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Speaker 1: Hello, and welcome to the Credit Edge Weekly Markets Podcast.

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

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Speaker 1: This week, we're very pleased to welcome Olev Melentiev, head

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Speaker 1: of US High Old Strategy at Bank of America. How

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Speaker 1: are you, Alec?

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Speaker 2: Pretty good? How about you, James?

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Speaker 1: Very good, Thanks so much for joining us today. Very

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Speaker 1: excited to dig into your credit market views. Also delighted

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Speaker 1: to welcome back Matt Goitner with Bloomberg Intelligence. Great to

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Speaker 1: see you again, Matt.

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Speaker 3: Good to see you, Thanks for having me back. I'm

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Speaker 3: Matt Weitner. I'm a credit analyst here with Bloomberg Intelligence,

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Speaker 3: and we are part of Bloomberg's research department, with five

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Speaker 3: hundred analysts and strategists working across all major world markets.

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Speaker 3: Our coverage includes over two thousand equities, over six hundred credits,

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Speaker 3: as well as outworks on more than ninety industries and

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Speaker 3: one hundred market indices, currencies and commodities.

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Speaker 1: So, just to set the scene a little bit here,

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Speaker 1: credit markets are rallying, Debt spreads remain tight. You're not

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Speaker 1: getting very much compensation for the risk of default or

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Speaker 1: downgrade on corporate debt. The mood is bullish, especially when

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Speaker 1: it comes to US assets. Most investors are very excited

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Speaker 1: about the high yields you can get on bonds that

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Speaker 1: have paid very low coupons for most of the last

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Speaker 1: ten years. If rates stay where they are or as

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Speaker 1: many expect, fall, fixed income investors stand to benefit, a

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Speaker 1: FED hike would probably cause a lot of trouble. Though

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Speaker 1: issuance is ramping up. There's been a record volume of

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Speaker 1: bond and loan sales as companies take advantage of the

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Speaker 1: window to raise debt, front loading their fundraising to avoid

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Speaker 1: any potential election volatility later this year. The bull case

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Speaker 1: is founded on a belief that the US economy will

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Speaker 1: avoid recession, earnings can stay solid, and companies are fine

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Speaker 1: with the higher borrowing costs, although there's a cohort of

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Speaker 1: very low quality issuers that may still blow up if

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Speaker 1: rates don't come down soon. Despite the mostly optimistic outlook

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Speaker 1: from investors, there's still quite a lot to worry about,

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Speaker 1: from commercial real estate stress, war, geopolitics and elections, to

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Speaker 1: debt defaults and distress. I'm sensing a bit of complacency

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Speaker 1: overall in credit markets, given how tight spreads have become.

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Speaker 1: Maybe even a bit of froth if you look at

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Speaker 1: some of the deals that are getting done. So what

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Speaker 1: do you think, Oh, we've heard a lot on this

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Speaker 1: show about the year of the bond, a golden age

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Speaker 1: for credit. You've been doing this a long time. What's

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Speaker 1: your take.

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Speaker 4: We agree with some arguments that are being put forward

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Speaker 4: in terms of optimism around credit. The yields that we're

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Speaker 4: seeing in the market today are very impressive by the

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Speaker 4: standards of the last ten, fifteen to twenty years. The

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Speaker 4: demand for the asset class is exceptionally strong.

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Speaker 2: We see.

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Speaker 4: High quality institutional long term demand for credit coming in

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Speaker 4: from pension funds, insurance companies, weals funds, as well as

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Speaker 4: well as walsh management industry. So just between these two factors,

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Speaker 4: I think the argument is pretty strong that you know,

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Speaker 4: credit will remain well supported into whatever uncertainty is coming

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Speaker 4: our way. Having said that, I think the argument is

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Speaker 4: incomplete given the fact that spreads are pretty much at

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Speaker 4: historical tights. So from that standpoint, I think complacency you

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Speaker 4: mentioned it in your opening remarks, is a very important

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Speaker 4: risk to consider given the fact that we're not really

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Speaker 4: being compensated for anything that could go sort of the

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Speaker 4: wrong way for the market.

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Speaker 1: And that really concerns because you know, you mentioned those investents,

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Speaker 1: they could just buy treasuries, you know, which are much

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Speaker 1: more liquid and yielding very high yields as well. So

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Speaker 1: when you start ignoring spreads and looking at just yield,

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Speaker 1: do we not get ourselves into a lot of trouble

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Speaker 1: down the road.

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Speaker 4: So it's you're right, it's essentially whenever we think about

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Speaker 4: allocating capital to credit markets, we think about a sliding

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Speaker 4: scale of choice between rate risk, super high quality on

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Speaker 4: one side, there'sus credit risk all the way down to

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Speaker 4: lowest quality issue is on the opposite side, And so

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Speaker 4: we really operate on that sliding scale most of the time.

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Speaker 4: And the question is where do you take your risks

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Speaker 4: right now? Again, given the fact that yields are attractive,

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Speaker 4: and they are attractive everywhere in rates and in credit,

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Speaker 4: the argument holds we think that you should not be

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Speaker 4: reaching all the way down in quality.

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Speaker 3: Okay, yeah, I mean one of our colleagues that published

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Speaker 3: a story EARL this month that sort of highlighted some

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Speaker 3: of the research that you were doing, and specifically I

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Speaker 3: was looking at the relationship between high yield and IG

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Speaker 3: spreads with your work that was finding that I think

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Speaker 3: almost half of the high yield and IG universe was

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Speaker 3: trading inside of two hundred basis points. So you know,

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Speaker 3: if we're going to get ray cuts this year and next,

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Speaker 3: how do you sort of see that relationship evolving? I

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Speaker 3: guess on its face it would seem like ray cuts

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Speaker 3: would be good for bonds, but we know that the

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Speaker 3: FED cutting would actually be in response to you know,

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Speaker 3: economic picture weakening, which all else equal would seem to

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Speaker 3: be negative for high yield, particularly those credits that are

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Speaker 3: further down on the rating spectrum. So how do you

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Speaker 3: sort of see that?

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Speaker 4: Yeah, so that data point, we thought it was really interesting,

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Speaker 4: just kind of grasping the fact that half of the

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Speaker 4: US high yield market is an outrading inside of two

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Speaker 4: hundred basis points, which historically is an IG domain. And

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Speaker 4: again here we are, and it happens to be a

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Speaker 4: historical record in terms of that proportion. So clearly sort

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Speaker 4: of raises eyebrows, like what exactly is going on here?

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Speaker 2: Now? I see two sides to that story. One side is.

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Speaker 4: Many of those issues are very high quality, so maybe

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Speaker 4: the argument actually is they're supposed to be upgraded at

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Speaker 4: some point in the future, and the market senses that

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Speaker 4: upgrade coming up and it creates them that way, and

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Speaker 4: sort of an expectation of this issue is eventually transitioning

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Speaker 4: to a g So that is actually very you know, bullish,

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Speaker 4: very pro risk argument. That makes sense to us. But

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Speaker 4: the fact again, but the fact that the fact that

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Speaker 4: it's half of the market that's trading that way kind

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Speaker 4: of tells you that it's probably more than that. It's

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Speaker 4: probably investors looking for safe quote unquote yield. They don't

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Speaker 4: want to reach all the way down. They know that

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Speaker 4: some of those issues at the bottom they're just not

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Speaker 4: set up for interest rates staying high, and so they

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Speaker 4: congregate in that meat to upper quality segment where you

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Speaker 4: can make kind of a reasonable case that on the

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Speaker 4: most scenarios you're not looking at any credit loss. Your

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Speaker 4: point on the FAT is really good because in most

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Speaker 4: of my meetings and conversations we keep hearing how clients

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Speaker 4: are looking forward for the FED to cut rates, and

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Speaker 4: we just have to be careful what we wish for.

