1 00:00:18,360 --> 00:00:21,080 Speaker 1: Hello, Welcome to the Credit Edge, a weekly markets podcast. 2 00:00:21,320 --> 00:00:24,120 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:24,520 --> 00:00:24,680 Speaker 2: Hi. 4 00:00:24,880 --> 00:00:27,560 Speaker 3: I'm Steve Lynn, a team leader and senior credit analyst 5 00:00:27,600 --> 00:00:31,600 Speaker 3: for Bloomberg Intelligence, and I cover the communications sector. This week, 6 00:00:31,640 --> 00:00:34,880 Speaker 3: we're very pleased to welcome Shannon Ward, a fixed income 7 00:00:34,920 --> 00:00:36,880 Speaker 3: portfolio manager at Capitol Group. 8 00:00:37,280 --> 00:00:40,120 Speaker 2: How are you, Shannon, I'm well, Thanks for having me. 9 00:00:40,159 --> 00:00:41,360 Speaker 2: How are you good? 10 00:00:41,600 --> 00:00:45,159 Speaker 3: Thanks for joining us. Shannon has thirty three years of 11 00:00:45,159 --> 00:00:48,120 Speaker 3: an investment industry experience and has been with Capitol Group 12 00:00:48,159 --> 00:00:50,600 Speaker 3: for nine years, where she serves on the Fixed Income 13 00:00:50,680 --> 00:00:55,520 Speaker 3: Management Committee in addition to her portfolio manager responsibilities. Capitol 14 00:00:55,560 --> 00:00:58,720 Speaker 3: Group is the world's largest active fund manager and has 15 00:00:59,120 --> 00:01:02,280 Speaker 3: more than three point two trillion of assets under management. 16 00:01:03,000 --> 00:01:05,679 Speaker 3: Prior to joining the Capitol Group, Shannon worked as a 17 00:01:05,680 --> 00:01:08,360 Speaker 3: portfolio manager at oak Tree Capital Management. 18 00:01:08,480 --> 00:01:08,760 Speaker 2: Thanks. 19 00:01:08,760 --> 00:01:11,000 Speaker 1: See, so credit markets are getting a bit rocked at 20 00:01:11,000 --> 00:01:15,399 Speaker 1: the moment. They've been through concerns about fraud, about AI disruption, 21 00:01:15,920 --> 00:01:18,720 Speaker 1: private credit redemptions, and then you add to that the 22 00:01:18,800 --> 00:01:20,840 Speaker 1: escalating war in the Middle East, which has pushed up 23 00:01:20,840 --> 00:01:24,160 Speaker 1: oil prices and rekindled fears of inflation and therefore the 24 00:01:24,200 --> 00:01:27,160 Speaker 1: prospects of rates staying higher for longer. That's not good 25 00:01:27,200 --> 00:01:29,360 Speaker 1: for weak borrowers with a lot of debt coming due. 26 00:01:29,400 --> 00:01:32,280 Speaker 1: And yet high yield bond spreads actually tightened in the 27 00:01:32,280 --> 00:01:35,440 Speaker 1: first day of trading after the war started. We're a 28 00:01:35,440 --> 00:01:37,480 Speaker 1: few days on from that now credit is starting to 29 00:01:37,480 --> 00:01:39,520 Speaker 1: sell off again, but it's still bouncing around a lot, 30 00:01:39,560 --> 00:01:42,720 Speaker 1: trying to find a level, wondering to start there, Shannon, 31 00:01:42,880 --> 00:01:44,120 Speaker 1: you know, what do you make of that? How does 32 00:01:44,160 --> 00:01:47,400 Speaker 1: the world's largest active fund manager position for all of 33 00:01:47,440 --> 00:01:48,280 Speaker 1: that uncertainty. 34 00:01:49,000 --> 00:01:52,200 Speaker 2: First, let's recognize there's a pretty huge human impact that 35 00:01:52,760 --> 00:01:55,800 Speaker 2: can't be forgotten when we talk about markets right now. 36 00:01:56,480 --> 00:02:00,840 Speaker 2: But the initial reaction, as you say, has been except 37 00:02:00,840 --> 00:02:05,800 Speaker 2: in certain directly impacted sectors. Oil markets obviously are impacted. 38 00:02:05,880 --> 00:02:10,040 Speaker 2: There's allow on to travel sectors, and you know, consumer 39 00:02:10,080 --> 00:02:12,799 Speaker 2: confidence is a question, but it is. It has been 40 00:02:12,880 --> 00:02:15,120 Speaker 2: pretty orderly, and I think a lot of that is 41 00:02:15,160 --> 00:02:20,320 Speaker 2: because participants in markets, you know, somewhat planned for this 42 00:02:20,639 --> 00:02:24,200 Speaker 2: and as best they could position their portfolios ahead of time. 43 00:02:24,680 --> 00:02:28,720 Speaker 2: So we haven't seen a big reaction. In the high 44 00:02:28,760 --> 00:02:33,240 Speaker 2: yield market in particular, it's been pretty calm and really 45 00:02:33,240 --> 00:02:36,399 Speaker 2: not a lot of what we would call cash trading. 46 00:02:36,520 --> 00:02:40,120 Speaker 2: So far, the trading and the impact on markets has 47 00:02:40,200 --> 00:02:45,360 Speaker 2: been from you know, index things and CDX and you know, 48 00:02:45,440 --> 00:02:49,079 Speaker 2: sort of hedging vehicles rather than a lot of actual 49 00:02:49,120 --> 00:02:53,600 Speaker 2: trading in you know, high acusips and so positioning. How 50 00:02:53,600 --> 00:02:56,160 Speaker 2: do you position for that? I think you do have 51 00:02:56,240 --> 00:02:59,959 Speaker 2: to think that you have made moves ahead of time, 52 00:03:00,280 --> 00:03:03,120 Speaker 2: you know, and of course that isn't always easy to 53 00:03:03,160 --> 00:03:06,240 Speaker 2: do because you can't predict the future with certainty. But 54 00:03:06,639 --> 00:03:11,160 Speaker 2: there were signs, right and there have been, you know, 55 00:03:11,560 --> 00:03:14,640 Speaker 2: ways that you can position before so that when markets 56 00:03:14,639 --> 00:03:17,040 Speaker 2: do you react, you can try to take advantage of it. 57 00:03:17,800 --> 00:03:19,880 Speaker 2: And that's what that's what we're supposed to do as 58 00:03:19,919 --> 00:03:20,760 Speaker 2: active managers. 59 00:03:21,400 --> 00:03:24,360 Speaker 1: But we did go to this very very tight price 60 00:03:25,080 --> 00:03:27,040 Speaker 1: in the words of a lot of investors for perfection. 61 00:03:27,200 --> 00:03:30,000 Speaker 1: This clearly is not that is there not a risk 62 00:03:30,040 --> 00:03:31,960 Speaker 1: that spreads could blow out a lot more from here? 63 00:03:33,000 --> 00:03:34,920 Speaker 2: There's always that risk, and I think the question is 64 00:03:35,000 --> 00:03:39,800 Speaker 2: really about timing. You know, how long does this conflict continue, 65 00:03:39,840 --> 00:03:44,440 Speaker 2: does it widen and you know broaden, So that for 66 00:03:44,520 --> 00:03:48,120 Speaker 2: sure would be something to watch and could cause risk 67 00:03:48,200 --> 00:03:52,680 Speaker 2: markets to sell off and spreads to widen. So that's 68 00:03:52,720 --> 00:03:54,520 Speaker 2: the risk, you know, and so we have to watch 69 00:03:54,520 --> 00:03:58,640 Speaker 2: it and be be cautious about how that all, you know, 70 00:03:58,720 --> 00:04:02,440 Speaker 2: flows through the highield market. The the biggest impact really 71 00:04:02,520 --> 00:04:04,960 Speaker 2: is going to be on specific sectors, I think, and 72 00:04:05,000 --> 00:04:08,280 Speaker 2: so positioning from a sector perspective is going to be important. 