it. This is almost a permanent utilization of debt capacity,

669
00:34:13,520 --> 00:34:16,000
Speaker 4: or it is a permanent utilization of debt capacity. And

670
00:34:16,040 --> 00:34:19,280
Speaker 4: so I think investors are appropriately baking in to say, Okay, well,

671
00:34:19,400 --> 00:34:22,839
Speaker 4: should we expect some downward migration and ratings, you know,

672
00:34:23,160 --> 00:34:25,520
Speaker 4: should we should we bake in more of a resupremia.

673
00:34:26,120 --> 00:34:28,799
Speaker 4: Obviously the starting levels of leverage are very very low.

674
00:34:28,880 --> 00:34:30,640
Speaker 4: But what does that look like two or three years

675
00:34:30,680 --> 00:34:32,479
Speaker 4: from now, given that this is a multi year trend.

676
00:34:33,080 --> 00:34:35,440
Speaker 2: Seems like there's sort of this wall of worry, but

677
00:34:35,480 --> 00:34:37,640
Speaker 2: it's not really as high as people thought, And I

678
00:34:37,680 --> 00:34:39,680
Speaker 2: don't see people running for the doors anytime soon.

679
00:34:39,920 --> 00:34:43,080
Speaker 4: And I think, you know, actually, this reminds me many

680
00:34:43,160 --> 00:34:46,640
Speaker 4: years ago I covered pharma and there was a wave

681
00:34:46,680 --> 00:34:49,520
Speaker 4: of debt funded m and A across multiple companies in

682
00:34:49,560 --> 00:34:52,279
Speaker 4: twenty nine to twenty ten. Some of those companies were

683
00:34:52,280 --> 00:34:54,920
Speaker 4: actually triple A rated at the time, and they consciously

684
00:34:54,920 --> 00:34:57,160
Speaker 4: added debt to their balance sheet. They took a few

685
00:34:57,200 --> 00:34:59,680
Speaker 4: notches of a downgrade, but they stayed comfortably within IG

686
00:34:59,760 --> 00:35:03,480
Speaker 4: tear and realize that their cost of capital was just

687
00:35:03,560 --> 00:35:06,040
Speaker 4: fine as a slightly lower rated IG company and they

688
00:35:06,040 --> 00:35:08,520
Speaker 4: actually didn't need to be that highly rated. It almost

689
00:35:08,520 --> 00:35:10,840
Speaker 4: feels very reminiscent to me what's happening with kind of

690
00:35:10,880 --> 00:35:13,439
Speaker 4: the AI investment cycle, but on a much larger scale

691
00:35:13,480 --> 00:35:16,560
Speaker 4: than what was happening in pharma many years ago. And

692
00:35:16,600 --> 00:35:19,160
Speaker 4: so I think these companies are in a great position

693
00:35:19,239 --> 00:35:22,120
Speaker 4: where they've had their entering with a period of significant

694
00:35:22,120 --> 00:35:25,600
Speaker 4: financial flexibility to do the strategic investment. It's almost to

695
00:35:25,640 --> 00:35:29,480
Speaker 4: your point on you know, investing now versus waiting a

696
00:35:29,520 --> 00:35:32,560
Speaker 4: little bit. I almost feel like it's an existential risk

697
00:35:32,600 --> 00:35:34,680
Speaker 4: that they just have to invest at this time. They

698
00:35:34,680 --> 00:35:39,120
Speaker 4: can't wait, but you know, their financial position has allowed

699
00:35:39,160 --> 00:35:39,640
Speaker 4: them to do that.

700
00:35:39,840 --> 00:35:42,320
Speaker 2: How are you guiding people in terms of these private deals,

701
00:35:42,360 --> 00:35:44,640
Speaker 2: because the vast majority of these deals are really asset

702
00:35:44,640 --> 00:35:47,040
Speaker 2: back deals, and if you know, it's not the typical

703
00:35:47,280 --> 00:35:54,279
Speaker 2: corporate credit analysts purview structures are completely different, and most people,

704
00:35:54,320 --> 00:35:57,280
Speaker 2: i think, are just buying on the basis that rating

705
00:35:57,320 --> 00:36:01,040
Speaker 2: agencies like this feels a little bit like great Financial crisis,

706
00:36:01,080 --> 00:36:03,080
Speaker 2: like it's not, but it's like, hey, the rating age

707
00:36:03,120 --> 00:36:07,080
Speaker 2: is you're just giving credit ratings based upon the leaseholder.