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Speaker 4: Because you're exactly right, and in phrasing it that way,

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Speaker 4: the FAT usually cuts interest rates in response to some

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Speaker 4: sort of weakness in the economy. And so the fact

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Speaker 4: that they are not cutting them today, that they are

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Speaker 4: on pause, it's unclear when they're going to start cutting,

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Speaker 4: is almost to prove that economy is strong and resilient,

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Speaker 4: and that's at the end of the day, what's important

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Speaker 4: for credit risk.

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Speaker 3: So how do you how do you sort of see

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Speaker 3: the economic picture unfurrowing into later this year and into

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Speaker 3: twenty twenty five. I think a natural extension of that

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Speaker 3: would be, you know, how do you think the FED

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Speaker 3: is going to behave in so far as rates and

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Speaker 3: you know, do we have higher for longer?

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Speaker 2: Do we expect cuts?

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Speaker 3: Like what's the ba A sort of house view.

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Speaker 2: Yeah, economy is very resilient.

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Speaker 4: We are almost eleven months since the last fat hike.

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Speaker 2: This is already the.

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Speaker 4: Second longest pause on record. The longest ever was fourteen

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Speaker 4: months back in two thousand and six through two thousand

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Speaker 4: and seven. So we get in there by Labor day.

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Speaker 4: This is going to be the longest pause, and our

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Speaker 4: economy is just saying the fat cut is not coming

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Speaker 4: until December. So the bo A view is we're going

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Speaker 4: to be witnessing the longest ever pause by the FED

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Speaker 4: into economy that has shown again incredible resiliency into otherwise

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Speaker 4: pretty restrictive monetary policy.

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Speaker 1: But if it heats up and we get more inflation,

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Speaker 1: what's the risk of a hike?

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Speaker 2: So that is a real risk scenario in my mind.

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Speaker 4: Everything else, you know, economy is slowing down that segment,

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Speaker 4: this industry. The market can deal with it kind of piecemeal.

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Speaker 4: The core assumption is that the worst of the inflation

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Speaker 4: impact is behind us and the FED is done raising

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Speaker 4: interest rates, So we have to reassess that view. It's

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Speaker 4: it's a whole other ballgame at that point in time, and.

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Speaker 1: We are as kind of everyone's sort of suggesting price

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Speaker 1: for perfection. You know that everything is going to turn

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Speaker 1: out okay. That doesn't seem to be much of a

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Speaker 1: you know, counter trade or any way of hedging if

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Speaker 1: suddenly things turn you know, the other way. So there

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Speaker 1: could be a bit of a shock at some point

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Speaker 1: in the credit for sure.

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Speaker 4: That again, that would be a major risk scenario for

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Speaker 4: asset classes. But there are good reasons, I think why

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Speaker 4: the market doesn't view that as a realistic outcome. Right,

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Speaker 4: So you look at multiple components of the CPI basket.

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Speaker 4: You look at goods, you look at energy, at food prices,

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Speaker 4: at some parts of the services busket and we're seen

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Speaker 4: effectively prices no longer rising or in many cases actually

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Speaker 4: actively falling.

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Speaker 2: So that's one part of it.

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Speaker 4: The other part of it is the segments that are

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Speaker 4: not cooperating yet, so you're looking at or services and housing.

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Speaker 4: There the arguments are it just takes longer time for

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Speaker 4: the tight monetary policy to work its way through to

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Speaker 4: slow things down. Hasn't worked that way so far, and

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Speaker 4: I think what's missing in that picture is just the

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Speaker 4: understanding that again consumer is there is a spectrum of consumers.

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Speaker 4: The low end consumer is already starting to show signs

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Speaker 4: of weakness pretty clearly, but that's not the consumer who

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Speaker 4: dominates these services. You know, leisure travel, those types of sayings, right,

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Speaker 4: they are premium premium segments where effectively you don't have

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Speaker 4: to have it, but people choose to have it, and

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Speaker 4: so if it costs a little more, that demand does

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Speaker 4: not automatically evaporate. So that's really the question is the

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Speaker 4: policy tight enough to slow those things down. But at

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Speaker 4: the same time, the Fed's mandate is not core services ex. Shelter, right,

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Speaker 4: the Feds mandate employment. But the other side of it

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Speaker 4: is overall CPI. Overall CPI is annualizing close to two

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Speaker 4: and a half percent based on the last three prints

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Speaker 4: or so. So I think the FED not overreaction is

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Speaker 4: a decent assumption here.

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Speaker 3: And so if you think that there's some cracks with

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Speaker 3: the consumer, does that how does that sort of filter

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Speaker 3: down to any particular sectors that you might be either

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Speaker 3: interested in, whether it's something to be weary of essentially avoided,

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Speaker 3: and sort of what's the rationale? And I guess on

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Speaker 3: the flip side, is there there any sectors that you

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Speaker 3: would point to that look interesting.

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Speaker 4: Specifically as it relates to consumer sensitivity. You know, retail,

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Speaker 4: especially low end retail, quick service restaurants, those types of

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Speaker 4: businesses have already shown reaction and probably that's something that

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Speaker 4: we would expect to continue. Otherwise, on a sector level,

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Speaker 4: I think there are some other factors that are kind

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Speaker 4: of overwhelming here. So sectors that we have viewed pretty

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Speaker 4: negatively throughout this year and continue to do so is in.

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Speaker 2: Cable media and telecom.

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Speaker 4: Maybe there is a consumer element to that as well,

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Speaker 4: but it's more of a kind of a structural shift

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Speaker 4: of how people access media, how people access data these days.

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Speaker 4: It has changed. Not everybody needs a COACCESL cable going

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Speaker 4: into their house, and so that is a more overarching

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Speaker 4: theme for those sectories, on top of what happens to

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Speaker 4: be pretty aggressively structured balance sheets going into this. Like

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Speaker 4: remember some of these names and the industries is where

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Speaker 4: we saw largest inflow of capital when the money was cheap.

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Speaker 2: The capital was used to buy back.

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Speaker 4: Shares to pay dividends, and now we're just on the

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Speaker 4: other side of it. So I think this sector view

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Speaker 4: is more about against those structural headwinds rather than consumers specifically.

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Speaker 1: But going to better retail that's done really well. Retail

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Speaker 1: and leisure in HAIEL have done really well. They've outperformed

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Speaker 1: this year. Does that continue or we can start to

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Speaker 1: see that trade onwind.

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Speaker 2: Our view on retail is.

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Speaker 4: A bit on a weaker side, but not necessar Sarah again,

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Speaker 4: kind of a core underweight. Core underweights for US, as

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Speaker 4: I said, is in cable media and telecoms we don't

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Speaker 4: expect outperformance. And I'm talking about kind of broadly retail

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Speaker 4: that we have in that index. There are probably some

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Speaker 4: pockets that could do reasonably well, but not all of.

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Speaker 3: You, Okay, And maybe it's just like stay taking a

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Speaker 3: step back, and how do you view this idea of

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Speaker 3: the sort of energy transition. If you listen to guys

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Speaker 3: like Caterpillary, they've highlighted some pretty bullish views over the

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Speaker 3: next five to ten years around their mining business, which

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Speaker 3: obvious sales equipment and machinery to their customers who produce

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Speaker 3: a lot of the commodities which are incredibly important and

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Speaker 3: sort of key enablers to this transition to cleaner energy

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Speaker 3: wind power evs. I think that typical ev requires six

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Speaker 3: times the mineral inputs of a conventional car, and you

250
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Speaker 3: know nine times that on an onshore wind plant compared

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Speaker 3: to a gas fire plant. So you know, with that

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Speaker 3: a minor our commodities the place that you like at

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Speaker 3: this point, whether it be copper, nickel, or lithium, or

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Speaker 3: there are some others that were not thinking of that

255
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Speaker 3: you like for the longer term.

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Speaker 4: So that level of detail is kind of beyond my

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Speaker 4: immediate focus which particular commodities you should be looking at here.