73 00:04:09,480 --> 00:04:13,240 Speaker 2: The markets in high yield have started off prett high quality, 74 00:04:13,800 --> 00:04:16,640 Speaker 2: and so that helps when it comes to a risk 75 00:04:16,839 --> 00:04:20,560 Speaker 2: off mood. You know, markets that perform the worst are 76 00:04:20,600 --> 00:04:23,840 Speaker 2: the ones where there's clearly the most issue with either 77 00:04:23,880 --> 00:04:29,480 Speaker 2: credit risk or you know, sort of positioning that's too lopsided. 78 00:04:30,200 --> 00:04:32,039 Speaker 2: So there's a lot to follow and a lot to 79 00:04:32,040 --> 00:04:34,160 Speaker 2: look at. There's not a shortage of things to think 80 00:04:34,200 --> 00:04:37,640 Speaker 2: about right now as managers in any in any risk 81 00:04:37,640 --> 00:04:39,560 Speaker 2: asset class, and high yield is no different. 82 00:04:40,960 --> 00:04:44,640 Speaker 3: So global conflict obviously is a big risk. But outside 83 00:04:44,640 --> 00:04:47,000 Speaker 3: of geopolitics, what do you see is the biggest risk 84 00:04:47,080 --> 00:04:48,479 Speaker 3: to leverage credit markets? 85 00:04:48,880 --> 00:04:51,359 Speaker 2: Leverage credit markets are broader than high yield, so I 86 00:04:51,360 --> 00:04:54,800 Speaker 2: would your question kind of expands beyond just the specific 87 00:04:55,440 --> 00:04:59,560 Speaker 2: high yield market, But the biggest risks outside of geopolitical 88 00:04:59,680 --> 00:05:04,320 Speaker 2: are related to certain sectors that have you know, gotten 89 00:05:04,480 --> 00:05:07,040 Speaker 2: just a lot of capital that has flowed into them 90 00:05:07,240 --> 00:05:11,920 Speaker 2: and maybe underwriting standards have weakened as a result. So 91 00:05:11,960 --> 00:05:14,720 Speaker 2: we should talk a little bit about you know, sector focuses, 92 00:05:14,760 --> 00:05:17,680 Speaker 2: but it's not really specifically in high yield. I mean, 93 00:05:17,680 --> 00:05:20,800 Speaker 2: I've been managing as a high yield investor and portfolio 94 00:05:20,880 --> 00:05:25,640 Speaker 2: manager for decades and you know, usually there's areas of 95 00:05:25,720 --> 00:05:27,960 Speaker 2: problem within high yield, but right now there really is. 96 00:05:28,080 --> 00:05:30,760 Speaker 2: It's not and it's kind of one of those unusual 97 00:05:30,800 --> 00:05:33,360 Speaker 2: situations where most of the high yield market is pretty good, 98 00:05:33,800 --> 00:05:37,600 Speaker 2: and so it's outside your point. It's outside of high yield. 99 00:05:37,640 --> 00:05:40,480 Speaker 2: It's in leverage credit markets, where there's a little bit 100 00:05:40,839 --> 00:05:45,400 Speaker 2: you know, less stability and where there could be opportunities 101 00:05:45,400 --> 00:05:48,919 Speaker 2: if you can go into parts of the market that 102 00:05:49,000 --> 00:05:52,880 Speaker 2: have been you know, maybe unfairly maligned or you know, 103 00:05:53,080 --> 00:05:57,880 Speaker 2: sold off in lockstep where there hasn't been the differentiation 104 00:05:57,960 --> 00:06:00,960 Speaker 2: between good companies and bad companies just all painted with 105 00:06:01,000 --> 00:06:04,360 Speaker 2: the same brush. So that's something to think about. But 106 00:06:04,800 --> 00:06:09,240 Speaker 2: you know, aside from sectors that we've all you know, 107 00:06:09,279 --> 00:06:12,279 Speaker 2: heard about, it really just the question of the over 108 00:06:12,400 --> 00:06:17,479 Speaker 2: leverage or the lack of underwriting you know, discipline that 109 00:06:17,720 --> 00:06:20,520 Speaker 2: goes into when a sector grows really quick as quickly 110 00:06:20,560 --> 00:06:22,920 Speaker 2: as we've seen, you know, in levered loans. 111 00:06:23,480 --> 00:06:24,720 Speaker 3: I was going to say, yeah, so it seems like 112 00:06:24,760 --> 00:06:27,560 Speaker 3: the levered loan market is a little bit more concerning 113 00:06:27,560 --> 00:06:29,040 Speaker 3: to you than the high old market at this point. 114 00:06:29,080 --> 00:06:29,599 Speaker 3: Is that correct? 115 00:06:30,880 --> 00:06:33,279 Speaker 2: It is? I mean, they're related markets, so you can't 116 00:06:33,720 --> 00:06:36,680 Speaker 2: just ignore you know, the impact of the knock on 117 00:06:36,760 --> 00:06:41,080 Speaker 2: impacts of when things change in a related market. So 118 00:06:41,320 --> 00:06:44,039 Speaker 2: that's where you know, as managers in high yield we 119 00:06:44,240 --> 00:06:46,279 Speaker 2: have to have eyes wide open and what that is 120 00:06:46,320 --> 00:06:49,280 Speaker 2: going to mean, what softness in one related market means 121 00:06:49,279 --> 00:06:53,640 Speaker 2: for another. So but yeah, I mean the reality is 122 00:06:53,680 --> 00:06:56,720 Speaker 2: the highield market hasn't really been this place where risk 123 00:06:57,400 --> 00:06:58,480 Speaker 2: underwriting has happened. 124 00:06:58,920 --> 00:06:59,120 Speaker 3: You know. 125 00:07:00,200 --> 00:07:02,560 Speaker 2: I think you've had guests talk about it before, and 126 00:07:02,600 --> 00:07:05,600 Speaker 2: you've done a good job on your podcast of addressing 127 00:07:05,600 --> 00:07:07,400 Speaker 2: the fact that the highield market is different than it 128 00:07:07,440 --> 00:07:10,920 Speaker 2: has been and it's pretty obvious, you know, it doesn't 129 00:07:10,960 --> 00:07:15,280 Speaker 2: take a thirty year veteran to tell you that the 130 00:07:15,360 --> 00:07:17,440 Speaker 2: truth is that the markets are a lot safer than 131 00:07:17,480 --> 00:07:22,160 Speaker 2: they have been, and that the excitement and the leverage 132 00:07:22,200 --> 00:07:25,440 Speaker 2: and you know, private equity growth has all happened outside 133 00:07:25,440 --> 00:07:29,960 Speaker 2: of high yield and loans, and so. 134 00:07:29,920 --> 00:07:32,640 Speaker 3: Your biggest concerns would it be for the There's been 135 00:07:32,680 --> 00:07:35,040 Speaker 3: a lot of news out there with regard to software firms, 136 00:07:35,520 --> 00:07:37,880 Speaker 3: exposure to software and the leverage loan market. Was that 137 00:07:37,960 --> 00:07:40,680 Speaker 3: an area that you feel that's been weaker on writing standards? 