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Speaker 1: Hello, Welcome to the Credit Edge Weekly Markets podcast. My

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

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Speaker 2: I'm Rob Schiffman, a senior analyst covering tech at Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Alex Mackie, CO,

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Speaker 2: Chief Investment Officer of Fixed Income and MFS Investment Management.

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Speaker 2: How are you doing today?

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Speaker 3: Alex doing great? Thanks for having me. Happy to be here.

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Speaker 2: Ah, awesome, so is co CIO. Alex has joint oversight

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Speaker 2: of MFS's global fixed Income team and works collaboratively with

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Speaker 2: the firm's investment leadership team to ensure its fixed income

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Speaker 2: investors have the tools and skill sets necessary to serve

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Speaker 2: clients globally. He's also a fixed income portfolio manager on

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Speaker 2: several strategies, including the forum's multisector fixed income strategies, with

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Speaker 2: oversight of dedicated US credit portfolios. So, James, why don't

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Speaker 2: you get us started here?

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Speaker 1: Thanks Robert, and great to have you on the show. Alex,

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Speaker 1: And and we should say say also that you oversee around

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Speaker 1: one hundred and twenty billion dollars in fixed income assets,

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Speaker 1: serving diverse institutional and retail investors around the world, And

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Speaker 1: to be clear also, we are talking about MFS investment management,

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Speaker 1: not market financial solutions. The UK Profty lender that went

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Speaker 1: bust amid all allegations and put the spotlight on lending

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Speaker 1: to non banks, stoking anxiety about defaults in private credit.

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Speaker 1: We are, though, talking at a time of high anxiety

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Speaker 1: for global markets, with energy prices spiking and geopolitical risk rising,

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Speaker 1: and yet public corporate debt at least at a very

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Speaker 1: high level, projects an air of calm and stability. Two

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Speaker 1: big risks that we've been discussing on this show are

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Speaker 1: US recession and a rate hike from the Fed. Neither

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Speaker 1: seems very likely at the moment, but the odds are

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Speaker 1: definitely so, Alex, I want to start there to what

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Speaker 1: extent are you positioning for either of those outcomes and

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Speaker 1: how would they affect credit markets if they did happen.

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Speaker 3: Yeah. Well, it's great to be able to think about

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Speaker 3: the evolution of the year because coming into twenty twenty six,

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Speaker 3: the priorities for conversation here at MFS across the global

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Speaker 3: platform focused on fixed income. We're really about an improving outlook,

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Speaker 3: at least for the first half of twenty twenty six

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Speaker 3: from a macro perspective, right, and then comparing and contrasting

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Speaker 3: that relative to the micro perspectives that we've got from

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Speaker 3: a global research organization that's deeply staffed across the globe,

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Speaker 3: and you know, that landscape, I think has been one

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Speaker 3: where we've continued to have relatively high conviction about the

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Speaker 3: strength and fundamentals, So that's been really supportive, but the

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Speaker 3: narrative has shifted meanfully when it comes to the thing

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Speaker 3: that we we've all spent a lot of time talking

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Speaker 3: about that's inflation, and inflation is a byproduct of what's

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Speaker 3: been going on with conflict. So the persistence of that,

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Speaker 3: right how long that lasts, is going to have a

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Speaker 3: whole host of implications from bottom up and the top down.

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Speaker 3: You mentioned the FED and frankly central branks around the world.

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Speaker 3: So we don't have high conviction yet that there is

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Speaker 3: a step function change, but the duration of this conflict

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Speaker 3: and the availability of energy globally is going to be

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Speaker 3: important input into how that decision for us as an

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Speaker 3: investor for our clients is going to be allocating capital

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Speaker 3: over the course of twenty twenty six. And then there's

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Speaker 3: the downstream effects that we hear about every single day

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Speaker 3: that are impacting companies and how they're being operated. So

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Speaker 3: it's been a change every year. There's a set of

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Speaker 3: risks that evolve, and sometimes you get them mostly right.

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Speaker 3: I don't think there were a lot that were calling

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Speaker 3: for a global energy crisis and a significant conflict in

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Speaker 3: the Middle least, but that's what we do, right.

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Speaker 2: So how do you manage through these geopolitical events? You know,

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Speaker 2: just a couple of months ago, I was talking every

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Speaker 2: single day about an AI bubble, which we're going to

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Speaker 2: get into later, but now everything's just shifted towards the

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Speaker 2: Mid East and the implication. So how do you manage

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Speaker 2: potentially a short term process versus long term results or

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Speaker 2: maybe even vice versa.

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Speaker 3: Right, right, Yeah, the background noise of AI, the background

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Speaker 3: noise of private credit that had really dominated the credit

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Speaker 3: market for the first couple of months of twenty twenty six,

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Speaker 3: those are still percolating in the background. They're just not

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Speaker 3: the leading edge of what's been driving volatility in the

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Speaker 3: markets in the short term. And we do believe that

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Speaker 3: resolution will come in some form. We can't and we

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Speaker 3: don't have a crystal ball to understand what that resolution is.

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Speaker 3: Going to look like for the crisis in the Middle East,

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Speaker 3: but we do believe that that is expected in the

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Speaker 3: not too distant future. That means that we're going to

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Speaker 3: have a landscape where all the positive impulses that we've

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Speaker 3: been spending a lot of time talking about at the

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Speaker 3: end of twenty twenty five and in the beginning of

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Speaker 3: twenty twenty six will be pulling through. It's just a

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Speaker 3: question of the order magnitude of those. And then the

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Speaker 3: risks related to AI and the risks related to private credit,

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Speaker 3: which really the dominant features for credit investors, are going

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Speaker 3: to get a lot more airtime. We expect that fully.

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Speaker 3: So those aren't on the shelf. They are active discussions

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Speaker 3: that we're having every single day.

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Speaker 1: So when you look at where market is currently up

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Speaker 1: pricing risk at the moment, you know, the high yields

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Speaker 1: spread widened out to a bit, so did the IG spread,

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Speaker 1: but they both come way back down again. They're both

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Speaker 1: around long term averages. So you know, we're pretty much

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Speaker 1: pricing very very tight levels of you know, not much

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Speaker 1: credit risk in the market as of now. Is that fair?

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Speaker 3: Well, it's where the market is, you know, you know,

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Speaker 3: the features of technicals right, So frameworking at fundamentals, valuations technicals,

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Speaker 3: technicals can do play an important part in how investors

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Speaker 3: are just an allocate capital. Yields have moved higher, right,

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Speaker 3: So while spreads haven't really moved, yields moved higher. So

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Speaker 3: the value proposition of fixed income has improved somewhat. Assuming

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Speaker 3: the risk free rate is mostly that risk free rate,

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Speaker 3: we think that that's been pulling some capital into the markets.

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Speaker 3: If you look at bond offerings deal book sizes, they're

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Speaker 3: still well over subscribed, and that's an important indicator of

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Speaker 3: what demand is in reality, so the demand function seems

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Speaker 3: to be healthy. Higher yields are a really important predictor

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Speaker 3: of what future returns are going to look like. That's

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Speaker 3: one of the things that I talk with clients about

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Speaker 3: all the time is just look at where your starting

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Speaker 3: yield is and you can have a pretty high confidence

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Speaker 3: interval around what your expected future return is going to

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Speaker 3: look like. That depends on the parts of the market

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Speaker 3: you're investing in, but starting yield really matters, and yields increased,

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Speaker 3: so demand for fixed income continues to be there. Frankly,

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Speaker 3: on the valuation strictly from a spread perspective, that's been

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Speaker 3: a little bit frustrating for us because we have a

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Speaker 3: lot of concerns and there are some fat tailed risks

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Speaker 3: that are out there, and yet the market hasn't correspondingly

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Speaker 3: increased the premium that you're getting compensated for putting capital

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Speaker 3: to work. So yeah, the IG market has barely budged

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Speaker 3: off of multidicatal tights. The high yield market same. That's

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Speaker 3: true in the US as well as over in Europe.

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Speaker 3: As a bypract of that, our risk positioning across the

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Speaker 3: platform really hasn't changed all that much because frankly, valuations

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Speaker 3: haven't changed all that much, and we think that investors

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Speaker 3: are going to be well served to be patient.

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Speaker 1: Do you worry? It's all though the demand might might

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Speaker 1: hold up at this point, and we've seen, you know,

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Speaker 1: not a great course of for returns. We're starting to

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Speaker 1: see some outflows from the funds, and then there's all

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Speaker 1: this noise that you referred to earlier about private credit,

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Speaker 1: you know, redemptions there and all that. At the same time,

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Speaker 1: we've got this ton of supply coming on, So the

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Speaker 1: net new supply of high yield and IG could just

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Speaker 1: be very substantial, the highest in years at a time

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Speaker 1: when you know, not just US demand, but lust be

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Speaker 1: foreign demand is also you know, staying closer to home

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Speaker 1: where yields are higher. Also there might be losses that

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Speaker 1: you know, you need to sell liquid stuff to cover.

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Speaker 1: So there's a whole load of stuff that worries me

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Speaker 1: more about demand than anything.