258
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Speaker 4: But from my seat, what I can tell you is

259
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Speaker 4: that broad commodity exposure has been a number one or

260
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Speaker 4: all wait this year, so it again has been this

261
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Speaker 4: way remains this way here, and parts of that argument

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Speaker 4: I thought we were really straightforward and remain to this day

263
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Speaker 4: is the energy segment and the industrial metal segment, again

264
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Speaker 4: very straightforward, just in terms of underlying commodities being strong.

265
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Speaker 4: Some of these sectors have undergone significant restructure in waves

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Speaker 4: in the last several years, so the balance sheet discipline

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Speaker 4: is pretty high. And so of all these sectors out there,

268
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Speaker 4: I can't really think of anything else that is better

269
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Speaker 4: set up for capital becoming more expensive on the go

270
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Speaker 4: forward basis. It has been expensive for them for years, right,

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Speaker 4: So that part, again I think is very straightforward. It

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Speaker 4: resonates well with investors. Geopolitical risk is an obvious consideration

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Speaker 4: in this respect. The only shortcoming there is the fact

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Speaker 4: that spreads are already pretty tight, right, so you're not

275
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Speaker 4: looking at exceptional value that way, but you're looking at again,

276
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Speaker 4: very strong capital preservation. You're going to get your copan,

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Speaker 4: you're going to get your money back on the other

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Speaker 4: side of it, So that's very very important. A little

279
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Speaker 4: edge year and kind of more difficult arguments are in

280
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Speaker 4: chemicals and packaging sectors where there has been some headwind.

281
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Speaker 4: There has been some reaction again to consume right here

282
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Speaker 4: to what's going on in China. We think those sectories

283
00:17:04,720 --> 00:17:08,399
Speaker 4: are getting interesting enough to be considered in that broader

284
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Speaker 4: argument of commodity exposure. Not everybody agrees, but we think

285
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Speaker 4: that there is a reasonable way to play it. And

286
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Speaker 4: then capital goods, as you mentioned some names in your question,

287
00:17:21,240 --> 00:17:26,159
Speaker 4: but that is the area that effectively makes this stuff happen.

288
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Speaker 4: So get an exposure to producers and service providers in

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00:17:31,160 --> 00:17:34,720
Speaker 4: that space, we think makes a lot of sense. The

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00:17:34,760 --> 00:17:37,240
Speaker 4: spread component is better in that segment, and it is

291
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Speaker 4: in actual commodity producers and the whole I think ai

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Speaker 4: ev theme now gives this argument the whole new.

293
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Speaker 2: Kind of life, right.

294
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Speaker 4: It's just basically the whole other side of the argument

295
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Speaker 4: that we're going to need a lot more stuff than

296
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Speaker 4: we saw just a couple.

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Speaker 2: Of years ago.

298
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Speaker 1: Some of these actors, like you mentioned the benefits of

299
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Speaker 1: higher oil prices. For example, it seems to accrew more

300
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Speaker 1: to the shareholders than the actual bondholders. So is there

301
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Speaker 1: a credit like is there an edge on the credit side,

302
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Speaker 1: is there more of a risk on the credit side.

303
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Speaker 1: How do you want to differentiate between the benefit going

304
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Speaker 1: either way?

305
00:18:14,359 --> 00:18:15,280
Speaker 2: If you go back to.

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Speaker 4: Those days when energy was in a difficult place and

307
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Speaker 4: we saw you know, very significant credit losses coming out

308
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Speaker 4: of that sector. The question usually was what is the

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Speaker 4: break even oil price for these producers to be able

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Speaker 4: to maintain that balance she it And I don't think

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Speaker 4: that way of kind of risk management approach to the

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Speaker 4: sector has changed a lot. And again given the fact

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Speaker 4: that the sector has gone through several waves of restructurings

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Speaker 4: in the last almost ten years, at this point, that

315
00:18:54,640 --> 00:18:58,919
Speaker 4: balance sheet discipline is in place. It's basically part of

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Speaker 4: their DNA shoe vibrus at this point.

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Speaker 2: And that break.

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Speaker 4: Even oil price that's needed to comfortably know that that

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Speaker 4: you're being paid and you get in your copan and

320
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Speaker 4: principle on the other side, is very low compared to

321
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Speaker 4: where oil actually is today. Even away from geopolitical.

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Speaker 1: Accident, you're seeing a lot of buoyancy on the capital

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Speaker 1: good side, given the high capsule, given the high commodity prices.

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Speaker 3: Yeah, no, definitely, And I mean it's not just those

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Speaker 3: CAPA guys that cover also guys in the airspace and

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Speaker 3: defense sector. So you know, we have guys like Helmet

327
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Speaker 3: or you know, I know they're going to their issues,

328
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Speaker 3: but I think Boeing offers some very widespread when compared

329
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Speaker 3: to the demand outlook they have in the base case

330
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Speaker 3: now is I think they can still have some levers

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Speaker 3: available to keep investment creating. You know, even under a

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Speaker 3: sort of harsher scenario, they have some coupon step language

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Speaker 3: at sort of protects bondholders to the downside with a

334
00:20:02,560 --> 00:20:05,639
Speaker 3: twenty five basis point notch for each wrong down to

335
00:20:05,960 --> 00:20:08,400
Speaker 3: to B plus is sort of a help cushion any

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00:20:08,400 --> 00:20:11,440
Speaker 3: sort of negative technical pressure that would obviously come about

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Speaker 3: from moving from the ig land down to high yield. Oh,

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Speaker 3: Like I was wondering if you know, as part of

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Speaker 3: that conversation for maybe rising stars and fallen angels, is

340
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Speaker 3: there anything on your list that you have particular interest

341
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Speaker 3: in terms of cuspy names that you have sort of

342
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Speaker 3: a high convictioner crossing over maybe falling out. How do

343
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Speaker 3: you how do you sort of see that playing out.

344
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Speaker 4: So on the rizing star side Again, I think it's

345
00:20:40,080 --> 00:20:47,080
Speaker 4: it's a very straightforward argument that many existing double b

346
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Speaker 4: issueres really are investment rate quality balance sheets. It has

347
00:20:53,200 --> 00:20:56,160
Speaker 4: been sort of historical way of how these things play

348
00:20:56,200 --> 00:20:59,879
Speaker 4: out is rating agencies want to be completely sure about

349
00:21:00,080 --> 00:21:04,160
Speaker 4: making that transition. It's not just another upgrade. It's consequential

350
00:21:04,440 --> 00:21:07,159
Speaker 4: the way they see thinks. And so it happens with

351
00:21:07,240 --> 00:21:10,639
Speaker 4: the delay, but the market gets it. The market views

352
00:21:10,680 --> 00:21:13,720
Speaker 4: these names as eventually go in ag whether it takes

353
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Speaker 4: three months, six months, nine months, it's less of irrelevant question.

354
00:21:18,119 --> 00:21:24,480
Speaker 4: So from standpoint of investment grade focused investors, I think

355
00:21:24,520 --> 00:21:29,480
Speaker 4: this is still the most important area of focus. Given

356
00:21:29,520 --> 00:21:32,680
Speaker 4: that IG spreads are just like everything else, not wide

357
00:21:32,720 --> 00:21:36,680
Speaker 4: at all eighty eight basis points on our index, So

358
00:21:36,720 --> 00:21:39,320
Speaker 4: you have to look for that spread somewhere, and you

359
00:21:39,400 --> 00:21:44,200
Speaker 4: looking at those rising star candidates that we consider potential upgrades,

360
00:21:44,720 --> 00:21:48,520
Speaker 4: and you're still being painted hudit fifty hunded seventeen in

361
00:21:48,560 --> 00:21:51,639
Speaker 4: some cases, So you can go two x on your spread,

362
00:21:52,440 --> 00:21:54,239
Speaker 4: which sounds pretty good, I think to a lot of

363
00:21:54,480 --> 00:21:59,560
Speaker 4: IG investors on a fallen angel side. So that risk

364
00:22:00,160 --> 00:22:03,600
Speaker 4: is always there, right, and I think the market, the

365
00:22:03,640 --> 00:22:06,640
Speaker 4: high yield market has worked out kind of muscle memory

366
00:22:07,080 --> 00:22:10,400
Speaker 4: how to deal with that, which is when it happens,

367
00:22:10,840 --> 00:22:15,760
Speaker 4: it usually hits the whites right around the transition because

368
00:22:16,040 --> 00:22:18,240
Speaker 4: whoever needs to sell, they sell at.