138 00:07:42,200 --> 00:07:46,040 Speaker 2: Yeah, and then you know that there are software borrowers 139 00:07:46,040 --> 00:07:47,800 Speaker 2: in the high yield market too, so we follow it 140 00:07:47,840 --> 00:07:51,840 Speaker 2: pretty closely. But the real growth in the past few 141 00:07:51,920 --> 00:07:56,280 Speaker 2: years have have been more towards you know, borrowing in 142 00:07:56,320 --> 00:07:59,160 Speaker 2: the in the loan market, and you know, not surprisingly 143 00:08:00,160 --> 00:08:03,080 Speaker 2: software bonds have felt some of the pain, but it's 144 00:08:03,120 --> 00:08:05,520 Speaker 2: a much smaller segment of the market. I think it's 145 00:08:05,680 --> 00:08:08,000 Speaker 2: you know, like three percent of the high old market 146 00:08:08,080 --> 00:08:11,880 Speaker 2: is in software, and when you contrast that with the 147 00:08:11,960 --> 00:08:15,480 Speaker 2: loan market, it's closer to the mid teens and you know, 148 00:08:15,520 --> 00:08:17,840 Speaker 2: maybe even higher in some of the private parts of 149 00:08:17,880 --> 00:08:21,160 Speaker 2: the market. So you know, at any time one sector 150 00:08:21,920 --> 00:08:24,840 Speaker 2: comes to dominate a part of the market so quickly, 151 00:08:25,520 --> 00:08:29,600 Speaker 2: you have to be concerned about concentration risk and about 152 00:08:29,880 --> 00:08:35,719 Speaker 2: investors just getting one sided, you know, all comfortable too 153 00:08:35,720 --> 00:08:39,320 Speaker 2: comfortable with the you know, the credit risk of a 154 00:08:39,360 --> 00:08:41,880 Speaker 2: particular sector that's been done that's done really well and 155 00:08:41,920 --> 00:08:45,040 Speaker 2: has been uncorrelated with the rest of market. So I mean, 156 00:08:45,120 --> 00:08:48,400 Speaker 2: having said that, I think right now markets are adopting 157 00:08:48,440 --> 00:08:51,160 Speaker 2: a bit of a you know, shoot first, ask questions 158 00:08:51,200 --> 00:08:54,720 Speaker 2: later sort of strategy when it comes to software, and 159 00:08:55,040 --> 00:08:58,559 Speaker 2: in my experience, that's not the right strategy, you know, 160 00:08:58,679 --> 00:09:00,360 Speaker 2: especially if you've done a good job of putting your 161 00:09:00,400 --> 00:09:05,280 Speaker 2: portfolio together with issuers whose business models you understand and 162 00:09:06,120 --> 00:09:09,920 Speaker 2: where you can take a level headed approach to the 163 00:09:10,040 --> 00:09:13,920 Speaker 2: range of outcomes. You know, Undoubtedly, I think there's going 164 00:09:14,000 --> 00:09:16,559 Speaker 2: to be some you know, baby out with the bath 165 00:09:16,600 --> 00:09:19,800 Speaker 2: water when when it comes to the sector, and that 166 00:09:19,880 --> 00:09:24,080 Speaker 2: means bargains can be had, so you know, also, I 167 00:09:24,080 --> 00:09:27,920 Speaker 2: think my expectation about this sector is that borrowers who 168 00:09:27,920 --> 00:09:32,080 Speaker 2: do have free cash flow and haven't you know, taken 169 00:09:32,080 --> 00:09:35,040 Speaker 2: on too much leverage and borrowed against a multiple of 170 00:09:35,080 --> 00:09:38,080 Speaker 2: their revenues with a bunch of you know, picking debt, 171 00:09:38,160 --> 00:09:40,320 Speaker 2: they're going to use their free cash flow to pay 172 00:09:40,320 --> 00:09:44,480 Speaker 2: down debt. The m and A window is probably going 173 00:09:44,559 --> 00:09:49,360 Speaker 2: to be closing or has already closed, so these borrowers 174 00:09:49,400 --> 00:09:52,240 Speaker 2: are going to be priority number one is paying down 175 00:09:52,280 --> 00:09:56,560 Speaker 2: their debt, so that when the refinancing time does come 176 00:09:56,679 --> 00:09:59,839 Speaker 2: for them, they'll you know, there's less of an existential 177 00:09:59,840 --> 00:10:02,160 Speaker 2: thre and you know, it's a lot like what we 178 00:10:02,200 --> 00:10:05,880 Speaker 2: saw with the kind of crisis that we had in 179 00:10:05,920 --> 00:10:10,760 Speaker 2: the energy sector in last decade, where you know, there's 180 00:10:10,559 --> 00:10:13,840 Speaker 2: a lot of exuberant about the sector. Borrowers took on 181 00:10:13,880 --> 00:10:17,960 Speaker 2: a lot of debt, and then capital allocation decisions get 182 00:10:18,280 --> 00:10:22,559 Speaker 2: radically reworked and you know that favored. Then the cash 183 00:10:22,559 --> 00:10:26,400 Speaker 2: flow gets directed to the lenders first, and only then 184 00:10:26,520 --> 00:10:31,040 Speaker 2: when balance sheets are right sized do the shareholders get returns. 185 00:10:31,360 --> 00:10:34,520 Speaker 2: So you know, it's like like anything, there's a cycle 186 00:10:35,000 --> 00:10:37,640 Speaker 2: that somewhat cures itself, and in the meanwhile, there will 187 00:10:37,679 --> 00:10:40,960 Speaker 2: be lots of opportunity for people who don't have already 188 00:10:41,000 --> 00:10:42,400 Speaker 2: too much exposure to software. 189 00:10:43,360 --> 00:10:46,120 Speaker 1: Well, there are so many you know, projections around AI 190 00:10:46,400 --> 00:10:49,520 Speaker 1: and so much uncertainty, and the sort of thesis is 191 00:10:49,760 --> 00:10:52,240 Speaker 1: averging into science fiction in terms of what it will 192 00:10:52,320 --> 00:10:55,560 Speaker 1: turn into. How do you, as a portfolio manager actually 193 00:10:55,640 --> 00:10:59,480 Speaker 1: sought through potential winners? You know, what software companies could 194 00:10:59,480 --> 00:11:01,360 Speaker 1: survive and how would you identify it? 195 00:11:02,360 --> 00:11:04,160 Speaker 2: Yeah, and it's the sector where you really need to 196 00:11:04,160 --> 00:11:07,720 Speaker 2: have expertise and this is part of the benefit of 197 00:11:07,800 --> 00:11:11,800 Speaker 2: having a lot of people who focus just on small sectors. 198 00:11:11,880 --> 00:11:16,400 Speaker 2: You know, having a team that does understand the difference 199 00:11:16,400 --> 00:11:19,800 Speaker 2: between company A, B, and C, especially companies whose names 200 00:11:19,840 --> 00:11:23,320 Speaker 2: you might not recognize. You know, a lot of these issuers, 201 00:11:23,360 --> 00:11:25,839 Speaker 2: no one's ever heard of the company. Unless you are 202 00:11:25,840 --> 00:11:28,800 Speaker 2: an active, deep participant in the market, you wouldn't know 203 00:11:28,800 --> 00:11:32,000 Speaker 2: what they do. And so I think the only way 204 00:11:32,000 --> 00:11:35,120 Speaker 2: to do that is by having someone who's followed the 205 00:11:35,240 --> 00:11:38,160 Speaker 2: sector for a long time, who has the time to 206 00:11:38,240 --> 00:11:44,280 Speaker 2: dedicate to making distinctions in markets that are going to 207 00:11:44,280 --> 00:11:48,640 Speaker 2: be painted with this broad brush. And that's the only 208 00:11:48,679 --> 00:11:51,000 Speaker 2: way to go about it. It's basic, but it takes 209 00:11:51,040 --> 00:11:55,719 Speaker 2: a lot of time and experience and ability to talk 210 00:11:55,760 --> 00:11:58,960 Speaker 2: to management teams and to understand what is going on 211 00:11:59,040 --> 00:12:02,120 Speaker 2: in their business and being able to take advantage of 212 00:12:02,240 --> 00:12:04,880 Speaker 2: prices that don't make any sense if you get it wrong, 213 00:12:05,200 --> 00:12:07,240 Speaker 2: you know, being able to think through the long the 214 00:12:07,320 --> 00:12:09,959 Speaker 2: long haul, the long game of how do you deal 215 00:12:10,000 --> 00:12:13,000 Speaker 2: with the fact that you've got something that hasn't worked 216 00:12:13,000 --> 00:12:15,880 Speaker 2: out and it's never the right reaction to just as 217 00:12:15,920 --> 00:12:19,160 Speaker 2: they said earlier, kind of get reaction, make a decision 218 00:12:19,240 --> 00:12:22,720 Speaker 2: based on the whole sector quote unquote being out of favor. 