708
00:36:07,120 --> 00:36:09,560
Speaker 2: But they could drop the lease after three years if

709
00:36:09,560 --> 00:36:11,520
Speaker 2: they want. So I'm just wondering what you're thinking about

710
00:36:11,800 --> 00:36:13,960
Speaker 2: the value of some of these private deals. Do you

711
00:36:13,960 --> 00:36:16,120
Speaker 2: think that it's just a cheaper way of playing the

712
00:36:16,800 --> 00:36:21,040
Speaker 2: higher rated hyper scalers or there's maybe a little bit

713
00:36:21,080 --> 00:36:22,960
Speaker 2: more there to worry about than people think.

714
00:36:23,080 --> 00:36:26,040
Speaker 4: Sure, so, actually, Shamshad on our team came up with

715
00:36:26,120 --> 00:36:29,279
Speaker 4: this great acronym which I love, which is the three

716
00:36:29,400 --> 00:36:33,000
Speaker 4: c's of really evaluating this risk. So the first is

717
00:36:33,080 --> 00:36:36,239
Speaker 4: construction risk, the second is claimed to tenants, so what

718
00:36:36,360 --> 00:36:38,520
Speaker 4: is the quality of the hyper scaler backing the lease?

719
00:36:38,800 --> 00:36:39,920
Speaker 3: And the third ist coverage.

720
00:36:39,960 --> 00:36:42,040
Speaker 4: So at the end of the bond or the JV term,

721
00:36:42,160 --> 00:36:43,960
Speaker 4: do you have a kind of notional outstanding that you

722
00:36:44,040 --> 00:36:44,800
Speaker 4: need to refinance?

723
00:36:44,840 --> 00:36:46,520
Speaker 3: And how does that compare to the least term?

724
00:36:47,000 --> 00:36:49,840
Speaker 4: Which I love and I think you are exactly right

725
00:36:49,880 --> 00:36:52,720
Speaker 4: that these are more reminiscent of project finance, and actually

726
00:36:52,719 --> 00:36:54,920
Speaker 4: if you look through the rating methodologies, they more skewed

727
00:36:54,920 --> 00:36:59,600
Speaker 4: towards project finance, not corporate credit. The single biggest issue

728
00:36:59,640 --> 00:37:02,360
Speaker 4: I think our investor base has had is just the

729
00:37:02,400 --> 00:37:05,800
Speaker 4: heterogeneity of all of these different structures. They're all different,

730
00:37:06,320 --> 00:37:09,520
Speaker 4: they don't really follow the same framework. Some are fully amortizing,

731
00:37:09,600 --> 00:37:12,799
Speaker 4: some are not, Some have much more construction risks. Some

732
00:37:12,880 --> 00:37:16,040
Speaker 4: don't unclear who's on the hook in some instances and

733
00:37:16,080 --> 00:37:19,120
Speaker 4: how that might differ versus other structures if construction.

734
00:37:18,760 --> 00:37:20,160
Speaker 3: Runs over or is delayed.

735
00:37:20,880 --> 00:37:22,719
Speaker 4: So that's what the market has really tried to get

736
00:37:22,760 --> 00:37:25,880
Speaker 4: their arms around. The Other point that we have made

737
00:37:25,960 --> 00:37:29,200
Speaker 4: is that while it is interesting to look at relative

738
00:37:29,280 --> 00:37:32,160
Speaker 4: value of these new deals versus kind of the unsecured

739
00:37:33,719 --> 00:37:37,400
Speaker 4: Hyperscaler off take bond at issue ins, it's important to

740
00:37:37,440 --> 00:37:40,759
Speaker 4: also recognize that once the lease terms are set, the

741
00:37:40,840 --> 00:37:45,279
Speaker 4: economics of AI don't flow through, either positively or negatively. So,

742
00:37:45,640 --> 00:37:48,279
Speaker 4: say AI ends up being much more profitable than any

743
00:37:48,320 --> 00:37:51,719
Speaker 4: of us anticipate, that should probably be reflected in the

744
00:37:51,840 --> 00:37:56,400
Speaker 4: unsecured hyperscaler bonds, but that won't necessarily cause the leases

745
00:37:56,440 --> 00:37:59,040
Speaker 4: to be restruck, and so that's also something to keep

746
00:37:59,080 --> 00:38:02,200
Speaker 4: in mind. So absolutely a new asset class. What I

747
00:38:02,239 --> 00:38:04,239
Speaker 4: gather is that a lot of this financing would be

748
00:38:04,320 --> 00:38:06,760
Speaker 4: happening in the project finance market is just too large,