369
00:22:18,119 --> 00:22:19,040
Speaker 2: That point in time.

370
00:22:19,680 --> 00:22:22,840
Speaker 4: Most buyers are more flexible so they can wait for

371
00:22:22,920 --> 00:22:25,119
Speaker 4: that moment to happen and then they step in and

372
00:22:25,119 --> 00:22:29,040
Speaker 4: pick things up and away from them. Some really rare

373
00:22:29,359 --> 00:22:33,960
Speaker 4: extreme situations like legal liabilities or some sort of fraud,

374
00:22:34,320 --> 00:22:37,320
Speaker 4: these names tend to perform very well once they are

375
00:22:37,359 --> 00:22:39,600
Speaker 4: already in high yield. So from that standpoint, I think

376
00:22:39,640 --> 00:22:41,359
Speaker 4: high yield investors.

377
00:22:41,000 --> 00:22:44,520
Speaker 2: Are not afraid of that risk. They're looking at.

378
00:22:44,400 --> 00:22:47,840
Speaker 4: It more from standpoint of opportunity, especially in the context

379
00:22:47,840 --> 00:22:50,000
Speaker 4: where we see it here today and people are again

380
00:22:50,280 --> 00:22:54,160
Speaker 4: craving force spread and they usually bring some spread into

381
00:22:54,200 --> 00:22:58,080
Speaker 4: the double B segment. Having said that, there are a

382
00:22:58,240 --> 00:23:00,359
Speaker 4: couple of situations.

383
00:22:59,600 --> 00:23:01,679
Speaker 2: Out there that are large.

384
00:23:02,560 --> 00:23:07,600
Speaker 4: You mentioned one of them, potentially Booing Chotter has been

385
00:23:07,760 --> 00:23:12,879
Speaker 4: in the news as well. These thing's a fifty billion

386
00:23:12,920 --> 00:23:16,640
Speaker 4: plus each cap structure, So this is not just another

387
00:23:16,720 --> 00:23:20,480
Speaker 4: fallen angel. If they were to happen even individually, they

388
00:23:20,480 --> 00:23:23,919
Speaker 4: would be the largest ever fallen angel in dollar terms.

389
00:23:24,960 --> 00:23:27,840
Speaker 4: So this can create some friction on the way down

390
00:23:28,640 --> 00:23:31,520
Speaker 4: all of view in isolation. If they were to happen

391
00:23:31,560 --> 00:23:34,679
Speaker 4: in isolation, the market will process them just like the

392
00:23:34,720 --> 00:23:37,879
Speaker 4: market processed the other way forward. Going up into IG

393
00:23:38,240 --> 00:23:42,800
Speaker 4: last year created a nice technical tailwind, So it's going

394
00:23:42,840 --> 00:23:45,080
Speaker 4: to be a bit of a headwind this time around

395
00:23:45,320 --> 00:23:48,239
Speaker 4: if one of these were to happen. If you have

396
00:23:49,160 --> 00:23:51,920
Speaker 4: both of them and maybe a couple of other situations

397
00:23:51,960 --> 00:23:54,480
Speaker 4: in media space that are about ten to fifteen billion

398
00:23:54,560 --> 00:23:59,160
Speaker 4: each taking place in a short sequence, then you can

399
00:23:59,200 --> 00:24:01,920
Speaker 4: have some nice volatilvery episode out of it.

400
00:24:03,000 --> 00:24:05,359
Speaker 1: Can we talk about the really low rated stuff like,

401
00:24:05,440 --> 00:24:09,399
Speaker 1: you know, we've just witnessed the fastest and steepest rising

402
00:24:09,520 --> 00:24:11,800
Speaker 1: rates that any of us can remember, really, I mean,

403
00:24:12,119 --> 00:24:14,800
Speaker 1: and that was expected to push a lot of lower

404
00:24:14,840 --> 00:24:17,320
Speaker 1: quality borrowers over the edge. You know, they just couldn't

405
00:24:17,320 --> 00:24:19,320
Speaker 1: afford to repay some of that debt. A lot of

406
00:24:19,359 --> 00:24:22,480
Speaker 1: it's coming due and there's a lot of it, and

407
00:24:22,560 --> 00:24:26,119
Speaker 1: yet default rates are very low, and the expectation is

408
00:24:26,160 --> 00:24:29,040
Speaker 1: that they will remain low. Are we fooling ourselves? Were

409
00:24:29,040 --> 00:24:31,359
Speaker 1: missing Something's what's going on with the I think you

410
00:24:31,400 --> 00:24:33,760
Speaker 1: call it the lower decile borrowers.

411
00:24:34,000 --> 00:24:34,240
Speaker 2: Yeah.

412
00:24:34,440 --> 00:24:38,960
Speaker 4: So the way we are looking at the market, we're

413
00:24:39,000 --> 00:24:43,320
Speaker 4: stepping back from ratings and we basically break issuers down

414
00:24:43,480 --> 00:24:50,880
Speaker 4: into quality death siles by definition ten of them.

415
00:24:49,280 --> 00:24:53,000
Speaker 2: And at the bottom death style. We are looking at

416
00:24:53,040 --> 00:24:55,400
Speaker 2: issuers that are.

417
00:24:57,280 --> 00:25:02,040
Speaker 4: In most likelihood not going to be able to come

418
00:25:02,080 --> 00:25:05,560
Speaker 4: out of this high rate episode without doing something to

419
00:25:05,680 --> 00:25:10,280
Speaker 4: their balance sheet. We come to that conclusion because their

420
00:25:10,320 --> 00:25:14,439
Speaker 4: balance sheets are effectively broken at this point. Half of

421
00:25:14,480 --> 00:25:19,200
Speaker 4: that segment is free cash flow negative unless the fat

422
00:25:19,240 --> 00:25:22,840
Speaker 4: cuts interest rates soon and deep, which is a pretty

423
00:25:22,840 --> 00:25:29,800
Speaker 4: weak assumption. The d t EV, which we find very useful,

424
00:25:29,840 --> 00:25:34,879
Speaker 4: measure that to enterprise value is eighty five percent for

425
00:25:35,000 --> 00:25:37,720
Speaker 4: that segment, so essentially there is no equity value left.

426
00:25:37,760 --> 00:25:40,480
Speaker 4: So for owners of those businesses, there is not a

427
00:25:40,520 --> 00:25:43,720
Speaker 4: lot to hold on to in terms of considering some

428
00:25:43,800 --> 00:25:51,199
Speaker 4: more drastic steps towards bond holders. Their ability to access

429
00:25:51,200 --> 00:25:55,080
Speaker 4: primary market is almost non existent. We basically see no

430
00:25:55,280 --> 00:25:59,679
Speaker 4: prints from that cohort in either public or private market.

431
00:26:00,160 --> 00:26:03,200
Speaker 4: By the way, is oftentimes being brought up as sort

432
00:26:03,200 --> 00:26:05,919
Speaker 4: of a savior in this environment, and from what we

433
00:26:05,960 --> 00:26:09,240
Speaker 4: can tell, private credit is not going into distress segment.