219 00:12:23,720 --> 00:12:26,040 Speaker 1: So would you describe the old strategy then as being 220 00:12:26,040 --> 00:12:28,800 Speaker 1: a sort of selective dip buyer in this. 221 00:12:28,960 --> 00:12:31,960 Speaker 2: Yeah, And you can do that if you have long 222 00:12:32,080 --> 00:12:38,040 Speaker 2: term you know, commitment to a particular market. You know, 223 00:12:38,160 --> 00:12:42,160 Speaker 2: we've been managing how you'll for decades and you and 224 00:12:42,240 --> 00:12:44,320 Speaker 2: you learn a lot over the course of that time. 225 00:12:44,400 --> 00:12:48,360 Speaker 2: What tends to happen again? And you know history repeats, 226 00:12:48,520 --> 00:12:50,880 Speaker 2: and so when you see stuff like this happen, you 227 00:12:50,920 --> 00:12:53,440 Speaker 2: have to be ready to take advantage of it because 228 00:12:53,440 --> 00:12:57,199 Speaker 2: there will be managers and market participants who aren't comfortable 229 00:12:57,440 --> 00:13:01,400 Speaker 2: and just have to reduce. And that is a time 230 00:13:01,600 --> 00:13:06,199 Speaker 2: to know which ones you want to buy and act. 231 00:13:07,240 --> 00:13:10,400 Speaker 1: And you make the comparison to the energy shaken out 232 00:13:10,480 --> 00:13:13,280 Speaker 1: of I think it was twenty fifteen twenty sixteen, which, 233 00:13:13,679 --> 00:13:16,680 Speaker 1: as I recall, was a lot more widespread in terms 234 00:13:16,720 --> 00:13:21,319 Speaker 1: of its impact on the credit market. This, in comparisoncy 235 00:13:21,400 --> 00:13:23,800 Speaker 1: is quite contained. Is there a point at which it 236 00:13:23,800 --> 00:13:26,320 Speaker 1: tips over into the rest of the credit market and 237 00:13:26,440 --> 00:13:28,160 Speaker 1: really sells to cause contagion? 238 00:13:29,920 --> 00:13:33,120 Speaker 2: Well, I think the reason felt like it was more 239 00:13:33,160 --> 00:13:36,360 Speaker 2: widespread is because it's so visible. You know, you had 240 00:13:36,800 --> 00:13:40,400 Speaker 2: everyone has on their screen what's happening to WGI, you know, 241 00:13:40,600 --> 00:13:44,240 Speaker 2: and everyone knows what's happening with oil markets, and it 242 00:13:44,640 --> 00:13:48,360 Speaker 2: was really it was largely a high yield market phenomenon, 243 00:13:48,400 --> 00:13:51,320 Speaker 2: you know, high yield and private equity phenomenon, and so 244 00:13:51,559 --> 00:13:53,560 Speaker 2: I think it was pretty well covered. And obviously that 245 00:13:53,600 --> 00:13:56,600 Speaker 2: with the benefit of hindsight. So I don't know that 246 00:13:56,640 --> 00:13:58,600 Speaker 2: there's a whole lot of difference. Really. I think it's 247 00:13:59,200 --> 00:14:04,080 Speaker 2: the same set up and the same sort of you know, 248 00:14:04,120 --> 00:14:09,520 Speaker 2: playbook that works itself out with with time, and you know, 249 00:14:09,559 --> 00:14:12,440 Speaker 2: there'll be opportunities along the way for people who are 250 00:14:12,520 --> 00:14:16,880 Speaker 2: level headed to sort of you know. Fine. 251 00:14:17,559 --> 00:14:19,880 Speaker 3: So we've talked about some of the concerns regarding the 252 00:14:19,920 --> 00:14:22,840 Speaker 3: software sector. What sectors do you think are well positioned now? 253 00:14:22,880 --> 00:14:25,400 Speaker 3: With sectors are you favorable at this time? 254 00:14:27,000 --> 00:14:29,600 Speaker 2: Well, I mean with you can look at overweights and underweights, 255 00:14:29,600 --> 00:14:32,760 Speaker 2: and there are certainly sectors where where we have positioned 256 00:14:32,800 --> 00:14:38,760 Speaker 2: ourselves with big overweights, and those are generally ones where 257 00:14:38,960 --> 00:14:42,800 Speaker 2: of course we have expertise, where there's predictable streams of 258 00:14:42,840 --> 00:14:46,360 Speaker 2: cash flows, where leverages are moderate, and where we think 259 00:14:46,400 --> 00:14:50,160 Speaker 2: we can you know, earn a reasonable return without a 260 00:14:50,160 --> 00:14:54,560 Speaker 2: lot of volatility. So you know that is thankfully there's 261 00:14:54,600 --> 00:14:56,960 Speaker 2: a lot of sectors like that where you can apply 262 00:14:57,800 --> 00:15:02,560 Speaker 2: the active management playbook right now because hig yielder is 263 00:15:02,600 --> 00:15:06,600 Speaker 2: pretty high quality. There's there are good companies like that 264 00:15:07,200 --> 00:15:13,040 Speaker 2: and good sectors to overweight. So, you know, we haven't 265 00:15:13,040 --> 00:15:15,760 Speaker 2: had a lot of to to the earlier discussion, there 266 00:15:15,760 --> 00:15:20,480 Speaker 2: hasn't been a lot of higher risk new issuance. Most 267 00:15:20,520 --> 00:15:23,400 Speaker 2: of what we've seen the last few months has been 268 00:15:23,680 --> 00:15:28,640 Speaker 2: refinancing of double B companies and so that is kind 269 00:15:28,640 --> 00:15:32,960 Speaker 2: of regular way high yield risk and so there's lots 270 00:15:32,960 --> 00:15:37,160 Speaker 2: of things to do, and you know, lots of companies 271 00:15:37,160 --> 00:15:40,440 Speaker 2: that are meeting the thresholds that we that we place 272 00:15:40,560 --> 00:15:46,360 Speaker 2: on you know, putting all of those things together, you know, 273 00:15:46,440 --> 00:15:48,360 Speaker 2: so it is sort of business as usual in a 274 00:15:48,400 --> 00:15:50,800 Speaker 2: way in the high yield market. With sectors there were 275 00:15:50,880 --> 00:15:52,800 Speaker 2: overweight or ones that we've liked for a long time, 276 00:15:54,320 --> 00:16:00,320 Speaker 2: you know, communications, cable, satellite sector, and then the typical 277 00:16:00,400 --> 00:16:03,600 Speaker 2: underweights that you've seen and that you would imagine that 278 00:16:03,680 --> 00:16:08,760 Speaker 2: relate more to cyclical sectors, you know, consumer, cyclical capital goods. 