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Speaker 3: Yep. And and we would echo that caution, and particularly

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Speaker 3: as it relates to take a look at it. For example,

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Speaker 3: three month returns for the US AGG space, they've gone

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Speaker 3: negative by order magnit to roughly two percent, a little

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Speaker 3: north of two percent. If if you look about it

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Speaker 3: in a historical context, you typically see flows moderate go

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Speaker 3: slightly negative. That's what's been happening here more recently. It

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Speaker 3: hasn't happened in other parts of the market. It hasn't

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Speaker 3: happened in the emerging market debt sector. It has happened

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Speaker 3: in high yield, that it has happened in investment grade.

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Speaker 3: But I think we'd categorize it as really relatively tempered

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Speaker 3: at this point. But we do know with pretty high

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Speaker 3: confidence that meaningful negative flows can create pretty outsized spread responses.

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Speaker 3: It's one of the things we spent a lot of

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Speaker 3: time talking about in the POSTGFC era, you had these bouts.

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Speaker 3: We referred to them as mini cycles, where you'd get

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Speaker 3: a burst wider of spread really on a technically driven dynamic.

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Speaker 3: Taking back to twenty eighteen, in the beginning of twenty nineteen,

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Speaker 3: it was really in December where there was a fear

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Speaker 3: that the FED was going to go too far, that

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Speaker 3: they were going to push the economy into a recession,

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Speaker 3: and you had selling into an environment where there just

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Speaker 3: were buyers. Some of it was seasonal, but selling can

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Speaker 3: push spreads meaningfully wider in a very short period of time,

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Speaker 3: and you better be positioned to take advantage of that.

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Speaker 3: That also is something we talk about all the time.

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Speaker 3: How are you putting a plan in place so that

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Speaker 3: when the markets offer a better value proposition to you,

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Speaker 3: you can deploy that capital. What segments are you most

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Speaker 3: interested in, what sectors are you most interested in, what

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Speaker 3: issuers are you most interested in? And then what are

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Speaker 3: your levels? Right you mentioned, you know, getting to long

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Speaker 3: term averages, we'd actually argue that current spreads are still

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Speaker 3: somewhat through long term averages, and we'd like to see

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Speaker 3: long term averages and probably get a little bit more

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Speaker 3: excited about deploying more capital.

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Speaker 2: So my spider sense started tingling as soon as you

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Speaker 2: mentioned fat tales. I guess you know, we're always worried

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Speaker 2: about doomsday in the fixed income markets. We'd love to

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Speaker 2: hear a little bit more about what those those risks

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Speaker 2: or the top risks are from your perspective. And you know,

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Speaker 2: if you're having a pretty big war that's affecting energy

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Speaker 2: prices across the globe, and we're still in such an

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Speaker 2: uncertain period, and this doesn't move credit markets that much wider,

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Speaker 2: what will.

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Speaker 3: Recession what? And the catalysts for a recessionary environment are

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Speaker 3: always really difficult to project, and forecasting recession is extraordinarily

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Speaker 3: difficult to forecast. But I think we would be quite

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Speaker 3: concerned if inflationary metrics continued to ramp higher and the

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Speaker 3: markets instead of just reading through that that was ultimately

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Speaker 3: going to cause recession and yields fell. If we had

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Speaker 3: a significant spike hire and yields, that would be a

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Speaker 3: scenario that could drive some real powerful technical pressures, and

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Speaker 3: we'd be quite concerned about that. The byproduct of lack

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Speaker 3: of energy availability into certain economy around the world, particularly

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Speaker 3: in Southeast Asia China as well. You know, the outcomes

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Speaker 3: of what that means for those economies and the spillover

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Speaker 3: effects that it has had. Those are difficult to project.

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Speaker 3: They're also difficult to plan out the scope of the impact.

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Speaker 3: So there are a number of different things that we

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Speaker 3: do worry about. A lot of it comes down to

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Speaker 3: what is and what could be catalysts for recession, and

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Speaker 3: we don't expect a recession. We're not anticipating that. I

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Speaker 3: mentioned at the beginning of this conversation that fundamentally we

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Speaker 3: feel quite good about the landscape for corporations, particularly in

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Speaker 3: the US, but there are flags, and those flags may

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Speaker 3: turn into something more than just a flag, and that

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Speaker 3: would be that would be the outcome that we'd really

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Speaker 3: be concerned about. Again, that's feeding into how aggregate risk

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Speaker 3: positioning ends up proliferating across the platform. Right, this is

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Speaker 3: not an environment where we want to be really pro risk.

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Speaker 2: So how do you prep for that? Do you keep

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Speaker 2: more cash on hand? Do you move up in credit quality?

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Speaker 2: Do you shift away from credit to other asset classes?

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Speaker 3: Yep, Well, it's going to be mandate by mandate, so

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Speaker 3: a little bit unique to each so it can be

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Speaker 3: a little bit more cash. It tends to be a

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Speaker 3: little bit more treasuries, it may be some mortgages. It

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Speaker 3: certainly will be a migration up the quality continuum. So

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Speaker 3: think about corporates moving up the rating scale, if you will.

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Speaker 3: And that in this environment is not a high cost proposition,

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Speaker 3: right what you're sacrificing in compensation to move up the

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Speaker 3: quality continuum from double bees to triple b's or triple

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Speaker 3: bees to single a's or single a's to double a's,

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Speaker 3: that compensation is low in an historical sense. I was

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Speaker 3: just looking at some charts earlier today comparing dispersion, or

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Speaker 3: trying to look at measures of dispersion. I think there

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Speaker 3: are lots of idiosyncratic examples, but when you look at

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Speaker 3: a market based level the dispersion, So take the ninetieth

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Speaker 3: percentile less than tenth percentile of market spreads, it's hardly moved.

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Speaker 3: So the market's not the market is not asking for

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Speaker 3: a lot of compensation to take on risk.

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Speaker 1: Is that fair?

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Speaker 3: I mean?

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Speaker 1: And also, what level do you think that you would

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Speaker 1: jump back into. Let's say, ig it's around let's say

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Speaker 1: mid eighties right now, spread I dealed around three hundred.

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Speaker 1: What levels would get you excited about jumping back.

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Speaker 3: In Yeah, we we look at long term averages. We

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Speaker 3: also look at long term medians, and you know, long

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Speaker 3: term averages you're talking into the one twenty context somewhere thereabouts.

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Speaker 3: That was, for a moment in time, a thought that

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Speaker 3: could have happened around the Liberation Day last year. We

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Speaker 3: would have anticipate. I wouldn't say we were hopeful, but

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Speaker 3: we were interested in whether or not this current bout

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Speaker 3: of volatility, which really hasn't leaked into the credit markets,

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Speaker 3: was going to end up putting us back into a

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Speaker 3: similar environment. It just hasn't happened yet. But long term

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Speaker 3: averages are a good starting point, and that would be

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Speaker 3: the important statement, is its starting point, So the beginnings

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Speaker 3: of stepping into credit, and of course we'll revisit the

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Speaker 3: fundamental dialogue and what the current risks are at that

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Speaker 3: point in time to determine how much and which segments

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Speaker 3: of the marketplace to step into risk. Give you an

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Speaker 3: example of how you can do that differently. You know,

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Speaker 3: COVID was a moment in time where you wanted to

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Speaker 3: let bond math do the work for you, so you

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Speaker 3: just buy long duration, high quality credit and the aggregate

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Speaker 3: of the market risk premamp that increased was more than

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Speaker 3: some stantial enough to compensate you in excess ways as

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Speaker 3: opposed to taking real risk in an environment where your

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Speaker 3: forecasting ability and your visibility was exceptionally low. So the

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Speaker 3: environment will dictate how you take that risk. But our

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Speaker 3: conversations about starting that process would absolutely begin as we

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Speaker 3: get and approach levels that are more along the lines

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Speaker 3: of laun term averages.

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Speaker 2: Before we get into how you're playing AI from this

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Speaker 2: sector perspective, I'd love a bigger picture thought process. There's

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Speaker 2: so much conversation on AI disruption and how it possibly

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Speaker 2: could have a significant negative impact on so many sectors.

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Speaker 2: Just wondering your thought process on how you're thinking about

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Speaker 2: that or might be most exposed or do you have

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Speaker 2: any real concerns and if so, how do you how

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Speaker 2: do you adjust your portfolio for that?

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Speaker 3: Well, Fortunately we've been from having a large research organization

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Speaker 3: at MFS and that resource. Your organization is not just

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Speaker 3: credit research focused individuals. We have equity focused individuals, and

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Speaker 3: we have quantitative solutions focused individuals. The evolution of AI

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Speaker 3: and the impact that it has on all of our

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Speaker 3: lives and every business that operates today and the businesses

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Speaker 3: that will operate in the future. That's a conversation where

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Speaker 3: we can get an incredible amount of bottom up input

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Speaker 3: to help us to try to risk assess those very

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Speaker 3: difficult to answer questions that I think you're getting at.