434
00:26:09,280 --> 00:26:12,320
Speaker 4: Private credit has a lot to do in the mid

435
00:26:12,359 --> 00:26:15,280
Speaker 4: to lower quality segment without having to reach for the

436
00:26:15,560 --> 00:26:18,320
Speaker 4: kind of really really difficult situation. That's again that's the

437
00:26:18,520 --> 00:26:23,200
Speaker 4: lend of distressed investors. And yet at the same time

438
00:26:23,280 --> 00:26:26,639
Speaker 4: their maturity profiles happen to be the highest across the

439
00:26:26,680 --> 00:26:30,080
Speaker 4: whole spectrum. So it's just a mix that we think

440
00:26:30,200 --> 00:26:34,000
Speaker 4: is impossible to work out again away from assumption of

441
00:26:34,080 --> 00:26:38,200
Speaker 4: interest rates falling sharply soon, and so we just assume

442
00:26:38,320 --> 00:26:42,480
Speaker 4: that those defaults are being staggered, they are coming along

443
00:26:42,840 --> 00:26:46,840
Speaker 4: as they happen, they mostly may be. What's different a

444
00:26:46,880 --> 00:26:49,760
Speaker 4: bit this time is just the fact that they mostly

445
00:26:49,840 --> 00:26:53,440
Speaker 4: coming in in the forms of LME for now, which

446
00:26:53,480 --> 00:26:55,520
Speaker 4: is fine, which is sort of the first stop. That's

447
00:26:55,560 --> 00:26:58,400
Speaker 4: how we think about it. It's not necessarily a final destination.

448
00:26:58,520 --> 00:27:04,600
Speaker 4: It's just issues delay the decision to file for bankruptcy

449
00:27:04,640 --> 00:27:07,520
Speaker 4: to the very end when all other options have been right,

450
00:27:07,720 --> 00:27:10,080
Speaker 4: and LEEM is just a nice option on the way there.

451
00:27:10,400 --> 00:27:10,640
Speaker 2: Uh.

452
00:27:11,240 --> 00:27:13,359
Speaker 4: In other words, you know, you don't lose control of

453
00:27:13,359 --> 00:27:15,600
Speaker 4: your company. You you just wipe out some of that.

454
00:27:15,440 --> 00:27:17,240
Speaker 1: That And just for the listeners out there, I don't

455
00:27:17,240 --> 00:27:22,040
Speaker 1: know what LEEMY is Liability management exercise. And so these

456
00:27:22,040 --> 00:27:24,359
Speaker 1: are these are basically companies that you know, they're trying

457
00:27:24,359 --> 00:27:29,080
Speaker 1: to swap out that that in a way that gives

458
00:27:29,080 --> 00:27:32,480
Speaker 1: them more breathing room, gives them more runway, but it

459
00:27:32,560 --> 00:27:38,160
Speaker 1: also disadvantages in some cases imposed the loss on investors, right, absolutely.

460
00:27:37,640 --> 00:27:41,320
Speaker 4: So it's it's companies or in some cases, as the

461
00:27:41,440 --> 00:27:44,320
Speaker 4: terrem is being used now, the credit or on credit

462
00:27:44,400 --> 00:27:48,760
Speaker 4: or violence. It could be initiated by creditors themselves to

463
00:27:50,320 --> 00:27:54,639
Speaker 4: initiate one of those exchanges. But the idea is exactly

464
00:27:54,720 --> 00:27:58,840
Speaker 4: as you describe, that issure is nonfinanceable on sort of

465
00:27:58,960 --> 00:28:01,919
Speaker 4: normal market that can terms, and so they have to

466
00:28:01,960 --> 00:28:07,600
Speaker 4: do something else, and something else usually means delaying maturity,

467
00:28:07,680 --> 00:28:12,960
Speaker 4: is postponing the copon in some cases discounting the part

468
00:28:13,520 --> 00:28:15,240
Speaker 4: of the dea obligation.

469
00:28:15,560 --> 00:28:16,680
Speaker 2: So yes, there is a.

470
00:28:16,640 --> 00:28:19,720
Speaker 4: Cost, there is the real cost to investors, to that investors,

471
00:28:20,119 --> 00:28:23,040
Speaker 4: but what it brings to the table on the other

472
00:28:23,200 --> 00:28:26,600
Speaker 4: end is a shot of making it through without filing

473
00:28:26,640 --> 00:28:30,359
Speaker 4: for bankruptcy. So investors go for it in hopes that

474
00:28:30,840 --> 00:28:34,080
Speaker 4: the recovery that they get on LEME is better than

475
00:28:34,080 --> 00:28:37,200
Speaker 4: the alternative, right, and it is a good assumption because

476
00:28:37,560 --> 00:28:40,480
Speaker 4: for LEMES we track and close to like fifty to

477
00:28:40,560 --> 00:28:43,480
Speaker 4: sixty cents on a dollar in terms of by recovery,

478
00:28:43,720 --> 00:28:46,840
Speaker 4: we mean we're seeing straight at the time of lem

479
00:28:47,600 --> 00:28:51,080
Speaker 4: for chapter eleven. So those recoveries are in the twenties

480
00:28:51,320 --> 00:28:56,040
Speaker 4: and some of them are even lower. So it's I

481
00:28:56,080 --> 00:29:00,400
Speaker 4: think it's it's it makes sense essentially for investors to

482
00:29:00,440 --> 00:29:04,240
Speaker 4: try that as a kind of last resort before before

483
00:29:04,320 --> 00:29:06,160
Speaker 4: the decision to file.

484
00:29:06,360 --> 00:29:08,960
Speaker 3: So I was curious, I mean, does that always work

485
00:29:09,040 --> 00:29:11,760
Speaker 3: or when they're doing it, how often are they do

486
00:29:11,840 --> 00:29:14,800
Speaker 3: they running back into issues in relatively short order, and

487
00:29:14,880 --> 00:29:17,520
Speaker 3: now they're back, they're operating. Everything is great, let's let's

488
00:29:17,640 --> 00:29:18,000
Speaker 3: move on.

489
00:29:18,480 --> 00:29:23,000
Speaker 4: Unfortunately, not so unfortunately, the track record that at least

490
00:29:23,080 --> 00:29:26,960
Speaker 4: we maintain shows that about forty percent of them tend

491
00:29:27,000 --> 00:29:31,240
Speaker 4: to redefault, and by redefault women the actual misspayment and

492
00:29:31,480 --> 00:29:36,800
Speaker 4: Chapter eleven. But sixty percent of them do work. And

493
00:29:36,840 --> 00:29:39,720
Speaker 4: I guess a lot of it is unknown, right, it's

494
00:29:39,760 --> 00:29:42,800
Speaker 4: at the time of leemy. You don't know whether it's

495
00:29:42,800 --> 00:29:44,480
Speaker 4: going to work out or not. A lot of it

496
00:29:44,520 --> 00:29:48,640
Speaker 4: depends on environment, you know, in recession, not in recession

497
00:29:48,840 --> 00:29:53,000
Speaker 4: where interest rates are so I think in most cases

498
00:29:53,200 --> 00:29:57,240
Speaker 4: you do get an LME before again a misspayment or

499
00:29:57,320 --> 00:30:00,560
Speaker 4: a Chapter eleven. So that's kind of way the market

500
00:30:00,640 --> 00:30:04,480
Speaker 4: operates these days, is to try this soft version of

501
00:30:04,560 --> 00:30:09,520
Speaker 4: restructuring before going down the route of permanent credit loss and.

502
00:30:09,480 --> 00:30:11,440
Speaker 1: This lower desa we're talking about how big is it?

503
00:30:11,960 --> 00:30:15,880
Speaker 4: Well, it's you know, we define them by issuer account,

504
00:30:16,280 --> 00:30:19,760
Speaker 4: So by definition, it's it's one tenth of the total sample.

505
00:30:19,880 --> 00:30:20,840
Speaker 2: We have about nine.

506
00:30:20,800 --> 00:30:24,880
Speaker 4: Hundred us ildsue sort of about ninety companies. In that sample,

507
00:30:25,920 --> 00:30:30,520
Speaker 4: there is about two hundred billion dollars of total debt.

508
00:30:30,920 --> 00:30:36,880
Speaker 4: Let's take here, right, we think about half of it

509
00:30:36,920 --> 00:30:42,280
Speaker 4: is essentially at risk of kind of immediate action in

510
00:30:42,360 --> 00:30:43,720
Speaker 4: terms of at least an leomy.