279 00:16:09,920 --> 00:16:13,280 Speaker 2: You know, those are easier to underweight for the just 280 00:16:13,320 --> 00:16:15,520 Speaker 2: the fact that the companies themselves and the sectors are 281 00:16:15,560 --> 00:16:16,160 Speaker 2: more volatile. 282 00:16:17,480 --> 00:16:21,000 Speaker 3: Yeah, we've seen a lot of positive impacting the communications sector. 283 00:16:21,040 --> 00:16:23,000 Speaker 3: You have you know, Echo Star, which was a distress 284 00:16:23,080 --> 00:16:27,320 Speaker 3: name for a while, selling Spectrum, really improving their capital structure. Charter, 285 00:16:27,400 --> 00:16:30,080 Speaker 3: which is the largest name in high yield, is acquiring 286 00:16:30,120 --> 00:16:33,160 Speaker 3: Cox Communication and lowering its target leverage ratio. So it 287 00:16:33,320 --> 00:16:35,480 Speaker 3: does seem to be a lot of positives in the 288 00:16:35,480 --> 00:16:36,560 Speaker 3: communications sector. 289 00:16:37,240 --> 00:16:40,920 Speaker 2: Yep, exactly. And those are where the alignment alignment is 290 00:16:41,640 --> 00:16:44,520 Speaker 2: good between what's good for the equity and what's good 291 00:16:44,560 --> 00:16:47,520 Speaker 2: for the bondholders. And when you can find situations like 292 00:16:47,520 --> 00:16:50,080 Speaker 2: that where there's you know, everyone is lined up together, 293 00:16:50,160 --> 00:16:55,120 Speaker 2: where the benefit to reducing debt it inners both to 294 00:16:55,160 --> 00:16:57,480 Speaker 2: the bondholders and the equity holders. So that's a good thing. 295 00:16:58,600 --> 00:17:01,440 Speaker 2: And so we look for situations like that where leverage 296 00:17:01,440 --> 00:17:04,480 Speaker 2: should come down and everyone benefits if that happens. 297 00:17:05,080 --> 00:17:07,040 Speaker 3: So there are still a few examples out there of 298 00:17:07,080 --> 00:17:10,679 Speaker 3: over leveraged companies. And obviously there's been a very active 299 00:17:11,040 --> 00:17:15,000 Speaker 3: lie building management exercise market for quite some time. So 300 00:17:15,119 --> 00:17:18,600 Speaker 3: does Capital Group participate in a lot of those exchanges. 301 00:17:18,800 --> 00:17:20,399 Speaker 3: Obviously you're large, I would imagine you do. 302 00:17:21,680 --> 00:17:25,920 Speaker 2: Yeah, I mean that there's for sure you want to 303 00:17:25,960 --> 00:17:30,840 Speaker 2: not be participating into many of these because usually that involves, 304 00:17:31,160 --> 00:17:33,560 Speaker 2: you know, something has gone wrong along the path from 305 00:17:33,560 --> 00:17:35,960 Speaker 2: when you bought the deal to when it pays you back. 306 00:17:36,400 --> 00:17:39,240 Speaker 2: So you hope that you're not involved in a lot 307 00:17:39,240 --> 00:17:42,200 Speaker 2: of lemis. But and also you know that the vast 308 00:17:42,200 --> 00:17:45,200 Speaker 2: majority of lem situations they don't end up very well, 309 00:17:45,440 --> 00:17:47,760 Speaker 2: you know, in the next few years. I think I've 310 00:17:47,760 --> 00:17:50,320 Speaker 2: seen a study that said that the majority of lemis 311 00:17:50,400 --> 00:17:53,960 Speaker 2: end up in bankruptcy within three years. So it is 312 00:17:54,000 --> 00:17:57,600 Speaker 2: not a, you know, a good thing, and it's certainly 313 00:17:57,640 --> 00:18:02,520 Speaker 2: not a you know, structuring in a positive way, and 314 00:18:04,160 --> 00:18:06,520 Speaker 2: but you have to deal with that, you know. It's 315 00:18:06,560 --> 00:18:10,399 Speaker 2: sort of a reality of the sophistication in capital markets 316 00:18:10,480 --> 00:18:14,880 Speaker 2: right now. It's also a result of the covenant light 317 00:18:14,960 --> 00:18:19,040 Speaker 2: activity that's happened. It's just enabled this new avenue for 318 00:18:19,840 --> 00:18:25,159 Speaker 2: tiering to capture discount and extend runway. So the key is, 319 00:18:25,320 --> 00:18:31,040 Speaker 2: you know, getting the lenders to agree to exchange into 320 00:18:31,080 --> 00:18:34,280 Speaker 2: some new instrument that they think will benefit them and 321 00:18:34,320 --> 00:18:37,240 Speaker 2: not out of fear that they'll be worse off if 322 00:18:37,280 --> 00:18:43,159 Speaker 2: they don't. So the lme situation is now no longer 323 00:18:43,240 --> 00:18:46,520 Speaker 2: news and me think everybody who's been in the leveraged 324 00:18:46,560 --> 00:18:49,760 Speaker 2: capital markets for the last decade has been through it, 325 00:18:50,480 --> 00:18:54,080 Speaker 2: and you know it is. It's something that can take place, 326 00:18:54,119 --> 00:18:58,439 Speaker 2: particularly when there's a long duration situation that's trading at 327 00:18:58,440 --> 00:19:02,800 Speaker 2: a discount. And interestingly, the fact that the hyeld market 328 00:19:02,840 --> 00:19:06,720 Speaker 2: has gotten a lot shorter, with duration now under three years, 329 00:19:06,760 --> 00:19:09,600 Speaker 2: it sort of has meant that a lot of this 330 00:19:09,880 --> 00:19:14,119 Speaker 2: lemy technology just has a more limited window, you know, 331 00:19:14,160 --> 00:19:17,439 Speaker 2: and lenders have learned a lot from lemies of the past, 332 00:19:17,480 --> 00:19:21,359 Speaker 2: and they we have more tools and experience both in 333 00:19:21,440 --> 00:19:25,480 Speaker 2: how to avoid them in advance and where the setup 334 00:19:25,520 --> 00:19:28,080 Speaker 2: is there for an aggressive enemy, and also to protect 335 00:19:28,600 --> 00:19:31,480 Speaker 2: against it if it happens. And if we're if we're 336 00:19:32,359 --> 00:19:35,040 Speaker 2: you know, a large investor in a situation like that, 337 00:19:35,080 --> 00:19:38,119 Speaker 2: we want to be as protective as we can of 338 00:19:38,960 --> 00:19:41,080 Speaker 2: our investments, so we know what to do. 339 00:19:43,040 --> 00:19:45,040 Speaker 3: And would you say the tools come more from experience, 340 00:19:45,080 --> 00:19:48,480 Speaker 3: doesn't sound like the underwriting standards have gotten that much better, 341 00:19:48,520 --> 00:19:51,440 Speaker 3: that lender protections are much better now and new deals 342 00:19:51,480 --> 00:19:52,840 Speaker 3: than it was in the past. 343 00:19:53,760 --> 00:19:56,359 Speaker 2: I think lenders that we've just gotten a lot smarter 344 00:19:56,440 --> 00:20:01,359 Speaker 2: about detecting the the weaknesses in indentures and so some 345 00:20:01,440 --> 00:20:06,200 Speaker 2: of the really gaping holes in indentures that allowed really 346 00:20:06,440 --> 00:20:09,720 Speaker 2: aggressive enemies to happen, those have been tightened up and closed. 