749
00:38:07,120 --> 00:38:09,720
Speaker 4: so it's coming into our market. But we're effectively creating

750
00:38:09,760 --> 00:38:13,640
Speaker 4: a new asset class, just like kind of interest in

751
00:38:13,960 --> 00:38:16,719
Speaker 4: other kind of you know, at ones or hybrids or

752
00:38:16,719 --> 00:38:19,839
Speaker 4: subordinated dead I think investors are generally using this as

753
00:38:19,880 --> 00:38:22,200
Speaker 4: a way to pick up some additional spread in what

754
00:38:22,320 --> 00:38:25,319
Speaker 4: is otherwise a pretty tight spread environment. So we've seen

755
00:38:25,360 --> 00:38:28,239
Speaker 4: a lot of interest there. Again, as you noted, there's

756
00:38:28,239 --> 00:38:30,120
Speaker 4: a lot of optimism around this theme. So I think

757
00:38:30,120 --> 00:38:33,480
Speaker 4: people are wanting to get involved. But there are some

758
00:38:33,600 --> 00:38:37,879
Speaker 4: real nuances that I think make all of these these

759
00:38:37,920 --> 00:38:41,160
Speaker 4: different transactions. There's a bit of a learning curve associated

760
00:38:41,160 --> 00:38:43,640
Speaker 4: with each, at least until the market coalesces around a

761
00:38:43,640 --> 00:38:44,440
Speaker 4: common structure.

762
00:38:44,880 --> 00:38:47,719
Speaker 1: Definitely get the excitement from both sides in the AI boom.

763
00:38:48,560 --> 00:38:51,279
Speaker 1: It is happening very quickly, at a speed. It comes

764
00:38:51,280 --> 00:38:53,759
Speaker 1: to names east mostly focus on the bus so at

765
00:38:53,760 --> 00:38:57,680
Speaker 1: a scale that we've never seen before. Even the see

766
00:38:57,719 --> 00:39:00,520
Speaker 1: of the biggest bank, Jamie Diamond, thinks that there could

767
00:39:00,520 --> 00:39:03,799
Speaker 1: be some bad stuff that happens along the way. Let's

768
00:39:03,840 --> 00:39:06,080
Speaker 1: see as hope you're right that that doesn't.

769
00:39:06,360 --> 00:39:08,000
Speaker 2: He's a newsman, bad news sales.

770
00:39:08,280 --> 00:39:10,360
Speaker 1: But before we let you go, I did want to

771
00:39:10,360 --> 00:39:12,319
Speaker 1: come back to your There is one piece in one

772
00:39:12,320 --> 00:39:15,040
Speaker 1: of your reports about fallen angels. We just sort of

773
00:39:15,400 --> 00:39:17,920
Speaker 1: look at that. You do expect a big increase in

774
00:39:17,960 --> 00:39:20,200
Speaker 1: fallen angels and wondering what was behind that one of

775
00:39:20,239 --> 00:39:21,560
Speaker 1: the sectors was driving it.

776
00:39:21,800 --> 00:39:26,320
Speaker 4: Yeah, I mean it's not outsized. I would say actually

777
00:39:26,520 --> 00:39:29,600
Speaker 4: relative to the change that we actually made, we actually

778
00:39:29,640 --> 00:39:34,640
Speaker 4: upgraded our Rising Star forecast, which has been most notable.

779
00:39:35,360 --> 00:39:37,959
Speaker 4: I think the interesting takeaway from the piece we wrote

780
00:39:38,040 --> 00:39:39,960
Speaker 4: last week is that a lot of folks that we

781
00:39:40,000 --> 00:39:42,799
Speaker 4: talked to, when they're thinking about assessing fallen angel risks,

782
00:39:42,800 --> 00:39:45,560
Speaker 4: so here we mean companies that are falling from investment

783
00:39:45,600 --> 00:39:47,840
Speaker 4: grade into high yield, they'll look at kind of the

784
00:39:47,920 --> 00:39:50,640
Speaker 4: obvious rating buckets. They'll look at kind of triple B

785
00:39:50,960 --> 00:39:53,760
Speaker 4: and triple B minus bonds that have a negative outlook

786
00:39:53,840 --> 00:39:57,080
Speaker 4: or a negative watch. What I found really surprising is

787
00:39:57,120 --> 00:40:01,080
Speaker 4: that since twenty ten, roughly half of the angels came

788
00:40:01,120 --> 00:40:06,120
Speaker 4: from other buckets that weren't signaling an obvious ratings downgrade.