511
00:30:45,480 --> 00:30:47,720
Speaker 1: Yeah, I mean that's a huge amount of defaults that

512
00:30:47,760 --> 00:30:48,880
Speaker 1: no one seems to be worried about.

513
00:30:49,160 --> 00:30:54,720
Speaker 4: Well, it's it's I think people understand that it's also

514
00:30:54,840 --> 00:30:58,880
Speaker 4: not going to happen like you know, next week, right,

515
00:30:58,920 --> 00:31:00,160
Speaker 4: It's going to take some time time.

516
00:31:00,320 --> 00:31:01,240
Speaker 2: And so if you.

517
00:31:03,360 --> 00:31:06,080
Speaker 4: Agree with that view that look, this can be spread

518
00:31:06,120 --> 00:31:08,320
Speaker 4: out over a year or two, which we think is

519
00:31:08,560 --> 00:31:13,800
Speaker 4: a reasonable assumption outside of a reception recession, that you know,

520
00:31:13,840 --> 00:31:17,000
Speaker 4: the market can process it. We I mean, the faults

521
00:31:17,040 --> 00:31:19,960
Speaker 4: are low. I agree with that description, but we still

522
00:31:20,000 --> 00:31:21,880
Speaker 4: track and you know, two and a half to three

523
00:31:21,920 --> 00:31:25,120
Speaker 4: percent defaults depend on how you count and on the

524
00:31:25,200 --> 00:31:28,160
Speaker 4: market size and our market size. The way we define

525
00:31:28,200 --> 00:31:31,120
Speaker 4: it is taking all high yeled issues but also including

526
00:31:31,200 --> 00:31:34,280
Speaker 4: loans that they have outstanding. So you're looking at you know,

527
00:31:34,400 --> 00:31:37,720
Speaker 4: close to one point seven trillion dollars of that outstanding.

528
00:31:37,920 --> 00:31:40,720
Speaker 4: So even two to three percent from from that stack

529
00:31:40,880 --> 00:31:42,760
Speaker 4: is is actually meaningful in terms of dollars.

530
00:31:43,240 --> 00:31:46,040
Speaker 1: And yeah, spreads just historically very very low.

531
00:31:46,120 --> 00:31:51,320
Speaker 4: So the market has figured out a fine line dividing

532
00:31:51,760 --> 00:31:55,360
Speaker 4: issuers who are likely to make it. And again the

533
00:31:55,720 --> 00:31:58,200
Speaker 4: top half of the market, as we just described before,

534
00:31:58,600 --> 00:32:01,240
Speaker 4: creating at ag level is pre They clearly viewed as

535
00:32:01,720 --> 00:32:09,600
Speaker 4: issuers who are insensitive against five percent rates against the

536
00:32:09,600 --> 00:32:14,320
Speaker 4: bottom decile, which appears to be again almost insensitive of

537
00:32:14,360 --> 00:32:17,280
Speaker 4: whatever reasonable assumptions you take about rates on a go

538
00:32:17,400 --> 00:32:18,200
Speaker 4: forward basis.

539
00:32:18,480 --> 00:32:19,520
Speaker 2: These issuers are just.

540
00:32:19,480 --> 00:32:23,760
Speaker 4: Not set up for them, so that what looks to

541
00:32:23,800 --> 00:32:25,680
Speaker 4: be the case here it is unusual.

542
00:32:25,760 --> 00:32:26,440
Speaker 2: I agree with you.

543
00:32:26,520 --> 00:32:30,600
Speaker 4: It's we call this dispersion another technical term here, but

544
00:32:31,240 --> 00:32:34,200
Speaker 4: it's basically, you know, the index rates here at three

545
00:32:34,280 --> 00:32:37,080
Speaker 4: hundred basis points. How close is every cent to three

546
00:32:37,120 --> 00:32:40,719
Speaker 4: hundred basis points. It's not close at all. Right, You've

547
00:32:40,840 --> 00:32:44,040
Speaker 4: got a bunch of stuff inside of two hundred basis points,

548
00:32:44,040 --> 00:32:46,680
Speaker 4: and then you have this cohort that creates at deeply

549
00:32:46,720 --> 00:32:51,080
Speaker 4: distressed levels. It's unusual, but that's that's where we are.

550
00:32:51,240 --> 00:32:53,200
Speaker 1: But we are saying that ten percent of the entire

551
00:32:53,280 --> 00:32:57,800
Speaker 1: hield market could default, go bankrupt, you know, just disappear,

552
00:32:58,280 --> 00:33:00,280
Speaker 1: and it still would not have a ripple effect cross

553
00:33:00,320 --> 00:33:02,240
Speaker 1: credit markets. It still wouldn't have any kind of more

554
00:33:02,760 --> 00:33:05,400
Speaker 1: broader implications for other issues.

555
00:33:05,920 --> 00:33:09,040
Speaker 4: If that happens over two or three year time horizon,

556
00:33:09,160 --> 00:33:11,800
Speaker 4: you're still looking at reasonably below default grades.

557
00:33:11,840 --> 00:33:15,440
Speaker 1: Yeah, which you know speaks to the massive liquidity in

558
00:33:15,480 --> 00:33:20,360
Speaker 1: the system or the rational, more rational view of investors.

559
00:33:19,960 --> 00:33:20,480
Speaker 2: Or what I mean.

560
00:33:20,520 --> 00:33:22,000
Speaker 1: What I mean, you've been doing this for a long time,

561
00:33:22,240 --> 00:33:24,400
Speaker 1: as I said earlier, But what's your like, how do

562
00:33:24,440 --> 00:33:28,239
Speaker 1: you kind of you know, what's your takeaway here? How

563
00:33:28,240 --> 00:33:30,080
Speaker 1: do you sort of make some sense of this? It

564
00:33:30,600 --> 00:33:31,800
Speaker 1: is quite a confusing situation.

565
00:33:32,720 --> 00:33:36,440
Speaker 4: I would not defend this three hundred basis points spread

566
00:33:36,520 --> 00:33:41,040
Speaker 4: level on the index. I think it is a stretch.

567
00:33:42,080 --> 00:33:46,680
Speaker 4: And I consider myself a student of history, so I

568
00:33:46,760 --> 00:33:50,400
Speaker 4: just go with what data tells me about how things

569
00:33:50,440 --> 00:33:53,760
Speaker 4: played out in the past, and data tells us from

570
00:33:54,120 --> 00:33:56,640
Speaker 4: that from three hundred basis points in high yield spreads,

571
00:33:57,200 --> 00:34:02,840
Speaker 4: usually you're not looking at exceptional total returns So now

572
00:34:02,880 --> 00:34:05,920
Speaker 4: the difficult I think that's an easy part. The difficult

573
00:34:05,920 --> 00:34:10,000
Speaker 4: part is making the case when that is supposed to happen,

574
00:34:10,040 --> 00:34:15,919
Speaker 4: and that is again a very tough question. The lack

575
00:34:17,400 --> 00:34:21,040
Speaker 4: of an impact is not the same. It differs from

576
00:34:21,120 --> 00:34:24,759
Speaker 4: time to time. The economy is not the same. Look

577
00:34:24,880 --> 00:34:28,719
Speaker 4: from inflation standpoint, we are in uncharity territory because the

578
00:34:28,800 --> 00:34:32,200
Speaker 4: last time we had inflation anywhere close to this was

579
00:34:32,239 --> 00:34:34,800
Speaker 4: forty or fifty years ago. Just think about the difference

580
00:34:34,880 --> 00:34:38,200
Speaker 4: is that this economy has undergone during that period of time.

581
00:34:38,239 --> 00:34:42,480
Speaker 4: So making PARALLELSI is exceptionally difficult. But I still hold

582
00:34:42,480 --> 00:34:46,440
Speaker 4: on to an assumption that three hundred basis points is

583
00:34:46,480 --> 00:34:51,200
Speaker 4: not the place where you are looking at strong opportunity

584
00:34:51,280 --> 00:34:53,040
Speaker 4: set in terms of total return outcomes.