347 00:20:10,160 --> 00:20:12,040 Speaker 2: I mean, it's always a bit of a game, right 348 00:20:12,160 --> 00:20:16,240 Speaker 2: that the the two parties are trying to figure out 349 00:20:16,720 --> 00:20:20,640 Speaker 2: how to dance around this topic. And so in any situation, 350 00:20:20,720 --> 00:20:22,879 Speaker 2: you've got someone who has more power than they're the 351 00:20:22,880 --> 00:20:25,679 Speaker 2: one that's going to you know, be the leader. But 352 00:20:26,200 --> 00:20:29,840 Speaker 2: that there's not a lot new when it comes to technology. 353 00:20:30,000 --> 00:20:32,439 Speaker 2: It's just a question of you know, what's this. Who 354 00:20:32,560 --> 00:20:37,280 Speaker 2: has the power to push back against aggressive covenants that 355 00:20:37,320 --> 00:20:40,320 Speaker 2: are not market or you know, who has the power 356 00:20:40,359 --> 00:20:42,400 Speaker 2: to say, well, this is the way it goes. Take 357 00:20:42,440 --> 00:20:44,320 Speaker 2: it or leave it, And then we have to decide 358 00:20:44,359 --> 00:20:46,240 Speaker 2: as lenders if we want to leave it. 359 00:20:47,640 --> 00:20:49,680 Speaker 1: In the communication sector, I know Steve's dying to ask 360 00:20:49,720 --> 00:20:53,000 Speaker 1: you about warners in paramount how that changes things? You know, 361 00:20:53,000 --> 00:20:55,840 Speaker 1: how you trade it. There's a you know, ton of 362 00:20:55,880 --> 00:21:01,040 Speaker 1: debt that're putting on, there's a big fallen nange. You know, 363 00:21:01,080 --> 00:21:04,520 Speaker 1: there's there's a ton of drama there. But is that 364 00:21:04,560 --> 00:21:05,280 Speaker 1: a trade for you? 365 00:21:06,440 --> 00:21:07,800 Speaker 2: I mean, it's going to be a huge issuer in 366 00:21:07,800 --> 00:21:11,479 Speaker 2: the high old market. It's it's can't you cannot ignore 367 00:21:11,520 --> 00:21:13,919 Speaker 2: it when it comes to its situations like that that 368 00:21:13,960 --> 00:21:16,760 Speaker 2: are so big. Also, there's just been so much press 369 00:21:16,800 --> 00:21:20,800 Speaker 2: and you know, it was already those two issuers that 370 00:21:20,840 --> 00:21:24,560 Speaker 2: are coming together, they already were big issuers in the market, 371 00:21:24,640 --> 00:21:27,240 Speaker 2: and so there's not a knowledge about the situation, and 372 00:21:27,280 --> 00:21:30,800 Speaker 2: it was this torture, long, long drawn out process, and 373 00:21:30,880 --> 00:21:33,639 Speaker 2: so anybody who's been paying attentions, you know, had a 374 00:21:33,720 --> 00:21:37,840 Speaker 2: chance to form opinions about the financing and about what 375 00:21:37,880 --> 00:21:40,240 Speaker 2: they what they want to do. So, yeah, we have opinions. 376 00:21:41,400 --> 00:21:44,280 Speaker 2: It's definitely going to be something for the high yield 377 00:21:44,320 --> 00:21:48,080 Speaker 2: market to absorb, because not only do you have a 378 00:21:48,119 --> 00:21:50,000 Speaker 2: lot of debt that's going to have to be issued 379 00:21:50,560 --> 00:21:54,159 Speaker 2: to finance it, but you have already existing debt that's 380 00:21:54,200 --> 00:21:56,040 Speaker 2: going to be you know, it's going to have to 381 00:21:56,080 --> 00:21:58,560 Speaker 2: be absorbed by the high yield market. And there's a 382 00:21:58,560 --> 00:22:01,000 Speaker 2: bunch of different levels of debts, so you know, they'll 383 00:22:01,040 --> 00:22:04,159 Speaker 2: be first lean, they'll be second lean, they'll be unsecured. 384 00:22:04,600 --> 00:22:07,960 Speaker 2: There's you know, legacy debt, new debt, you take your pick, 385 00:22:08,200 --> 00:22:10,280 Speaker 2: and so there's a lot definitely a lot to do 386 00:22:10,800 --> 00:22:13,399 Speaker 2: and there will be real to value opportunities along the way. 387 00:22:13,960 --> 00:22:18,159 Speaker 2: So yeah, so we're geared up to to try to, 388 00:22:18,359 --> 00:22:20,160 Speaker 2: you know, figure this one out. 389 00:22:20,600 --> 00:22:22,520 Speaker 1: Is it a big risk though for the overall buget, 390 00:22:22,520 --> 00:22:24,560 Speaker 1: given that we really don't know where you know, these 391 00:22:24,600 --> 00:22:26,320 Speaker 1: businesses are going. I mean maybe Steve, you have a 392 00:22:26,400 --> 00:22:27,960 Speaker 1: vision of the future, but I have no idea what 393 00:22:28,000 --> 00:22:29,359 Speaker 1: these people are could be people are going to do 394 00:22:29,400 --> 00:22:30,159 Speaker 1: with that business. 395 00:22:30,640 --> 00:22:32,960 Speaker 3: Well, it's it's going to be a complicated capital structure 396 00:22:32,960 --> 00:22:35,080 Speaker 3: in many different parts. And I think you know, as 397 00:22:35,119 --> 00:22:37,679 Speaker 3: Shannon probably knows that. The key here is they have 398 00:22:37,720 --> 00:22:41,399 Speaker 3: a very aggressive synergy assumption of six billion dollars. The 399 00:22:41,440 --> 00:22:42,800 Speaker 3: synergy is a big number. 400 00:22:43,440 --> 00:22:47,000 Speaker 2: Yep, exactly, and the diving in and to figure out 401 00:22:47,000 --> 00:22:49,280 Speaker 2: what is behind that number is going to be important. 402 00:22:50,160 --> 00:22:53,399 Speaker 2: How much do you believe in the laid out game plan? 403 00:22:54,160 --> 00:22:58,119 Speaker 2: So yeah, our our media analyst is you know, super 404 00:22:58,119 --> 00:23:01,639 Speaker 2: busy right now, and as I said, has sort of 405 00:23:01,640 --> 00:23:05,400 Speaker 2: seen it all before with decades of experience. So I'm excited. 406 00:23:06,000 --> 00:23:08,400 Speaker 2: This is good. The high yield market is really good 407 00:23:08,400 --> 00:23:12,680 Speaker 2: at pricing risk, so I think we can you know, yeah, 408 00:23:12,720 --> 00:23:14,439 Speaker 2: I think it'll be good and we have had a 409 00:23:14,560 --> 00:23:18,919 Speaker 2: pretty flat overall high yield market when it comes to 410 00:23:18,960 --> 00:23:21,919 Speaker 2: the size. So, as we said, there's a lot of 411 00:23:21,920 --> 00:23:25,720 Speaker 2: excitement that's happened outside of high yield. So we're you know, 412 00:23:25,760 --> 00:23:31,000 Speaker 2: there's cash, there's you know, there is definitely not a 413 00:23:31,040 --> 00:23:34,040 Speaker 2: concern about it being able to be absorbed. It's just 414 00:23:34,080 --> 00:23:35,280 Speaker 2: a question of where it will price. 415 00:23:36,320 --> 00:23:38,760 Speaker 1: And historically fallen angels have been good for yield investors. 416 00:23:38,760 --> 00:23:40,119 Speaker 1: So are you bullish on this opportunity? 