789
00:40:06,840 --> 00:40:10,360
Speaker 4: So that is striking to me that actually it's not

790
00:40:10,480 --> 00:40:13,560
Speaker 4: as obvious as just tracking the kind of cuspy ratings

791
00:40:13,560 --> 00:40:15,600
Speaker 4: and cuspy outlooks that we have to think More broadly,

792
00:40:15,920 --> 00:40:18,200
Speaker 4: the other interesting point is that if you go in

793
00:40:18,239 --> 00:40:20,719
Speaker 4: the opposite direction, if you go on Rising Stars and

794
00:40:20,760 --> 00:40:23,719
Speaker 4: you look at high yield moving to IG, that kind

795
00:40:23,719 --> 00:40:26,960
Speaker 4: of surprise factor is even more pronounced, and there we

796
00:40:27,000 --> 00:40:29,919
Speaker 4: attribute that to strategic m and a so an ig

797
00:40:30,040 --> 00:40:32,200
Speaker 4: acquirer buying a high old firm, and then automatically they

798
00:40:32,239 --> 00:40:34,279
Speaker 4: get their ratings uplift, where the market wouldn't have really

799
00:40:34,320 --> 00:40:38,359
Speaker 4: been prepared for that in most instances, I think I'm

800
00:40:38,360 --> 00:40:42,279
Speaker 4: not super I'm not super concerned about the fallen angels risk.

801
00:40:42,400 --> 00:40:44,960
Speaker 4: I think it's important to also keep in context just

802
00:40:45,000 --> 00:40:47,840
Speaker 4: the growth and size of the triple B market. So

803
00:40:48,000 --> 00:40:50,160
Speaker 4: if you have kind of a probability in any given

804
00:40:50,200 --> 00:40:52,200
Speaker 4: year that a portion of the triple B market falls

805
00:40:52,200 --> 00:40:55,640
Speaker 4: into high yielded territory, as the universe of triple B

806
00:40:55,800 --> 00:40:58,040
Speaker 4: has grown, it's only logical to think that that number

807
00:40:58,080 --> 00:41:00,400
Speaker 4: will grow over time. I would also go to the

808
00:41:00,400 --> 00:41:03,319
Speaker 4: point that we kind of referenced earlier, which is this

809
00:41:03,440 --> 00:41:05,839
Speaker 4: is just not as detrimental to performance as it has

810
00:41:05,880 --> 00:41:08,840
Speaker 4: been in the past. Actually, our analysis last week showed

811
00:41:08,840 --> 00:41:12,680
Speaker 4: that US fallen angels actually outperform on the downgrade right,

812
00:41:13,200 --> 00:41:16,759
Speaker 4: which hopefully that means that active credit analysis actually works.

813
00:41:16,800 --> 00:41:19,320
Speaker 4: That analysts have been looking at these companies, they're monitoring

814
00:41:19,360 --> 00:41:22,080
Speaker 4: the fundamentals, they're prepared for it, and in many instances,

815
00:41:22,120 --> 00:41:24,800
Speaker 4: high YELD investors are happy to own investment grade legacy,

816
00:41:24,840 --> 00:41:27,680
Speaker 4: investment grade risk, especially if there's a plan to return

817
00:41:27,719 --> 00:41:30,880
Speaker 4: to investment grade metrics where they don't outperform, as in Europe,

818
00:41:31,320 --> 00:41:34,279
Speaker 4: and that was a new development and there we found

819
00:41:34,280 --> 00:41:36,920
Speaker 4: that that was largely because there are a lot more

820
00:41:37,000 --> 00:41:40,600
Speaker 4: single agency ratings in Europe relative to US, So that

821
00:41:41,360 --> 00:41:45,040
Speaker 4: kind of deterioration quickly in ratings can be very quick

822
00:41:45,560 --> 00:41:48,799
Speaker 4: and impact the index eligibility rules very quickly, and so

823
00:41:48,840 --> 00:41:51,480
Speaker 4: you're more caught off guard in the European market. But

824
00:41:52,120 --> 00:41:55,000
Speaker 4: not a going back to kind of the tempering of

825
00:41:55,040 --> 00:41:57,920
Speaker 4: the view on technicals. I wouldn't put I wouldn't put

826
00:41:57,920 --> 00:42:00,799
Speaker 4: the upgrade or downgrade kind of fallen angel rising star

827
00:42:00,960 --> 00:42:03,360
Speaker 4: technicals as high on the list of impacting performance. I

828
00:42:03,360 --> 00:42:05,839
Speaker 4: think there are a lot of other technicals that are

829
00:42:05,840 --> 00:42:06,480
Speaker 4: more meaningful.