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Speaker 3: What businesses are at risk? What are the disintermediation possibilities?

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Speaker 3: Are you looking at revenue risk? Are you talking about

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Speaker 3: expense opportunities? This is where our team comes together and

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Speaker 3: we help each other to make better investment decisions. Right

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Speaker 3: where you're investing across the capital ste back is a

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Speaker 3: very different question. But doing deep research on the companies,

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Speaker 3: there are a lot of analogies that can be drawn

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Speaker 3: about what a credit investor is doing relative to what

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Speaker 3: an equity investor is doing. So from a very high level,

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Speaker 3: we're excited about the AI ecosystem as debt investors, as

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Speaker 3: credit investors, we're excited about the growth of the ecosystem.

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Speaker 3: It's challenging all of us to start to look at

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Speaker 3: different structures, to think about different means of financing. We've

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Speaker 3: had a couple of different financings in the marketplace. One

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Speaker 3: just yesterday was placed for multiple billion, multiple billions of

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Speaker 3: dollars in support of data centers in the IG market

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Speaker 3: kind of a first of its kind structure. These are opportunities,

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Speaker 3: but it's not just blindly buying into an area of growth.

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Speaker 3: We need to do the cross sector comparison. Right, Is

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Speaker 3: this financing being sought out for the market where they

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Speaker 3: can get the least cost option and the security packages

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Speaker 3: are not commensurate with what the corresponding risks are or alternatively,

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Speaker 3: are AI financing requirements supporting growth in non corporate segments

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Speaker 3: of the fixed income marketplace? Securitize credit. Is that a

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Speaker 3: great place for us to go and think about ways

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Speaker 3: that we can take on comparable risks and growth dynamics

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Speaker 3: and at the same time get better security and comparable compensation.

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Speaker 3: So it's creating new opportunities for us. It's also putting

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Speaker 3: an incredible amount of debt into the marketplace, which is

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Speaker 3: adding liquidity. It's giving you the opportunity to have potentially

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Speaker 3: more tactical investment opportunities. So it's an exciting time filled

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Speaker 3: with risks. I think a lot of this is more

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Speaker 3: risky for the equity value proposition than it is at

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Speaker 3: least today for the credit proposition. You know, if you

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Speaker 3: have fears of the growth of a business slowing because

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Speaker 3: of some degrees of AI disintermediation that could be very

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Speaker 3: problematic for the equity price, it may not be problematic

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Speaker 3: at all for the credit profile. And so I think

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Speaker 3: there are going to be examples where we can look

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Speaker 3: back and point to, maybe with the baff water or

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Speaker 3: a bit of hyperbole, as to the disintermediation threat that exists.

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Speaker 3: I can think of some particular names I can unfortunately

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Speaker 3: share those with you. But those are the kinds of

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Speaker 3: opportunities where we say, yes, this may end up slowing

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Speaker 3: down the top line, but these are essential services that

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Speaker 3: companies are providing for their clients, and they're extraordinarily difficult

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Speaker 3: to rip out of those businesses. So yes, maybe the

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Speaker 3: cash flow growth slows somewhat, but the ability to repay

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Speaker 3: your debt obligations remains incredibly sound, and when spreads respond

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Speaker 3: in a negative way, that's an opportunity for us at

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Speaker 3: MFS to step into a situation.

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Speaker 2: Do you have specific sectors though, that you don't like?

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Speaker 2: I mean the poster child for disang remediations, financial services, legal,

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Speaker 2: and certainly in tech high yield software, which is underperformed dramatically.

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Speaker 2: I'm just wondering what you've thought about those spaces or

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Speaker 2: others that give you pause.

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Speaker 3: Yeah, I'll give you the unfortunate Well, on the one

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Speaker 3: hand this and on the other hand that it is

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Speaker 3: going to be somewhat idiosyncretic. And you know, data centers

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Speaker 3: is an area where we have plenty of different ways

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Speaker 3: to own that risk. We don't subscribe to the view

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Speaker 3: that owning data centers is definitionally a great way to

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Speaker 3: take credit risk. But these are just boxes. You're kind

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Speaker 3: of left with an entity that can't be repurposed into

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Speaker 3: anything valuable. The chips that are going inside those units

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Speaker 3: have a very short depreciation life, and then it's a

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Speaker 3: question of will they be reupt at the end of

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Speaker 3: that useful life. You don't know. It's a lot of risk.

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Speaker 3: So there are there are plenty of issuers who are

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Speaker 3: putting that kind of content or that kind of asset

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Speaker 3: into the debt markets today, and we're scrutinizing that heavily.

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Speaker 3: We think that there that could be potentially a dangerous

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Speaker 3: way to allocate debt capital, so that that would be

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Speaker 3: one software obviously, in particularly in the high yield market,

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Speaker 3: is a is a sector where we have plenty of

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Speaker 3: reasons for concern between high leverage between asset light models

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Speaker 3: and the possibility of disintermiation, which is going to be

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Speaker 3: difficult to forecast, so those are being heavily scrutinized. I

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Speaker 3: don't think that's very differentiated for the rest of the market.

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Speaker 3: You've seen that sector come under a lot of pressure

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Speaker 3: both in public and in private credit markets, so I

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Speaker 3: think those are the two principal callouts, but overall, for

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Speaker 3: corporate issuers in the public bond markets, typically these are

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Speaker 3: really large businesses that have significant market share, that had

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Speaker 3: been operating for many decades, and their ability to defend

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Speaker 3: their marketplace is pretty significant. And they're not just going

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Speaker 3: to sit on their hands and watch as AI eats

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Speaker 3: their lunch, right, They're going to be investing proactively to

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Speaker 3: try to help grow their business. I think it's much

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Speaker 3: much harder to be an equity investor facing these prospects

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Speaker 3: than it is to be a dead investor facing these

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Speaker 3: same risks.

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Speaker 2: Yeah, I completely agree. We've been wildly bullish on uninvestment

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Speaker 2: grade issuance so far that, like you said, demand has

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Speaker 2: been sort of through the roof. I'm wondering, though, you know,

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Speaker 2: these effectively are the mount rushmores of credit. You know,

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Speaker 2: we talked about being worth more than the US government.

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Speaker 2: Microsoft is rated higher than the US government. But you know,

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Speaker 2: with so much issuance or record issuance last year, probably

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Speaker 2: going to be record issuance again because we're talking about

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Speaker 2: trillions of dollars of capex. Companies now are starting to

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Speaker 2: issue not just in multi currencies, but all along the curve.

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Speaker 2: I mean, we saw Alphabet do one hundred year bond.

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Speaker 2: Is there a certain sweet spot for you? You know,

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Speaker 2: do you do you get to a point where there's

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Speaker 2: you don't care what the carry is on a thirty

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Speaker 2: or fifty year bond because you're too worried about the

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Speaker 2: technology fifty years out. You know, it's the front end

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Speaker 2: where do you see the most value on morning's issuers.

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Speaker 3: It's funny because I feel like that question has really

401
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Speaker 3: evolved when it comes to assessing the technology landscape. I

402
00:25:00,400 --> 00:25:03,600
Speaker 3: covered technology back in the early two thousands, and that

403
00:25:03,800 --> 00:25:06,119
Speaker 3: was the first question on every credit, Well, what's the

404
00:25:06,160 --> 00:25:08,320
Speaker 3: substitution risk? These guys are going to go away? You

405
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Speaker 3: can't possibly buy a ten year bond in this Cisco

406
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Speaker 3: as an example, that's obviously changed with the essentiality of

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Speaker 3: what these megacap companies are delivering to the to the market,

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Speaker 3: to the to the global economy today. So we don't

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Speaker 3: we don't have nearly the same kinds of reservations. It

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Speaker 3: really comes down to the strategy the capability that needs

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Speaker 3: to invest the capital. So it depends on the nature

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Speaker 3: of what is that capability. Is it a short duration,

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Speaker 3: intermediate duration, longer duration product, and if there is an

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Speaker 3: offering from you mentioned alphabet, if there is a long

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Speaker 3: duration security that is that is on offer, we can

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Speaker 3: entertain that it's really about the fit for the capability

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Speaker 3: that in sex with what the client's outcomes and goals

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Speaker 3: are aligned with. So we're not we're not terribly concerned

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Speaker 3: one hundred year bonds that is. That's that's to me,

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Speaker 3: a great insurance type of conversation. It's a it's a

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Speaker 3: unique type of a structure. We've seen those and other

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Speaker 3: corporate issuers over time. I wonder if some of it

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Speaker 3: was just a desire on the part of the company

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Speaker 3: and the bankers to prove that, you know, we are

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Speaker 3: who we say we are.

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Speaker 1: I know, well it is well the bullish I'll take

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Speaker 1: the other side of that I'm worry, worry about the

428
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Speaker 1: bubble bursting and people other people seem to be given

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Speaker 1: the demand for hedges, and you know, there have been

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Speaker 1: some some solutions out there. There are CDs you know

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Speaker 1: that are getting more active, that becoming parts of the

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Speaker 1: cd X, which is, you know, giving you more exposure.