417 00:23:41,200 --> 00:23:43,159 Speaker 2: I mean, we'll see. There's as I said, there's a 418 00:23:43,160 --> 00:23:45,880 Speaker 2: lot to still decide about it, and you know, we'll 419 00:23:45,880 --> 00:23:47,920 Speaker 2: see how the financing takes shape. It's not going to 420 00:23:47,960 --> 00:23:50,520 Speaker 2: happen until I think post labor day at least that's 421 00:23:50,560 --> 00:23:53,399 Speaker 2: the plans. So you know, there's still a lot of 422 00:23:53,400 --> 00:23:56,120 Speaker 2: time to figure out and things could change along the way. 423 00:23:58,040 --> 00:24:01,840 Speaker 2: But yeah, were have been good opportunities in fallen angels 424 00:24:01,880 --> 00:24:05,120 Speaker 2: and if the management team is dedicated to paying down 425 00:24:05,119 --> 00:24:07,440 Speaker 2: debt and uses all of its where with all the 426 00:24:07,440 --> 00:24:09,919 Speaker 2: paydown debt, that could be a good thing. But we 427 00:24:09,960 --> 00:24:12,679 Speaker 2: don't know, so I think, yeah, we'll see. 428 00:24:14,119 --> 00:24:16,480 Speaker 3: So So with regard to supply to the highield market 429 00:24:16,520 --> 00:24:19,240 Speaker 3: that you talked about we see a lot of companies 430 00:24:19,280 --> 00:24:21,879 Speaker 3: pursuing asset backed securities. It's a bigger market now and 431 00:24:21,920 --> 00:24:24,760 Speaker 3: a lot of companies are tapping that. Is that an 432 00:24:24,760 --> 00:24:27,280 Speaker 3: impact of the highield market As far as the limiting supply. 433 00:24:27,720 --> 00:24:30,640 Speaker 2: Well, usually it hasn't been the same sort of companies 434 00:24:30,680 --> 00:24:32,840 Speaker 2: that will issue in both the asset back market and 435 00:24:32,920 --> 00:24:35,000 Speaker 2: the highield market. We do see some of that, you know, 436 00:24:35,040 --> 00:24:38,159 Speaker 2: they're companies who have a lot of very easy to 437 00:24:38,280 --> 00:24:42,320 Speaker 2: value or very identifiable assets that are pretty easy to 438 00:24:43,560 --> 00:24:46,680 Speaker 2: make decisions about. That that makes sense, But most high 439 00:24:46,680 --> 00:24:48,600 Speaker 2: heeled companies aren't like that. You know, most high heeld 440 00:24:48,680 --> 00:24:53,040 Speaker 2: companies have a business in a few markets doesn't lend 441 00:24:53,040 --> 00:24:56,760 Speaker 2: itself to an ABS structure. Again, that's not always the case, 442 00:24:56,760 --> 00:25:00,280 Speaker 2: and we certainly have seen that happen certain markets, but 443 00:25:00,760 --> 00:25:03,399 Speaker 2: most of the time that's not something that's competitive with 444 00:25:03,480 --> 00:25:07,720 Speaker 2: high yield. Maybe different now, I mean maybe different with 445 00:25:08,200 --> 00:25:11,080 Speaker 2: the big capital needs that are happening around AI. You know, 446 00:25:11,119 --> 00:25:14,320 Speaker 2: those may that those situations may lend themselves better to 447 00:25:15,400 --> 00:25:19,720 Speaker 2: ABS structures than they do to high yield, especially the 448 00:25:19,840 --> 00:25:22,959 Speaker 2: very very big capital needs. So if you think about 449 00:25:23,560 --> 00:25:26,439 Speaker 2: the capital needs that are talked about with regard to 450 00:25:26,480 --> 00:25:28,400 Speaker 2: data centers. I mean, that's just no way the high 451 00:25:28,440 --> 00:25:31,520 Speaker 2: yield market can absorb that those structures have to be 452 00:25:32,320 --> 00:25:36,239 Speaker 2: done outside of the typical high yield market. I mean, 453 00:25:36,240 --> 00:25:40,840 Speaker 2: we've seen a handful of AI data center financings come 454 00:25:40,840 --> 00:25:42,800 Speaker 2: to high yield and they're you know, they're big in 455 00:25:42,840 --> 00:25:45,080 Speaker 2: and of themselves, you know, two billion or three billion 456 00:25:45,640 --> 00:25:48,159 Speaker 2: at a time, But in relation to what has to 457 00:25:48,160 --> 00:25:51,520 Speaker 2: happen to fund the overall you know, AI build out, 458 00:25:51,560 --> 00:25:54,560 Speaker 2: that's just a drop in the bucket. And so those 459 00:25:54,560 --> 00:25:57,200 Speaker 2: financing can't they can't be done in high yield in 460 00:25:57,240 --> 00:25:59,920 Speaker 2: the traditional sense. There will be one office, as we've seen, 461 00:26:00,040 --> 00:26:02,880 Speaker 2: and then you know, there'll be maybe some opportunities there 462 00:26:02,880 --> 00:26:04,520 Speaker 2: for us to look at, but the big ones won't 463 00:26:04,520 --> 00:26:06,400 Speaker 2: happen in how yield Do. 464 00:26:06,359 --> 00:26:09,680 Speaker 1: You look for opportunities in the ABF and the ig 465 00:26:09,960 --> 00:26:12,359 Speaker 1: loan and all those other avenues that are opening up. 466 00:26:12,400 --> 00:26:14,679 Speaker 1: I mean, there's such massive ideals that are going through 467 00:26:14,760 --> 00:26:15,320 Speaker 1: as you say. 468 00:26:15,840 --> 00:26:18,359 Speaker 2: Yeah, not me did I try to focus on high yield? 469 00:26:18,400 --> 00:26:20,240 Speaker 2: And I think focus is a good thing. You got 470 00:26:20,240 --> 00:26:24,360 Speaker 2: to you know, narrow lanes make you make better investors, 471 00:26:24,400 --> 00:26:27,560 Speaker 2: in my opinion. So we have groups that do that, 472 00:26:27,680 --> 00:26:29,399 Speaker 2: but it's not me. I don't spend time on that. 473 00:26:29,880 --> 00:26:31,359 Speaker 1: It's still a big lane of hoy yo. And I 474 00:26:31,359 --> 00:26:33,639 Speaker 1: want to talk about the leverage loans again because I 475 00:26:33,680 --> 00:26:36,760 Speaker 1: think that's a fascinating discussion. You brought up lack of 476 00:26:36,840 --> 00:26:39,840 Speaker 1: underwriting discipline. I'm curious as to whether you think it 477 00:26:39,920 --> 00:26:42,959 Speaker 1: extends beyond just the software sector. 