585
00:34:54,000 --> 00:34:56,680
Speaker 1: When I ask people if it really is different this time,

586
00:34:56,719 --> 00:34:58,560
Speaker 1: and they say yes, do you believe that it is

587
00:34:58,600 --> 00:35:01,080
Speaker 1: different this time? The hyal market in terms of its

588
00:35:01,480 --> 00:35:04,160
Speaker 1: quality and its structure, and it's liquidity and all those

589
00:35:04,239 --> 00:35:06,440
Speaker 1: things that we have worried about in the past.

590
00:35:06,640 --> 00:35:09,759
Speaker 4: So there are aspects of this market that are not

591
00:35:09,840 --> 00:35:15,840
Speaker 4: the same. The size of issuers has increased significantly, like

592
00:35:15,880 --> 00:35:19,120
Speaker 4: an average high yel is shore twenty years ago, with

593
00:35:19,320 --> 00:35:23,319
Speaker 4: a small company with two hundred million dollars a litt

594
00:35:23,320 --> 00:35:27,760
Speaker 4: bit the leveraged five or six times, and the average

595
00:35:27,800 --> 00:35:31,200
Speaker 4: high yel is Shue today is a billion dollar abit.

596
00:35:31,239 --> 00:35:36,000
Speaker 4: The company almost by definition well diversified, and the leverage

597
00:35:36,040 --> 00:35:38,360
Speaker 4: happens to be you know, three and a half acts

598
00:35:38,800 --> 00:35:45,040
Speaker 4: for the whole market. The sector composition we think is

599
00:35:45,160 --> 00:35:50,560
Speaker 4: beneficial because this market actually happens to have significant commodity exposure,

600
00:35:50,880 --> 00:35:55,360
Speaker 4: it happens to have significant capital goods and other type

601
00:35:55,360 --> 00:35:59,560
Speaker 4: of industrial exposure, which is the good attribute here. So

602
00:35:59,800 --> 00:36:05,439
Speaker 4: I agree with reasons for things to have gotten this tight.

603
00:36:05,960 --> 00:36:09,600
Speaker 4: I'm just saying now that we hear now that volatility

604
00:36:09,640 --> 00:36:13,240
Speaker 4: in this is are at in many cases historical lows,

605
00:36:13,600 --> 00:36:18,120
Speaker 4: as the case in vixen inequities, or at least at

606
00:36:18,160 --> 00:36:21,880
Speaker 4: the lows of this hiking cycle in terms of rate volatility. Again,

607
00:36:22,000 --> 00:36:25,200
Speaker 4: to your point early in this conversation, the level of

608
00:36:25,239 --> 00:36:27,360
Speaker 4: complacency is right there in the numbers.

609
00:36:28,360 --> 00:36:31,440
Speaker 3: So I mean, under the complacency if we get some

610
00:36:32,040 --> 00:36:38,000
Speaker 3: volatility or you know, a recession, is there a sort

611
00:36:38,000 --> 00:36:41,319
Speaker 3: of level above the three hundred where you kind of think,

612
00:36:41,640 --> 00:36:45,400
Speaker 3: in a shallow recession, this might be a decent level,

613
00:36:45,640 --> 00:36:48,640
Speaker 3: something a little harder of a landing. This is sort

614
00:36:48,680 --> 00:36:50,680
Speaker 3: of the range where we think is reasonable and you

615
00:36:50,760 --> 00:36:53,600
Speaker 3: might be getting some good returns for high yield.

616
00:36:53,960 --> 00:36:57,480
Speaker 4: Yeah, so four hundred basis points we think is the

617
00:36:57,560 --> 00:37:01,040
Speaker 4: level where you're just being fairly compensated, where you don't

618
00:37:01,080 --> 00:37:03,799
Speaker 4: really need to do much in terms of kind of

619
00:37:04,120 --> 00:37:07,400
Speaker 4: actively deviating. You can just take in the exposure generic

620
00:37:07,440 --> 00:37:11,640
Speaker 4: hig yield exposure and do reasonably well. If that happens

621
00:37:11,640 --> 00:37:14,360
Speaker 4: in the context of raids being where they are today,

622
00:37:14,840 --> 00:37:17,200
Speaker 4: you're going to be looking at close to nine percent

623
00:37:17,520 --> 00:37:19,240
Speaker 4: all in yield for high yield.

624
00:37:19,680 --> 00:37:21,360
Speaker 2: You know, if investors like eight.

625
00:37:21,239 --> 00:37:24,480
Speaker 4: Percent, they're obviously going to be pretty excited about the

626
00:37:24,560 --> 00:37:31,240
Speaker 4: nine percent outcome. The real opportunity set opens up above

627
00:37:31,280 --> 00:37:33,680
Speaker 4: those levels. So if you were to kind of make

628
00:37:33,719 --> 00:37:38,120
Speaker 4: the case for kind of a double digit returns, you

629
00:37:38,160 --> 00:37:41,160
Speaker 4: would need to step in at somewhere above four hundred

630
00:37:41,200 --> 00:37:45,680
Speaker 4: basis points, maybe closer to five hundred basis points to

631
00:37:46,280 --> 00:37:51,880
Speaker 4: get to that outcome. To our earlier conversation on quality position,

632
00:37:52,000 --> 00:37:54,600
Speaker 4: and this is what we've been recommended, we basically have

633
00:37:54,680 --> 00:37:57,719
Speaker 4: been saying, look, the top half of the market, super

634
00:37:57,800 --> 00:38:01,920
Speaker 4: high quality. Every since fine there the mentally speaking, just

635
00:38:02,000 --> 00:38:04,919
Speaker 4: difficult to outperform the index, right, So that's kind of

636
00:38:05,360 --> 00:38:08,440
Speaker 4: the simple fact that holds us away from it. The

637
00:38:08,480 --> 00:38:11,839
Speaker 4: bottom decile for US is just a no fly down,

638
00:38:12,080 --> 00:38:18,400
Speaker 4: and we still in relatively earnest early innings of those restructurings.

639
00:38:17,960 --> 00:38:19,759
Speaker 2: So we don't want to go there.

640
00:38:20,280 --> 00:38:22,840
Speaker 4: But if you think about the mid to lower quality

641
00:38:22,880 --> 00:38:28,120
Speaker 4: segments where you are being paid today four hundred, five hundred,

642
00:38:28,160 --> 00:38:32,239
Speaker 4: in some cases six hundred basis points of spread, you

643
00:38:32,320 --> 00:38:34,839
Speaker 4: are not in the first line of fire in terms

644
00:38:34,840 --> 00:38:38,120
Speaker 4: of potential defaults and enemies, as long as we are

645
00:38:38,160 --> 00:38:40,840
Speaker 4: not in recession, which seems to be again a decent

646
00:38:40,920 --> 00:38:41,760
Speaker 4: assumption here.

647
00:38:42,560 --> 00:38:45,040
Speaker 2: We think that's where the outperformance sits.

648
00:38:45,120 --> 00:38:47,759
Speaker 4: So from that standpoint, you don't necessarily have to time

649
00:38:47,840 --> 00:38:51,640
Speaker 4: the market, which is again extremely difficult, if not impossible.

650
00:38:52,120 --> 00:38:56,719
Speaker 4: You can look for opportunities in places like that.

651
00:38:55,880 --> 00:38:57,880
Speaker 1: That'd be sort of single bee equivalent.

652
00:38:58,840 --> 00:38:59,520
Speaker 2: Yeah, on a.

653
00:38:59,600 --> 00:39:03,200
Speaker 4: Rating skin, it's somewhere mid to lower single bee segment.

654
00:39:03,280 --> 00:39:06,319
Speaker 1: Okay, that's the best relative value right now. And in

655
00:39:06,400 --> 00:39:09,319
Speaker 1: terms of other products like loans or structured is there

656
00:39:09,320 --> 00:39:11,720
Speaker 1: any any better relative value to be had outside of bonds?