830
00:42:06,640 --> 00:42:08,000
Speaker 2: Do you have any names you want to throw up?

831
00:42:08,360 --> 00:42:10,480
Speaker 4: We can give you the list of the names that

832
00:42:10,520 --> 00:42:12,439
Speaker 4: have already happened, but we have not. It's a top

833
00:42:12,480 --> 00:42:14,719
Speaker 4: down forecast, so we have not put any companies in play.

834
00:42:14,719 --> 00:42:16,360
Speaker 3: And we get that question. We've done that question a

835
00:42:16,400 --> 00:42:17,360
Speaker 3: few times since last.

836
00:42:17,200 --> 00:42:20,400
Speaker 1: Thursday, and that's where we started on very very tight spreads.

837
00:42:20,440 --> 00:42:24,040
Speaker 1: I mean, obviously there is dispersion, so there are value

838
00:42:24,280 --> 00:42:27,520
Speaker 1: pockets in the market. Where is the relative value in credit?

839
00:42:27,719 --> 00:42:29,799
Speaker 4: Yeah, I mean I think the relative value is in

840
00:42:29,920 --> 00:42:33,080
Speaker 4: selectively taking credit risks. So for example, in ig we

841
00:42:33,160 --> 00:42:35,759
Speaker 4: prefer Triple B over the higher rated cohort because I

842
00:42:35,760 --> 00:42:38,480
Speaker 4: think you are picking up some additional spread. For the

843
00:42:38,480 --> 00:42:41,160
Speaker 4: most part, those are still solid companies, largely committed to

844
00:42:41,239 --> 00:42:44,160
Speaker 4: remaining investment grade. I would say we're not really shying

845
00:42:44,200 --> 00:42:46,640
Speaker 4: away from credit risk either. If you look at kind

846
00:42:46,680 --> 00:42:50,920
Speaker 4: of a quality overlap between double b's and single or

847
00:42:50,920 --> 00:42:53,400
Speaker 4: excuse me, double b's and Triple b's, we expect that

848
00:42:53,440 --> 00:42:57,120
Speaker 4: relationship to remain range bound. We're not expecting underperformance of

849
00:42:57,200 --> 00:42:59,759
Speaker 4: the high old pocket of Double Be's, right, So I

850
00:42:59,760 --> 00:43:02,920
Speaker 4: think wouldn't really shy away from taking credit risk. I

851
00:43:02,920 --> 00:43:05,080
Speaker 4: don't think there's a lot of scope for compression between

852
00:43:05,120 --> 00:43:07,160
Speaker 4: the two. But I also don't think the doubleb's are

853
00:43:07,200 --> 00:43:10,279
Speaker 4: really poised to underperform. We talked about the preference for

854
00:43:10,360 --> 00:43:13,960
Speaker 4: highyold over leverage loans. That's driven by a few things. One,

855
00:43:14,040 --> 00:43:16,600
Speaker 4: you're not leaving as much carry on the table by

856
00:43:17,200 --> 00:43:20,440
Speaker 4: overweighting high yield verse loans because that carry differential that

857
00:43:20,480 --> 00:43:23,719
Speaker 4: loans is offering is compressed relative to history somewhat, and

858
00:43:23,800 --> 00:43:26,680
Speaker 4: also the ratings and sector mix and loans is more challenging,

859
00:43:26,800 --> 00:43:29,239
Speaker 4: so we prefer high yield. And then there are other

860
00:43:29,280 --> 00:43:31,560
Speaker 4: pockets of the market. We see value in certain areas

861
00:43:31,560 --> 00:43:35,120
Speaker 4: of structured products, like mortgages, for example, agency mortgages versus

862
00:43:35,200 --> 00:43:39,000
Speaker 4: IG If you really want to take leverage loan exposure,

863
00:43:39,000 --> 00:43:41,400
Speaker 4: we would recommend doing it through COLO form where you

864
00:43:41,440 --> 00:43:44,520
Speaker 4: have some opportunity to build in structural protections as opposed

865
00:43:44,600 --> 00:43:48,800
Speaker 4: to owning the loans outright. So I think in US banks,

866
00:43:48,800 --> 00:43:51,320
Speaker 4: for example, we're comfortable moving down in the capital structure

867
00:43:51,320 --> 00:43:53,520
Speaker 4: into subordinated debt. So it's really kind of picking your

868
00:43:53,520 --> 00:43:57,279
Speaker 4: spots and saying, within reason, kind of adding credit risk

869
00:43:57,400 --> 00:43:59,200
Speaker 4: where it's hard to say that you feel like you're

870
00:43:59,239 --> 00:44:02,479
Speaker 4: getting fully compet because again we're acknowledging that spreads are tight,

871
00:44:02,600 --> 00:44:06,239
Speaker 4: But where is that kind of risk trade off at

872
00:44:06,320 --> 00:44:08,600
Speaker 4: least a bit more palatable in the context of a

873
00:44:08,640 --> 00:44:09,840
Speaker 4: pretty tight spread environment.