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Speaker 1: But I wonder about that in terms of your your

434
00:26:53,600 --> 00:26:56,720
Speaker 1: ability to hedge the bubble risk and whether you kind

435
00:26:56,760 --> 00:26:59,360
Speaker 1: of are are doing that to a certain extent right now.

436
00:27:00,680 --> 00:27:02,800
Speaker 3: You know, we have some strategies and we have some

437
00:27:02,840 --> 00:27:07,040
Speaker 3: investors who are more active in hedging and utilization of

438
00:27:07,040 --> 00:27:10,200
Speaker 3: derivatives in order to affect that type of hedge strategy.

439
00:27:11,400 --> 00:27:13,879
Speaker 3: We do have the ability to manage cash bonds along

440
00:27:13,880 --> 00:27:18,159
Speaker 3: those lines. So hedging the AI risk, I think, is

441
00:27:18,200 --> 00:27:21,360
Speaker 3: a very different question than just hedging aggregate risk at

442
00:27:21,359 --> 00:27:25,560
Speaker 3: the portfolio level. Reasons for caution when you think about

443
00:27:25,560 --> 00:27:27,600
Speaker 3: the capex cycle. So maybe I'll just kind of turn

444
00:27:27,640 --> 00:27:32,000
Speaker 3: it around a little bit. The capex cycle specifically related

445
00:27:32,040 --> 00:27:37,240
Speaker 3: to AI is going through this never seen before type

446
00:27:37,240 --> 00:27:40,760
Speaker 3: of growth experience, and when you get to twenty eight

447
00:27:40,880 --> 00:27:45,240
Speaker 3: and twenty nine and thirty, the scale of that spend

448
00:27:45,240 --> 00:27:49,520
Speaker 3: plan that's out there is so large, and there is

449
00:27:49,560 --> 00:27:51,199
Speaker 3: going to be a demand at some point on the

450
00:27:51,200 --> 00:27:56,160
Speaker 3: part of the market that returns will be required, right

451
00:27:56,680 --> 00:27:58,960
Speaker 3: And this again, I think this is and maybe Robert

452
00:27:58,960 --> 00:28:00,840
Speaker 3: and I are agreeing on on same with some of

453
00:28:00,920 --> 00:28:05,920
Speaker 3: the same things here. For credit investors, the returns are important,

454
00:28:06,080 --> 00:28:08,199
Speaker 3: but they're not nearly as important as they are for

455
00:28:08,280 --> 00:28:11,679
Speaker 3: the equity investor. So the magnitude of returns is going

456
00:28:11,760 --> 00:28:14,840
Speaker 3: to dictate the pace of spending that will continue. We've

457
00:28:14,840 --> 00:28:17,840
Speaker 3: got a blueprint for the next five years. Maybe it

458
00:28:17,880 --> 00:28:20,760
Speaker 3: goes smoothly, maybe it continues to grow, or maybe there's

459
00:28:20,760 --> 00:28:23,880
Speaker 3: a hiccup in between where the returns become a little

460
00:28:23,880 --> 00:28:27,679
Speaker 3: bit unsatisfactory and that likely has a response function on

461
00:28:27,720 --> 00:28:30,000
Speaker 3: the part of those who are spending and they slow

462
00:28:30,040 --> 00:28:34,199
Speaker 3: it down. So you know, these companies are only going

463
00:28:34,240 --> 00:28:38,040
Speaker 3: to get bigger. And with that, as a credit investor,

464
00:28:38,680 --> 00:28:42,360
Speaker 3: and particularly as an organization at MFS where we have

465
00:28:43,280 --> 00:28:48,280
Speaker 3: benchmark awareness or customize benchmarks solutions for our clients, we

466
00:28:48,360 --> 00:28:51,160
Speaker 3: need to manage that risk. And the technology sector just

467
00:28:51,200 --> 00:28:53,440
Speaker 3: continues to grow. You can go in and look at

468
00:28:53,280 --> 00:28:57,480
Speaker 3: the composition of the indices. Tech has been the fastest

469
00:28:57,480 --> 00:28:59,840
Speaker 3: growing sector for a very long period of time. It

470
00:28:59,920 --> 00:29:03,640
Speaker 3: was the fastest growing sector prior to this this boom

471
00:29:03,720 --> 00:29:05,840
Speaker 3: that we're going through, and that's only going to continue.

472
00:29:05,880 --> 00:29:09,320
Speaker 3: So you have to hedge that or manage risk. Manage that.

473
00:29:09,360 --> 00:29:11,840
Speaker 3: I would not not hedged, but it's risk. Manage it.

474
00:29:12,120 --> 00:29:14,280
Speaker 3: So you've got to choose how you're going to take

475
00:29:14,760 --> 00:29:18,040
Speaker 3: that risk. There's gonna be plenty of bonds to choose from,

476
00:29:18,360 --> 00:29:21,479
Speaker 3: so pick your credits, do the deep work. Uh. And

477
00:29:21,520 --> 00:29:24,520
Speaker 3: then and then along the way, I would like to

478
00:29:24,520 --> 00:29:28,240
Speaker 3: believe that there are going to be some idiosyncratic opportunities

479
00:29:28,480 --> 00:29:31,720
Speaker 3: that are might be adjacencies to the names that get

480
00:29:31,760 --> 00:29:35,560
Speaker 3: all the press, get all the headlines that like the hyperscalers,

481
00:29:35,600 --> 00:29:40,320
Speaker 3: continue to receive. I think there's some good examples of that.

482
00:29:40,480 --> 00:29:42,800
Speaker 3: I think I think Broadcom is one of those very

483
00:29:42,840 --> 00:29:46,960
Speaker 3: good examples of in the ecosystem growing like a weed,

484
00:29:47,480 --> 00:29:50,920
Speaker 3: but they're not spending anywhere along the same lines as

485
00:29:51,360 --> 00:29:54,120
Speaker 3: the hyperscalers. That's funny.

486
00:29:54,200 --> 00:29:57,040
Speaker 2: Years ago everyone was worried about BROADCLM levering up and

487
00:29:57,080 --> 00:30:00,880
Speaker 2: going to junk and you know, now there's superstar. Just

488
00:30:01,400 --> 00:30:04,360
Speaker 2: one more on this topic from me, and I get

489
00:30:04,360 --> 00:30:07,560
Speaker 2: this asked a lot like with all this debt issuance

490
00:30:07,640 --> 00:30:11,440
Speaker 2: and likely a lot more coming, do you end up

491
00:30:11,480 --> 00:30:15,040
Speaker 2: reaching limits like how much of an individual name can

492
00:30:15,080 --> 00:30:18,080
Speaker 2: you own regardless of what the bench you know, what

493
00:30:18,160 --> 00:30:20,880
Speaker 2: the index size would be. Do you just does it

494
00:30:20,960 --> 00:30:24,000
Speaker 2: get too large relative to other holdings where you just

495
00:30:24,040 --> 00:30:26,360
Speaker 2: say I can't own it? My answer is has has

496
00:30:26,440 --> 00:30:28,000
Speaker 2: been one of the You know, it's simple from the

497
00:30:28,200 --> 00:30:31,560
Speaker 2: bi perspective to say, at the right price, people won't anything.

498
00:30:31,880 --> 00:30:34,920
Speaker 2: But do you do you see becoming a potential problem

499
00:30:34,960 --> 00:30:37,880
Speaker 2: that it just I can't own another bond of this name.

500
00:30:38,040 --> 00:30:40,200
Speaker 3: I don't think we see that as a problem. It

501
00:30:40,240 --> 00:30:44,000
Speaker 3: could be a gating factor on the spread level. Right,

502
00:30:44,040 --> 00:30:45,960
Speaker 3: So maybe that's saying the same thing that you're saying,

503
00:30:45,960 --> 00:30:48,040
Speaker 3: but just saying it a little bit differently. You know,

504
00:30:48,120 --> 00:30:51,400
Speaker 3: the ability for a double a credit like META to

505
00:30:51,480 --> 00:30:53,920
Speaker 3: trade like a double A credit is going to face

506
00:30:53,960 --> 00:30:57,080
Speaker 3: some challenges. When you're putting tens of billions of new

507
00:30:57,120 --> 00:31:01,120
Speaker 3: issue paper into the marketplace on a recurring basis, there

508
00:31:01,160 --> 00:31:04,400
Speaker 3: are new issue concessions that the market does command. There

509
00:31:04,520 --> 00:31:07,640
Speaker 3: is going to be I guess a proliferation of exposure

510
00:31:08,280 --> 00:31:11,480
Speaker 3: where some investors may have explicit limits like you're talking

511
00:31:11,480 --> 00:31:16,000
Speaker 3: about at MFS, the value proposition is going to dictate

512
00:31:16,280 --> 00:31:18,600
Speaker 3: the size of the position. Then you run that through

513
00:31:18,600 --> 00:31:21,240
Speaker 3: your risk models and it will give you a syncratic

514
00:31:21,320 --> 00:31:23,880
Speaker 3: risk at the issuer level that is going to then

515
00:31:23,960 --> 00:31:27,560
Speaker 3: determine when if you've hit some form of a limit.