657
00:39:12,480 --> 00:39:18,399
Speaker 4: So loans, we like them for quite some time over

658
00:39:18,480 --> 00:39:23,680
Speaker 4: high yield just given the floating rate nature not comfortable

659
00:39:23,719 --> 00:39:29,280
Speaker 4: to this day, not particularly comfortable with high quality duration exposure.

660
00:39:30,760 --> 00:39:35,520
Speaker 4: So from that standpoint, loans have been now preferred overweight,

661
00:39:36,239 --> 00:39:40,640
Speaker 4: remain that way today. But I would say the gap

662
00:39:41,040 --> 00:39:44,719
Speaker 4: of potential outperformance between loans and high yield at this

663
00:39:44,840 --> 00:39:47,840
Speaker 4: point it is probably the tightest we have seen it

664
00:39:47,880 --> 00:39:50,360
Speaker 4: in the last year or so, So we would not

665
00:39:50,480 --> 00:39:53,680
Speaker 4: be necessarily going for more in that direction. We would

666
00:39:53,680 --> 00:39:56,399
Speaker 4: be if Annison kind of taking some of it off

667
00:39:56,400 --> 00:40:00,160
Speaker 4: the table. Relative value between high yield and i G.

668
00:40:00,640 --> 00:40:03,440
Speaker 4: Now you has been very straightforward. It's just you know,

669
00:40:03,560 --> 00:40:07,520
Speaker 4: take take credit risk. Credit risk is a good attribute

670
00:40:07,640 --> 00:40:10,440
Speaker 4: in the absence of a recession, and that's where we

671
00:40:10,480 --> 00:40:14,319
Speaker 4: are still today. Again, was a stronger you going into

672
00:40:14,320 --> 00:40:15,480
Speaker 4: the year at this point.

673
00:40:16,560 --> 00:40:18,520
Speaker 2: I'll put it to you this way.

674
00:40:19,120 --> 00:40:23,880
Speaker 4: You're most likely not losing money in either i G

675
00:40:24,239 --> 00:40:29,560
Speaker 4: or high yield from these levels. Your outcomes are going

676
00:40:29,640 --> 00:40:33,400
Speaker 4: to be dependent. If economy is a little weaker and

677
00:40:33,760 --> 00:40:36,680
Speaker 4: rates are a little lower than you're pretty clearly going

678
00:40:36,719 --> 00:40:37,400
Speaker 4: to be better.

679
00:40:37,239 --> 00:40:39,319
Speaker 2: Off an IG and vice versa.

680
00:40:39,400 --> 00:40:42,399
Speaker 4: If if economy just stays more resilient and rates can

681
00:40:42,520 --> 00:40:44,560
Speaker 4: can't really come down, then high yield is going to

682
00:40:44,600 --> 00:40:47,400
Speaker 4: do better. For now, we just still in that second camp.

683
00:40:47,480 --> 00:40:50,840
Speaker 4: We prefer to take some extra credit.

684
00:40:50,640 --> 00:40:52,200
Speaker 2: Risk on top of interest rhtorrisks.

685
00:40:52,560 --> 00:40:54,800
Speaker 1: Do you see any signs of froth in the market?

686
00:40:54,920 --> 00:40:59,480
Speaker 4: Aisle going back to the top half of the market

687
00:40:59,719 --> 00:41:03,400
Speaker 4: in out of two hundred basis points, I think realistically

688
00:41:03,880 --> 00:41:09,560
Speaker 4: maybe you know, assured of those issues over time could

689
00:41:10,040 --> 00:41:12,880
Speaker 4: end up being ig But the rest of it is

690
00:41:13,200 --> 00:41:15,680
Speaker 4: is just you know, high yield balance it that's creating

691
00:41:15,760 --> 00:41:18,400
Speaker 4: like ag so to me, that is that is a

692
00:41:18,440 --> 00:41:22,319
Speaker 4: sign of frost. Again, not to say that you're not

693
00:41:22,360 --> 00:41:25,200
Speaker 4: getting your money back, but you're just probably going to

694
00:41:25,320 --> 00:41:28,839
Speaker 4: end up seeing those bonds creating at widal levels at

695
00:41:28,840 --> 00:41:30,120
Speaker 4: some point in the next year or two.

696
00:41:30,960 --> 00:41:34,200
Speaker 1: Do you worry about much like I mean, we are

697
00:41:34,280 --> 00:41:36,320
Speaker 1: credit guys. We worry all the time. Is there anything

698
00:41:36,360 --> 00:41:39,080
Speaker 1: that you know or is there anything that when you

699
00:41:39,080 --> 00:41:40,839
Speaker 1: go out on the road and meet people that they

700
00:41:40,880 --> 00:41:43,120
Speaker 1: ask you about and they're particularly concerned about in terms

701
00:41:43,120 --> 00:41:44,560
Speaker 1: of you know, these are the big things that I'm

702
00:41:44,560 --> 00:41:46,920
Speaker 1: really concerned about and how it's going to affect credit.

703
00:41:47,800 --> 00:41:50,279
Speaker 4: We worry about things that we can't control, right and

704
00:41:50,440 --> 00:41:53,319
Speaker 4: things that we can't control, like one, just kind of

705
00:41:53,600 --> 00:41:57,040
Speaker 4: get it out of the ways, geopolitical risk, which you

706
00:41:57,080 --> 00:41:59,640
Speaker 4: know can happen overnight, and then we just kind of

707
00:41:59,640 --> 00:42:05,720
Speaker 4: deal with with the consequences of whatever. The situation is unpredictable,

708
00:42:05,920 --> 00:42:09,520
Speaker 4: very difficult to do anything about it from credit investors

709
00:42:09,600 --> 00:42:14,239
Speaker 4: hit away from that, it's the one risk aspect that

710
00:42:14,280 --> 00:42:17,440
Speaker 4: we already touched on, which is if inflation is in

711
00:42:17,480 --> 00:42:21,719
Speaker 4: fact not coming down, is an assumption that is going

712
00:42:21,800 --> 00:42:26,800
Speaker 4: to break a lot of models, so to speak. It's

713
00:42:26,880 --> 00:42:29,440
Speaker 4: not set up for the fat it's not set up

714
00:42:29,480 --> 00:42:32,320
Speaker 4: for credit markets, it's not set up for the rate market.

715
00:42:33,360 --> 00:42:36,200
Speaker 1: Great stuff. Aleg Melentiev, head of US High Held Strategy

716
00:42:36,200 --> 00:42:37,800
Speaker 1: at Bank of America. It's been a pleasure having you

717
00:42:37,840 --> 00:42:40,600
Speaker 1: on the Credit Edge Manny, Thanks, thank you, And of

718
00:42:40,600 --> 00:42:43,000
Speaker 1: course Matt Goingner with Bloomberg Intelligence, thank you very much

719
00:42:43,000 --> 00:42:43,680
Speaker 1: for being on the show.

720
00:42:43,880 --> 00:42:44,239
Speaker 2: Thank you.

721
00:42:44,480 --> 00:42:48,400
Speaker 1: Bloomberg Intelligence part of Bloomberg's research department with five hundred

722
00:42:48,440 --> 00:42:52,440
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723
00:42:52,560 --> 00:42:55,680
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724
00:42:55,680 --> 00:42:59,360
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725
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726
00:43:03,000 --> 00:43:05,520
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727
00:43:05,560 --> 00:43:08,920
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00:43:08,920 --> 00:43:11,800
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729
00:43:11,880 --> 00:43:15,560
Speaker 1: or email me directly at jcrombieight at Bloomberg dot net.

730
00:43:16,440 --> 00:43:18,440
Speaker 1: I'm James Cromby. It's been a pleasure having you join

731
00:43:18,520 --> 00:43:37,400
Speaker 1: us again next week on the Credit Edge