874
00:44:10,200 --> 00:44:12,880
Speaker 1: Sounds pretty bullish. And the longer this goes on, the

875
00:44:12,920 --> 00:44:14,520
Speaker 1: more people ask me, how does it all end when

876
00:44:14,760 --> 00:44:16,880
Speaker 1: and what are you worried about I'm worried.

877
00:44:16,960 --> 00:44:21,840
Speaker 4: I'm worried about a traditional slowdown in the economic backdrop,

878
00:44:21,960 --> 00:44:26,080
Speaker 4: because I think that is really that would really call

879
00:44:26,120 --> 00:44:28,680
Speaker 4: into question our view that defaults have peaked.

880
00:44:28,760 --> 00:44:31,080
Speaker 3: It would call into question just.

881
00:44:31,120 --> 00:44:36,640
Speaker 4: The generally contained realized loss performance in areas like private credit.

882
00:44:37,320 --> 00:44:41,759
Speaker 4: So it's really kind of a bona fide traditional economic slowdown, which,

883
00:44:41,960 --> 00:44:44,600
Speaker 4: depending on if you think the COVID recovery was a

884
00:44:44,640 --> 00:44:47,400
Speaker 4: real recovery, you could make the argument that the credit

885
00:44:47,440 --> 00:44:49,799
Speaker 4: cycle is pretty extended and pretty long, and so that

886
00:44:49,800 --> 00:44:52,759
Speaker 4: would be the one thing that I'm monitoring. It is

887
00:44:52,800 --> 00:44:55,759
Speaker 4: not our base case, I should say, but of all

888
00:44:55,840 --> 00:44:58,600
Speaker 4: of the different kind of tail risks, it's a generic

889
00:44:58,719 --> 00:45:00,120
Speaker 4: economic slowdown that gives.

890
00:45:00,200 --> 00:45:01,960
Speaker 1: The most concerned slow down lot recession.

891
00:45:02,080 --> 00:45:03,640
Speaker 4: I would say it needs to be pretty close to

892
00:45:03,680 --> 00:45:08,040
Speaker 4: your recession. Two point one percent real GDP growth, in

893
00:45:08,080 --> 00:45:09,920
Speaker 4: my view, is a good enough backdrop for credit. So

894
00:45:09,920 --> 00:45:11,279
Speaker 4: I would say if we get to kind of the

895
00:45:11,560 --> 00:45:14,320
Speaker 4: very low end of that range, or you know, certainly

896
00:45:14,360 --> 00:45:16,719
Speaker 4: negative for recession territory, that would really do it. But

897
00:45:17,120 --> 00:45:18,560
Speaker 4: the market will move well ahead of that.

898
00:45:19,160 --> 00:45:22,120
Speaker 1: Great stuff. Amanda Line in Chief Credit strategies with Golden Sas.

899
00:45:22,160 --> 00:45:24,000
Speaker 1: Thank you very much for being on on the Credit Edge.

900
00:45:24,000 --> 00:45:25,479
Speaker 1: It has been a real pleasure. Thank you for having

901
00:45:25,520 --> 00:45:28,400
Speaker 1: me and Rob Shiftman with Bloomberg Intelligence. Thank you so

902
00:45:28,520 --> 00:45:31,320
Speaker 1: much for joining us today. Thanks James for even more analysis.

903
00:45:31,360 --> 00:45:33,440
Speaker 1: Read all of Rob's great work on the Bloomberg Terminal.

904
00:45:33,600 --> 00:45:36,839
Speaker 1: Tech is his life. Call him. Bloomberg Intelligence is part

905
00:45:36,840 --> 00:45:39,480
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907
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908
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913
00:46:02,840 --> 00:46:04,680
Speaker 1: I'm James Crombie. It's been a feasure having you join

914
00:46:04,760 --> 00:46:06,399
Speaker 1: us again next week on the Credit Edge.