516
00:31:28,800 --> 00:31:31,480
Speaker 3: Those are also models that are going to be benchmark

517
00:31:31,560 --> 00:31:34,720
Speaker 3: or customized benchmark aware, So there will be some sort

518
00:31:34,760 --> 00:31:40,200
Speaker 3: of disintermediation of absolute issuer size as a gating factor

519
00:31:40,200 --> 00:31:42,280
Speaker 3: at least here at MFS, but you'll certainly have that

520
00:31:42,640 --> 00:31:46,000
Speaker 3: for some investors where that could be a problem. This

521
00:31:46,600 --> 00:31:48,360
Speaker 3: is an area that we haven't really spent a lot

522
00:31:48,360 --> 00:31:51,680
Speaker 3: of time talking about, but were there to be a

523
00:31:51,720 --> 00:31:57,760
Speaker 3: moment in time where there were regulatory constraints that impacted

524
00:31:58,120 --> 00:32:04,160
Speaker 3: market participants segments of the of the investment grade market, Insurance,

525
00:32:04,240 --> 00:32:06,360
Speaker 3: just because it's an easy sector to highlight as a

526
00:32:06,400 --> 00:32:10,520
Speaker 3: really large active investor in the investment grade market, reached

527
00:32:10,600 --> 00:32:15,440
Speaker 3: limits on regulatory requirements for individual issuer names or these

528
00:32:15,560 --> 00:32:19,440
Speaker 3: names in particular, or a name in particular, that would

529
00:32:19,600 --> 00:32:23,120
Speaker 3: create some indigestion. There are other sectors in the past

530
00:32:23,160 --> 00:32:26,600
Speaker 3: where that's happened for very different reasons than we could

531
00:32:26,640 --> 00:32:30,760
Speaker 3: think of for the hyperscalers, but that could be that

532
00:32:30,800 --> 00:32:33,560
Speaker 3: could be a risk to the absolute exposure on an

533
00:32:33,600 --> 00:32:34,240
Speaker 3: issuer level.

534
00:32:35,120 --> 00:32:37,120
Speaker 1: The text spread has widened outcut a bit with all

535
00:32:37,160 --> 00:32:38,520
Speaker 1: this supply. Do you think it's going to go a

536
00:32:38,560 --> 00:32:41,000
Speaker 1: lot wider? Do you think new issue concessions have to

537
00:32:41,040 --> 00:32:43,400
Speaker 1: go a lot higher to clear all of this massive

538
00:32:43,440 --> 00:32:44,640
Speaker 1: debt that Robert's talking about.

539
00:32:45,560 --> 00:32:50,440
Speaker 3: Well, you know, the market's pretty smart, bankers are pretty smart. Typically,

540
00:32:50,480 --> 00:32:53,960
Speaker 3: supply doesn't come unless there's demand. And yes, there'll be

541
00:32:54,040 --> 00:32:56,840
Speaker 3: bouts of modest new issue concessions that get put into

542
00:32:56,840 --> 00:33:01,080
Speaker 3: the marketplace. When you see those, you know, quote unquote

543
00:33:01,400 --> 00:33:05,120
Speaker 3: concessions hit at least in the IG space ten fifteen

544
00:33:05,160 --> 00:33:10,520
Speaker 3: maybe twenty basis points, those are significant and at that

545
00:33:10,680 --> 00:33:14,840
Speaker 3: point usually the supply funnel starts to squeeze a little

546
00:33:14,840 --> 00:33:19,960
Speaker 3: bit tighter and the market digests and corrects. So, you know,

547
00:33:20,040 --> 00:33:24,280
Speaker 3: the underperformance of tech that has been an interesting observation.

548
00:33:25,480 --> 00:33:28,040
Speaker 3: You know that had been trading well through industrials, well

549
00:33:28,080 --> 00:33:32,959
Speaker 3: through in utilities, well through financial or banking specifically for years.

550
00:33:33,120 --> 00:33:36,720
Speaker 3: That now is trading wide I think to all of

551
00:33:36,760 --> 00:33:40,120
Speaker 3: those groups except for maybe financials. Financials maybe a few

552
00:33:40,160 --> 00:33:43,480
Speaker 3: basis points behind them at this point, there is you know,

553
00:33:43,560 --> 00:33:48,959
Speaker 3: there's an improved value proposition within technology. It does it

554
00:33:49,040 --> 00:33:52,600
Speaker 3: does put a little bit of a limit on how

555
00:33:52,960 --> 00:33:55,840
Speaker 3: fast you could see a reversal of that trend. Right,

556
00:33:55,880 --> 00:33:59,600
Speaker 3: If you keep pumping bonds into a sector, then your

557
00:34:00,560 --> 00:34:02,760
Speaker 3: you're going to be creating a little bit of a

558
00:34:02,840 --> 00:34:08,840
Speaker 3: dynamic that pushes against persistent spread tightening and normalization evaluation. Right.

559
00:34:08,920 --> 00:34:12,239
Speaker 1: Okay, the other big thing that we keep hitting is

560
00:34:12,280 --> 00:34:15,080
Speaker 1: private credit, and I know you're mostly a public credit shot,

561
00:34:15,160 --> 00:34:17,399
Speaker 1: but I'm interested in your views. First of all, how

562
00:34:17,440 --> 00:34:20,279
Speaker 1: all this noise is affecting your day to day and

563
00:34:20,600 --> 00:34:23,239
Speaker 1: the perception of risk, because you know, not that many

564
00:34:23,280 --> 00:34:25,560
Speaker 1: weeks ago people were saying this is all all, you know,

565
00:34:25,680 --> 00:34:28,839
Speaker 1: two thousand and eight all over again, which I don't

566
00:34:28,840 --> 00:34:32,040
Speaker 1: think it. I don't think it really is. But stat aside,

567
00:34:32,040 --> 00:34:33,560
Speaker 1: there is a huge amount of noise. There's a lot

568
00:34:33,560 --> 00:34:38,240
Speaker 1: of fear about debt generally about companies, about risk, about

569
00:34:38,280 --> 00:34:41,239
Speaker 1: software or about all that stuff. And it seems to be,

570
00:34:41,320 --> 00:34:45,799
Speaker 1: you know, emanating mostly from the BDC's redemptions side. So

571
00:34:45,800 --> 00:34:47,959
Speaker 1: I'm curious as to your view of that. But also

572
00:34:48,040 --> 00:34:50,600
Speaker 1: is is there an oportunity to buy BDC debt cheep

573
00:34:50,600 --> 00:34:52,439
Speaker 1: because those spreads are really wide as well.

574
00:34:53,080 --> 00:34:56,000
Speaker 3: Right, Well, we get asked about private credit all the

575
00:34:56,040 --> 00:34:59,680
Speaker 3: time by our clients, by the marketplaces, by prospects, and

576
00:34:59,719 --> 00:35:02,200
Speaker 3: while we're not an active investor in private credit, we

577
00:35:03,040 --> 00:35:07,680
Speaker 3: want to understand the participation of private credit investors, private

578
00:35:07,840 --> 00:35:13,319
Speaker 3: credit capital allocators. And what you can what you can

579
00:35:13,440 --> 00:35:16,279
Speaker 3: simply look at is the flow of capital into that

580
00:35:16,360 --> 00:35:23,799
Speaker 3: marketplace was and has been very rapid. And history never

581
00:35:23,840 --> 00:35:28,000
Speaker 3: repeats itself, but it oftentimes rhymes. Where capital flows with

582
00:35:28,440 --> 00:35:32,600
Speaker 3: the greatest speed typically is where the accidents tend to happen.

583
00:35:33,360 --> 00:35:36,720
Speaker 3: Now that's not saying that we will have an accident

584
00:35:36,719 --> 00:35:40,080
Speaker 3: in private credit, and it is a value proposition that

585
00:35:40,160 --> 00:35:42,440
Speaker 3: for certain investors makes all the sense in the world.

586
00:35:43,600 --> 00:35:46,080
Speaker 3: The biggest question, and I think this is coming through

587
00:35:46,120 --> 00:35:48,759
Speaker 3: with a lot of the headlines that we're getting about

588
00:35:48,800 --> 00:35:52,319
Speaker 3: redemptions and so forth, is the matching up of who

589
00:35:52,400 --> 00:35:54,799
Speaker 3: are the capital owners and how are they choosing to

590
00:35:54,800 --> 00:35:57,359
Speaker 3: allocate into private credit, how has it been sold, has

591
00:35:57,400 --> 00:36:03,080
Speaker 3: it been put into the bright market places. That's a

592
00:36:03,160 --> 00:36:05,560
Speaker 3: that's not a decision and or an observation that we

593
00:36:05,640 --> 00:36:09,920
Speaker 3: have responsibility for making a call on But there are

594
00:36:09,960 --> 00:36:12,800
Speaker 3: some pretty reasonable signs to say that the growth of

595
00:36:12,840 --> 00:36:16,440
Speaker 3: the market has been more recently sponsored by a less

596
00:36:16,560 --> 00:36:20,960
Speaker 3: traditional and or maybe in some cases some of the

597
00:36:20,960 --> 00:36:27,040
Speaker 3: the misplaced customers or clients. So the pressures on redemptions

598
00:36:27,040 --> 00:36:30,040
Speaker 3: for BBC's because you brought that group up in particular,

599
00:36:30,200 --> 00:36:33,640
Speaker 3: the pressure on redemptions or for redemptions that they're facing

600
00:36:34,520 --> 00:36:38,160
Speaker 3: likely ends up causing creating some opportunities within the public

601
00:36:38,719 --> 00:36:41,719
Speaker 3: credit markets. You know, you can you can look at

602
00:36:41,760 --> 00:36:45,600
Speaker 3: the portfolio of these companies right the portfolios of these companies.

603
00:36:45,600 --> 00:36:47,319
Speaker 3: You can see all the issuers. You don't get the

604
00:36:47,360 --> 00:36:51,000
Speaker 3: details of what those issuers actually are, but you can

605
00:36:51,000 --> 00:36:54,920
Speaker 3: see the diversification diversification matters. You can also see the

606
00:36:54,960 --> 00:37:00,880
Speaker 3: appruals and you can see the losses. They the possibility

607
00:37:01,120 --> 00:37:04,520
Speaker 3: that you have a lowly levered and BDCs are designed

608
00:37:04,520 --> 00:37:09,880
Speaker 3: in a very low debt to equity leverage construct low leveraged,

609
00:37:10,320 --> 00:37:17,280
Speaker 3: manageable redemption diversified portfolio of assets getting compensated for taking

610
00:37:17,320 --> 00:37:21,800
Speaker 3: on that risk at a level will become fairly fairly compelling.

611
00:37:22,160 --> 00:37:24,600
Speaker 3: So we've been spending a lot of time talking about

612
00:37:24,600 --> 00:37:29,000
Speaker 3: BDCs you have to, and they had been a segment

613
00:37:29,040 --> 00:37:32,240
Speaker 3: of the market or sector within the investment grade marketplace

614
00:37:32,280 --> 00:37:35,080
Speaker 3: particularly that had grown a lot. The count of issuers

615
00:37:35,080 --> 00:37:38,280
Speaker 3: had been growing significantly, and there's been a pretty significant

616
00:37:38,280 --> 00:37:41,680
Speaker 3: dislocation in spreads. Right in a market where spreads haven't

617
00:37:41,719 --> 00:37:45,000
Speaker 3: moved much and the market broadly hasn't provided a lot

618
00:37:45,000 --> 00:37:49,440
Speaker 3: of dispersion, BDCs have created some dispersion, So you know

619
00:37:49,520 --> 00:37:51,960
Speaker 3: there are going to be some losses there there are not.

620
00:37:52,239 --> 00:37:54,439
Speaker 3: You can't just say that this is a buy every

621
00:37:54,520 --> 00:37:57,520
Speaker 3: name because the business model is perfect. You've got to

622
00:37:57,560 --> 00:37:59,200
Speaker 3: do the bottom up work. You've got to look at

623
00:37:59,200 --> 00:38:03,799
Speaker 3: the individual company, see where they're their loan risk is

624
00:38:03,800 --> 00:38:07,080
Speaker 3: being taken. Are they at the first lean level, are

625
00:38:07,080 --> 00:38:10,600
Speaker 3: they taking equity risk? What's the composition of that word,

626
00:38:10,640 --> 00:38:15,880
Speaker 3: their diversification levels, So that's that is an opportunity. But again,

627
00:38:15,920 --> 00:38:18,520
Speaker 3: you've got to do the deep research. And you know,

628
00:38:18,600 --> 00:38:22,760
Speaker 3: fortunately at MFS, we've got a large team that's focused

629
00:38:22,760 --> 00:38:25,640
Speaker 3: on doing just that, and our portfolio managers are partnering

630
00:38:26,000 --> 00:38:28,400
Speaker 3: with the analysts who are doing the deep research to

631
00:38:28,440 --> 00:38:33,080
Speaker 3: identify ways that the appropriate portfolios can allocate capital. When

632
00:38:33,120 --> 00:38:37,839
Speaker 3: those idiosyncratic stories are providing the right value proposition.

633
00:38:37,719 --> 00:38:39,680
Speaker 1: And sorry, just to be clear, that opportunity would be

634
00:38:39,719 --> 00:38:43,560
Speaker 1: to buy the bones of the BBC's correct correct.

635
00:38:43,239 --> 00:38:46,400
Speaker 2: From a positioning standpoint, Typically in fixed income we don't

636
00:38:46,719 --> 00:38:50,799
Speaker 2: usually have screaming buys. We may have screaming cells. I'm

637
00:38:50,800 --> 00:38:54,040
Speaker 2: just wondering, you know what sectors, what names are screaming

638
00:38:54,040 --> 00:38:54,920
Speaker 2: at you right now.

639
00:38:59,440 --> 00:39:01,520
Speaker 3: I think the names that are screening most are the

640
00:39:01,560 --> 00:39:05,359
Speaker 3: ones that phrase a baby with the bathwater. There are

641
00:39:05,400 --> 00:39:09,960
Speaker 3: some companies that are being unduly punished, and it's all

642
00:39:10,000 --> 00:39:15,600
Speaker 3: on a relative basis, but being unduly punished for having

643
00:39:15,640 --> 00:39:22,560
Speaker 3: some degrees of threat that AI is putting at them.

644
00:39:24,040 --> 00:39:28,360
Speaker 3: We can make that evaluation as to the order magnitude

645
00:39:28,360 --> 00:39:31,040
Speaker 3: of what that threat is. And when the market is

646
00:39:31,160 --> 00:39:34,880
Speaker 3: just wholesale selling an individual company and or maybe a

647
00:39:34,880 --> 00:39:41,239
Speaker 3: small group within a particular sector, that is where the

648
00:39:41,320 --> 00:39:45,880
Speaker 3: covering analysts are going to be banging the table. And

649
00:39:45,920 --> 00:39:48,480
Speaker 3: we have a very structured process as to how you

650
00:39:48,560 --> 00:39:51,920
Speaker 3: bang that table, but banging the table to say we

651
00:39:51,960 --> 00:39:55,640
Speaker 3: should be scrutinizing this, you should be thinking about allocating

652
00:39:56,040 --> 00:39:58,120
Speaker 3: into this name. We haven't owned it in the past,

653
00:39:58,200 --> 00:40:00,279
Speaker 3: or we don't own enough of it. And then making

654
00:40:00,320 --> 00:40:04,239
Speaker 3: sure that we're doing that across the platform where appropriate,

655
00:40:04,360 --> 00:40:07,560
Speaker 3: so that that is one where we're not focused on

656
00:40:08,840 --> 00:40:10,960
Speaker 3: or you know, the the center of focus in the

657
00:40:10,960 --> 00:40:16,120
Speaker 3: markets is energy and the conflict. But every day we're

658
00:40:16,200 --> 00:40:22,439
Speaker 3: talking about the disintermediation, the baby with the bathwater, what's

659
00:40:22,480 --> 00:40:26,640
Speaker 3: most oversold and why aren't we owning it? Challenging ourselves

660
00:40:27,320 --> 00:40:31,520
Speaker 3: to step toward risk and that's what we have to do,

661
00:40:31,600 --> 00:40:33,440
Speaker 3: right that's where you're going to end up generating the

662
00:40:33,480 --> 00:40:35,600
Speaker 3: most significant excess returns over time.

663
00:40:36,960 --> 00:40:40,680
Speaker 1: Do the BDCs full into that set of baby with

664
00:40:40,680 --> 00:40:42,400
Speaker 1: the buth water because a lot of people seem to

665
00:40:42,400 --> 00:40:43,279
Speaker 1: be panicking about that.

666
00:40:44,760 --> 00:40:46,480
Speaker 3: I think it's a little bit too early to tell

667
00:40:46,560 --> 00:40:52,839
Speaker 3: if it's that kind of category. But the the ability

668
00:40:52,920 --> 00:41:00,319
Speaker 3: to differentiate one issue relative to another, that part is

669
00:41:00,400 --> 00:41:09,200
Speaker 3: becoming increasingly important. And the differentiation in spreads evaluation, I think,

670
00:41:09,239 --> 00:41:13,680
Speaker 3: in our view has not has not become dispersed enough.

671
00:41:14,120 --> 00:41:16,879
Speaker 3: It is increasing, but it has not become dispersed enough.

672
00:41:17,480 --> 00:41:19,520
Speaker 3: And you know, we so we think that there are

673
00:41:19,560 --> 00:41:22,560
Speaker 3: going to be opportunities within there, but you're going to

674
00:41:22,640 --> 00:41:24,360
Speaker 3: have to be You're going to have to be very

675
00:41:24,400 --> 00:41:26,440
Speaker 3: selective in how you step towards that.

676
00:41:27,360 --> 00:41:29,640
Speaker 1: And is the opportunity that now or is it wait

677
00:41:29,719 --> 00:41:32,080
Speaker 1: and see because there's still so much uncertainty and at

678
00:41:32,239 --> 00:41:35,439
Speaker 1: a lot more probably problems to come over the next

679
00:41:35,440 --> 00:41:35,960
Speaker 1: few weeks.

680
00:41:37,520 --> 00:41:39,080
Speaker 3: Well, I think there are going to be lots of

681
00:41:39,160 --> 00:41:41,480
Speaker 3: questions that are going to take the better part of

682
00:41:41,520 --> 00:41:44,560
Speaker 3: this year and maybe into next year to end up

683
00:41:44,560 --> 00:41:49,560
Speaker 3: being resolved. I'd say it's it's a lot better value

684
00:41:49,600 --> 00:41:52,640
Speaker 3: proposition today than it was coming into the beginning of

685
00:41:52,640 --> 00:41:57,000
Speaker 3: twenty twenty six. There's names you mentioned, you know, difference

686
00:41:57,000 --> 00:41:59,719
Speaker 3: between equity and credit before, like Blue Out whose equities

687
00:41:59,719 --> 00:42:03,520
Speaker 3: are you know, at their lows? Bonds have certainly sold off,

688
00:42:03,520 --> 00:42:06,440
Speaker 3: but maybe not as bad as as what happened with equity.

689
00:42:06,480 --> 00:42:09,040
Speaker 3: Is that the type of name that you've got your

690
00:42:09,400 --> 00:42:11,719
Speaker 3: your eye on. Have you creeped into names like that?

691
00:42:12,880 --> 00:42:15,640
Speaker 3: Is there anything specific there you are to talk about? Yeah,

692
00:42:15,719 --> 00:42:19,799
Speaker 3: Unfortunately I can't really talk about specific names that we

693
00:42:19,880 --> 00:42:23,160
Speaker 3: might be making actionable decisions around. But what I can

694
00:42:23,280 --> 00:42:25,759
Speaker 3: tell you is that you can line up all the

695
00:42:25,760 --> 00:42:29,560
Speaker 3: public and the private BDCs and you can go through

696
00:42:29,600 --> 00:42:33,440
Speaker 3: and see which ones have the leverage metrics that are

697
00:42:33,480 --> 00:42:36,160
Speaker 3: most attractive. You can see which ones have the crules

698
00:42:36,400 --> 00:42:40,160
Speaker 3: that are either most attractive and or most concerning, and

699
00:42:40,200 --> 00:42:43,239
Speaker 3: then you can line up valuation against that and then

700
00:42:43,400 --> 00:42:46,440
Speaker 3: dig deeper into the portfolio companies that are underlying each

701
00:42:46,480 --> 00:42:50,800
Speaker 3: of these businesses, and you can see you want diversification,

702
00:42:51,320 --> 00:42:55,480
Speaker 3: you want low leverage, you want low crules. Those are

703
00:42:55,520 --> 00:42:57,879
Speaker 3: the kinds of characteristics that you that you'd really want

704
00:42:57,880 --> 00:43:03,080
Speaker 3: to zoom in on before choosing to proactively step into

705
00:43:04,120 --> 00:43:07,480
Speaker 3: what we know is a business model that's geared towards

706
00:43:08,080 --> 00:43:12,840
Speaker 3: lending on a highly levered basis to smaller companies.

707
00:43:13,520 --> 00:43:15,920
Speaker 1: On that note, I think a lot of the fear

708
00:43:16,040 --> 00:43:19,160
Speaker 1: is around you know the portfolio, not knowing how much

709
00:43:19,239 --> 00:43:21,279
Speaker 1: is it worth, how is it being marked, if it's

710
00:43:21,280 --> 00:43:25,440
Speaker 1: being marked, and what are the actual defaults if you

711
00:43:25,440 --> 00:43:27,680
Speaker 1: can even see them. And so you know, yes, you

712
00:43:27,719 --> 00:43:31,000
Speaker 1: can see, you know something of the portfolio, but can

713
00:43:31,040 --> 00:43:32,880
Speaker 1: you get down to a level that you're comfortable with

714
00:43:33,000 --> 00:43:35,399
Speaker 1: you know all of the risk involved.

715
00:43:36,719 --> 00:43:39,400
Speaker 3: Well, you're you're never going to have perfect precision, and

716
00:43:39,440 --> 00:43:43,120
Speaker 3: that's where the diversification piece comes into play. We're also

717
00:43:43,160 --> 00:43:46,440
Speaker 3: in the business of taking risk, so you can't you

718
00:43:46,520 --> 00:43:50,360
Speaker 3: can't get something for nothing. You know, the ability of

719
00:43:50,400 --> 00:43:57,080
Speaker 3: our analysts who are deep experts focused on industries, digging

720
00:43:57,120 --> 00:44:02,200
Speaker 3: into companies, meeting with them regularly, understanding what management's priorities are,

721
00:44:03,040 --> 00:44:06,560
Speaker 3: ripping apart the portfolios in the case of the BDC's

722
00:44:06,600 --> 00:44:09,560
Speaker 3: the portfolio companies to the best of the ability from

723
00:44:09,560 --> 00:44:14,239
Speaker 3: a transparency perspective, and then making the assessment as to

724
00:44:14,320 --> 00:44:19,520
Speaker 3: whether the valuation proposition on a risk adjusted basis is

725
00:44:19,600 --> 00:44:23,520
Speaker 3: significant enough. That'll feed through into how you size positions, right,

726
00:44:24,040 --> 00:44:27,719
Speaker 3: That'll feed into how diversified of an allocation you might

727
00:44:27,840 --> 00:44:33,080
Speaker 3: choose to make. So you have to take risk. You're

728
00:44:33,120 --> 00:44:36,160
Speaker 3: never going to have perfect foresight, and it's a matter

729
00:44:36,480 --> 00:44:37,760
Speaker 3: of how you risk management.

730
00:44:38,920 --> 00:44:41,319
Speaker 1: And when you look around everything you're doing, it's quite

731
00:44:41,320 --> 00:44:44,040
Speaker 1: a big global portfolio. You see tons of different things.

732
00:44:44,040 --> 00:44:46,960
Speaker 1: But I'm wondering where you think best relative value is

733
00:44:47,360 --> 00:44:49,080
Speaker 1: right now. I mean, I know it's a really murky

734
00:44:49,360 --> 00:44:52,480
Speaker 1: twelve months horizon, but let's say for the next twelve months, Well,

735
00:44:52,600 --> 00:44:55,480
Speaker 1: do you put your finger on as really great credit

736
00:44:55,520 --> 00:44:56,560
Speaker 1: relative value right now?

737
00:44:57,719 --> 00:45:02,120
Speaker 3: Well, our preferences to be making that up in quality treade.

738
00:45:02,239 --> 00:45:05,839
Speaker 3: So our preference is really to take risk marginally into

739
00:45:05,840 --> 00:45:09,279
Speaker 3: the investment grade market. You've got great liquidity, you've got

740
00:45:09,280 --> 00:45:12,000
Speaker 3: really durable credits, you've got a landscape for fundamentals that

741
00:45:12,080 --> 00:45:16,319
Speaker 3: continues to be relatively healthy with modest, if not better

742
00:45:16,360 --> 00:45:20,440
Speaker 3: than modest, top line growth and corresponding cash flow growth.

743
00:45:20,920 --> 00:45:24,480
Speaker 3: So if you have to allocate to risk, trying to

744
00:45:24,480 --> 00:45:26,600
Speaker 3: focus on that up in quality. If you're talking about

745
00:45:26,600 --> 00:45:30,279
Speaker 3: a high yield mandate staying invested, trying to be competitive

746
00:45:30,920 --> 00:45:35,480
Speaker 3: relative to what the market yield may be, but skewing

747
00:45:36,080 --> 00:45:38,800
Speaker 3: up the quality continuum there, So thinking about going single

748
00:45:38,800 --> 00:45:41,600
Speaker 3: B to double B, those will be our preferences.

749
00:45:42,080 --> 00:45:44,520
Speaker 1: And this is a global US, not just US, it's

750
00:45:44,560 --> 00:45:46,120
Speaker 1: everything that.

751
00:45:46,320 --> 00:45:48,600
Speaker 3: Yeah, that's a global view. That's a global view. I mean,

752
00:45:48,640 --> 00:45:52,560
Speaker 3: we have a global conversation around risks and opportunities, which

753
00:45:52,600 --> 00:45:56,560
Speaker 3: is really focused on spread markets, spread markets globally, whether

754
00:45:56,600 --> 00:46:02,520
Speaker 3: it's IG, high yield, US, your PN E, M, corporate,

755
00:46:02,560 --> 00:46:09,480
Speaker 3: EM sovereign, and in those exercises, really the dominant conclusion

756
00:46:09,760 --> 00:46:11,600
Speaker 3: is leaning toward up in quality.

757
00:46:12,200 --> 00:46:15,840
Speaker 1: Do you not in that segment worry about some leverage

758
00:46:16,040 --> 00:46:18,560
Speaker 1: increasing and potential downgrade risk as we get more M

759
00:46:18,560 --> 00:46:20,480
Speaker 1: and A, as we get more supplies, we get potentially

760
00:46:20,480 --> 00:46:22,480
Speaker 1: the economies starting to slow.

761
00:46:23,520 --> 00:46:28,520
Speaker 3: Do worry about that. That's an interesting byproduct of frankly,

762
00:46:28,600 --> 00:46:33,279
Speaker 3: the current administration that has really been a much much

763
00:46:33,320 --> 00:46:38,040
Speaker 3: more supportive. It's been a much much more supportive environment

764
00:46:38,560 --> 00:46:43,840
Speaker 3: for getting regulatory approval and businesses wanting to grow grow faster.

765
00:46:45,320 --> 00:46:48,200
Speaker 3: M and A is a traditional playbook for that. We're seeing.

766
00:46:48,560 --> 00:46:53,759
Speaker 3: We are seeing that. So that is a concern. I

767
00:46:53,800 --> 00:46:58,000
Speaker 3: would say. The way that we can offset that is

768
00:46:58,040 --> 00:47:01,560
Speaker 3: because those concerns are those risks to be idiosyncratic in nature.

769
00:47:01,560 --> 00:47:03,640
Speaker 3: They don't tend to drive the aggregate of the market.

770
00:47:04,040 --> 00:47:07,000
Speaker 3: So if we have the ability and we do to

771
00:47:07,160 --> 00:47:12,520
Speaker 3: cover companies, cover them globally, and to have our analysts

772
00:47:12,640 --> 00:47:17,080
Speaker 3: focusing as investors in trying to identify excess returns as

773
00:47:17,320 --> 00:47:20,279
Speaker 3: as a kind of a north star or goal for

774
00:47:20,920 --> 00:47:28,440
Speaker 3: the way that they're recommending credits, we can idiosyncratically identify

775
00:47:29,800 --> 00:47:33,160
Speaker 3: with a degree of reasonability how to avoid those types

776
00:47:33,200 --> 00:47:36,160
Speaker 3: of situations, and that it's it's a it's a great

777
00:47:36,280 --> 00:47:38,680
Speaker 3: it's a great question to bring up, because we've been

778
00:47:38,719 --> 00:47:40,839
Speaker 3: talking about that a lot more over the last number

779
00:47:40,840 --> 00:47:41,760
Speaker 3: of months.

780
00:47:42,320 --> 00:47:44,839
Speaker 1: Well, it's the one thing that your clients worry most

781
00:47:44,880 --> 00:47:47,000
Speaker 1: about other than the things we've already told about. Is

782
00:47:47,000 --> 00:47:49,000
Speaker 1: that one they concern that you think we're missing it.

783
00:47:50,200 --> 00:47:52,960
Speaker 3: Twenty twenty two PTSD. I think that's the thing that

784
00:47:53,200 --> 00:47:57,759
Speaker 3: clients worry about most and and we worry about it some.

785
00:47:58,640 --> 00:48:02,359
Speaker 3: The The reality of the environment today relative to twenty

786
00:48:02,360 --> 00:48:04,920
Speaker 3: twenty two, and this is where it's important that we

787
00:48:04,960 --> 00:48:07,520
Speaker 3: have an open dialogue with our clients, is our view

788
00:48:07,640 --> 00:48:11,600
Speaker 3: is significantly different than where we are now. The starting

789
00:48:11,640 --> 00:48:14,160
Speaker 3: point is very different than twenty twenty two. The starting

790
00:48:14,160 --> 00:48:17,880
Speaker 3: point for twenty twenty two was you had a environment

791
00:48:17,960 --> 00:48:20,480
Speaker 3: for global central banks that we're all moving in a

792
00:48:20,560 --> 00:48:23,960
Speaker 3: direction of a tightening cycle. You were coming off of

793
00:48:24,360 --> 00:48:29,040
Speaker 3: floor rates, and the prospect for returns, the break even

794
00:48:29,160 --> 00:48:33,680
Speaker 3: for returns was so low. You compare that to the

795
00:48:33,840 --> 00:48:39,319
Speaker 3: environment now, where you have in historical context relatively high

796
00:48:39,360 --> 00:48:44,839
Speaker 3: starting yield. You have monetary policy that broadly speaking has

797
00:48:44,880 --> 00:48:50,680
Speaker 3: pivoted from a loosening or maybe a pause preference to

798
00:48:50,760 --> 00:48:53,239
Speaker 3: now kind of universally pause with the possibility of maybe

799
00:48:53,320 --> 00:48:55,920
Speaker 3: some short, short term high access on our call. But

800
00:48:56,320 --> 00:48:59,600
Speaker 3: that's what's changed there. The other thing that's really changed

801
00:48:59,719 --> 00:49:02,439
Speaker 3: is labor environment. The labor environment in twenty twenty two

802
00:49:03,360 --> 00:49:09,440
Speaker 3: was in a shortfall position. Right, employers were talking about

803
00:49:10,080 --> 00:49:12,280
Speaker 3: not being able to find the workers that they wanted.

804
00:49:12,760 --> 00:49:17,120
Speaker 3: Now you've got a relatively weak labor environment. Right, payrolls

805
00:49:17,200 --> 00:49:23,560
Speaker 3: run rate, payrolls of zero is becoming an acceptable outcome

806
00:49:24,320 --> 00:49:27,160
Speaker 3: that is incredibly different than twenty twenty two. So we

807
00:49:27,200 --> 00:49:31,800
Speaker 3: think for those reasons, the possibility that the PTSD of

808
00:49:33,480 --> 00:49:38,320
Speaker 3: inflation rising yields rising fixed income value proposition not delivering

809
00:49:38,400 --> 00:49:45,520
Speaker 3: the diversification benefits relative to other risk sectors that clients

810
00:49:45,880 --> 00:49:50,440
Speaker 3: can get exposure to. Were skeptical of that. And we

811
00:49:50,480 --> 00:49:55,319
Speaker 3: think that it's an understandable emotional state because it just

812
00:49:55,360 --> 00:49:58,520
Speaker 3: happened only four years ago, but we don't think that

813
00:49:58,560 --> 00:50:00,839
Speaker 3: the fundamental setup it is consisting and with that toword

814
00:50:01,120 --> 00:50:02,879
Speaker 3: type of experience, and the.

815
00:50:02,880 --> 00:50:04,960
Speaker 1: Risk then is that they miss out on all of

816
00:50:05,000 --> 00:50:07,880
Speaker 1: the potential gains rather than they invest too much at

817
00:50:07,880 --> 00:50:08,280
Speaker 1: this point.

818
00:50:08,640 --> 00:50:11,920
Speaker 3: That's exactly right. That's exactly right, because because if and

819
00:50:11,960 --> 00:50:15,279
Speaker 3: when you do have growth slow, and if and when

820
00:50:15,320 --> 00:50:18,960
Speaker 3: you do have something that looks and smells more like

821
00:50:19,000 --> 00:50:21,680
Speaker 3: the possibility of recession, you know what all the central

822
00:50:21,680 --> 00:50:23,799
Speaker 3: banks are going to do. They're all going to they're

823
00:50:23,840 --> 00:50:25,560
Speaker 3: going to do it about face and they are going

824
00:50:25,640 --> 00:50:30,319
Speaker 3: to be supportive, and that is going to that is

825
00:50:30,360 --> 00:50:33,480
Speaker 3: going to drive fields significantly lower, and that's going to

826
00:50:33,480 --> 00:50:37,040
Speaker 3: provide powerful returns and the probability that we're having that

827
00:50:37,080 --> 00:50:42,120
Speaker 3: conversation and inflation is still a key concern for showing

828
00:50:42,640 --> 00:50:45,600
Speaker 3: increased upward pressure is extraordinarily low.

829
00:50:46,840 --> 00:50:49,799
Speaker 1: Great stuff, Alex Mackey with MFS Investment Management, It's been

830
00:50:49,840 --> 00:50:51,880
Speaker 1: a pleasure having you on the Credit Edge. Many thanks,

831
00:50:52,440 --> 00:50:54,600
Speaker 1: thank you so much, And to Robert Schiffman with boom

832
00:50:54,600 --> 00:50:56,440
Speaker 1: Bag Intelligence, thank you so much for joining us today.

833
00:50:56,640 --> 00:50:57,080
Speaker 3: Great day.

834
00:50:57,239 --> 00:50:59,719
Speaker 1: For even more analysis, read all of Rept's great work

835
00:50:59,760 --> 00:51:02,600
Speaker 1: on the Bloomberg Terminal. Tech is his life, Call him.

836
00:51:02,719 --> 00:51:05,399
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837
00:51:05,440 --> 00:51:08,720
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838
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839
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840
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841
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844
00:51:27,800 --> 00:51:31,600
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845
00:51:31,640 --> 00:51:33,520
Speaker 1: It's been a pleasure having you join us again next

846
00:51:33,560 --> 00:51:48,600
Speaker 1: week on the Credit Edge