478 00:26:43,760 --> 00:26:45,760 Speaker 2: Well, I mean, I think it does a little bit. 479 00:26:45,800 --> 00:26:47,480 Speaker 2: To what I said earlier about anytime you see a 480 00:26:47,480 --> 00:26:51,120 Speaker 2: bunch of capital chasing a sector, you end up with 481 00:26:51,640 --> 00:26:56,400 Speaker 2: risks that there's you know, the underwriting standards deteriorate. So 482 00:26:57,520 --> 00:27:02,160 Speaker 2: you know, big growth in the levered loan market, especially 483 00:27:02,200 --> 00:27:06,520 Speaker 2: with most of those companies being thing will be rated 484 00:27:06,920 --> 00:27:12,040 Speaker 2: or lower you know. I mean, I know, I'm a 485 00:27:12,040 --> 00:27:15,879 Speaker 2: practitioner and single be credit. I know how those should 486 00:27:15,880 --> 00:27:18,760 Speaker 2: be underwritten, and I know what can go wrong. That 487 00:27:18,880 --> 00:27:21,560 Speaker 2: the loan market has shifted, It's changed over the course 488 00:27:21,600 --> 00:27:24,760 Speaker 2: of the last decade or so. And I made that, 489 00:27:24,880 --> 00:27:26,600 Speaker 2: but I who knows how this ends. I've been talking 490 00:27:26,640 --> 00:27:28,600 Speaker 2: about this for a long time. If you had interviewed 491 00:27:28,600 --> 00:27:31,080 Speaker 2: me three years ago, I would have been talking about 492 00:27:31,119 --> 00:27:33,960 Speaker 2: how the loan market was getting lower quality and you know, 493 00:27:34,040 --> 00:27:37,320 Speaker 2: higher risk, and that these are smaller companies with less 494 00:27:37,400 --> 00:27:40,199 Speaker 2: levers to pull, and you know, if rates go up, 495 00:27:40,200 --> 00:27:43,240 Speaker 2: they're cash flow deteriorates. So I don't know how that 496 00:27:43,320 --> 00:27:48,400 Speaker 2: all plays out, and but I do see this as 497 00:27:49,359 --> 00:27:52,359 Speaker 2: you know, it's just never one thing that causes something 498 00:27:52,359 --> 00:27:55,960 Speaker 2: to go wrong. It's usually three things. Yeah, you start 499 00:27:56,000 --> 00:28:01,200 Speaker 2: off with a very levered company that it has benefited 500 00:28:01,240 --> 00:28:05,439 Speaker 2: from interest rates being rock bottom low, and then you 501 00:28:05,560 --> 00:28:08,399 Speaker 2: change the interest rate picture and interest rates are no 502 00:28:08,440 --> 00:28:12,520 Speaker 2: longer rock bottom low and they're now medium level. You know, 503 00:28:12,600 --> 00:28:15,439 Speaker 2: that's a stress. And then if you're something in the 504 00:28:15,520 --> 00:28:19,520 Speaker 2: environment changes, either your your customers different in some way, 505 00:28:19,680 --> 00:28:22,159 Speaker 2: or your cost of your cost of buying product is 506 00:28:22,200 --> 00:28:25,040 Speaker 2: different in some way. You know, inflation is an impact. 507 00:28:26,359 --> 00:28:30,439 Speaker 2: So that's the second or the third thing, you know, 508 00:28:30,480 --> 00:28:33,360 Speaker 2: and then it doesn't take anything more. You're you're already there, 509 00:28:33,400 --> 00:28:36,280 Speaker 2: You're set. The setup is not good when you've had 510 00:28:36,760 --> 00:28:40,160 Speaker 2: a super levered company with rates going up and then 511 00:28:40,160 --> 00:28:43,240 Speaker 2: something in the macro environment changes, it's that that could 512 00:28:43,240 --> 00:28:43,960 Speaker 2: be the third thing. 513 00:28:44,840 --> 00:28:47,000 Speaker 1: Lipsid so that leverage loads have done really well through 514 00:28:47,000 --> 00:28:48,840 Speaker 1: a lot of stress over the last few years, even 515 00:28:49,080 --> 00:28:51,520 Speaker 1: as you know the FED jacked up race by the 516 00:28:51,640 --> 00:28:55,440 Speaker 1: you know, the fastest rate in the generation they've done. Okay, 517 00:28:55,560 --> 00:28:58,000 Speaker 1: there's still a ton of demand from clos there's not 518 00:28:58,040 --> 00:29:00,920 Speaker 1: that much net supply, so you know, technically it would 519 00:29:00,920 --> 00:29:03,800 Speaker 1: seem that leverage loans would would do fine in this environment, 520 00:29:03,800 --> 00:29:07,760 Speaker 1: particularly if you know this this inflation about we're seeing 521 00:29:07,800 --> 00:29:08,920 Speaker 1: again sticks. 522 00:29:10,080 --> 00:29:13,520 Speaker 2: Yeah, and with the question is can they refinance at 523 00:29:13,520 --> 00:29:16,160 Speaker 2: the time when the debt comes due. So in the meanwhile, 524 00:29:16,240 --> 00:29:19,480 Speaker 2: probably nothing's going to happen. You know that the covenants 525 00:29:19,480 --> 00:29:21,720 Speaker 2: aren't there. As we talked about, covenant light is pretty 526 00:29:21,760 --> 00:29:28,320 Speaker 2: much the regular way. There's no sort of outflows that 527 00:29:28,360 --> 00:29:30,440 Speaker 2: we've seen that are going to cause loan funds to 528 00:29:31,000 --> 00:29:33,160 Speaker 2: have to sell. We don't know yet the early days, 529 00:29:33,200 --> 00:29:35,960 Speaker 2: but so far no. So really it's just a question 530 00:29:36,000 --> 00:29:38,760 Speaker 2: of when these loans come due in the next two 531 00:29:38,840 --> 00:29:41,040 Speaker 2: or three years that were put on, that were put 532 00:29:41,040 --> 00:29:44,120 Speaker 2: in place, you know, three or four or five years ago, Dick, 533 00:29:44,200 --> 00:29:46,320 Speaker 2: can they refinance? And that maybe where the high old 534 00:29:46,320 --> 00:29:48,719 Speaker 2: market steps up. You know, it may be that the 535 00:29:48,720 --> 00:29:51,440 Speaker 2: companies that used to borrow in both the loan market 536 00:29:51,480 --> 00:29:55,360 Speaker 2: and the highield market that then you sort of left 537 00:29:55,680 --> 00:29:58,480 Speaker 2: on masked the highield market. It went just to loans 538 00:29:58,920 --> 00:30:02,840 Speaker 2: that they return, and the high old market is positioned 539 00:30:02,880 --> 00:30:05,320 Speaker 2: for that. This is what we do every day. You know, 540 00:30:05,400 --> 00:30:07,560 Speaker 2: single be credited used to be the big part of 541 00:30:07,680 --> 00:30:09,920 Speaker 2: the market. It's now more double B. But you know, 542 00:30:09,960 --> 00:30:13,440 Speaker 2: we all haven't forgotten how to do that. We know 543 00:30:13,560 --> 00:30:16,840 Speaker 2: our muscle memory is there for lending to middle sized 544 00:30:17,000 --> 00:30:19,840 Speaker 2: single be rated companies. So it's really just a question 545 00:30:19,880 --> 00:30:22,600 Speaker 2: of what that looks like and how does that get structured, 546 00:30:23,600 --> 00:30:27,680 Speaker 2: what's the right rate, and can it be done with 547 00:30:27,720 --> 00:30:30,120 Speaker 2: the same owner that has it now or does it 548 00:30:30,160 --> 00:30:32,720 Speaker 2: have to be done in a new ownership fashion where 549 00:30:32,760 --> 00:30:36,080 Speaker 2: the lenders where the equity is no longer the equity 550 00:30:36,120 --> 00:30:38,480 Speaker 2: and the lender owns the company and then the lender 551 00:30:38,560 --> 00:30:42,720 Speaker 2: sells that asset to somebody else or refinances it in 552 00:30:42,760 --> 00:30:47,240 Speaker 2: the high yield market. So so really it's yeah, it's 553 00:30:47,240 --> 00:30:50,160 Speaker 2: sort of back to normal for high yield if that happens. 554 00:30:51,120 --> 00:30:53,800 Speaker 3: And so, how do you handle the public high yield 555 00:30:53,840 --> 00:30:55,760 Speaker 3: markets versus the private debt markets. 556 00:30:56,120 --> 00:30:59,000 Speaker 2: Well, most of what we participate in is public markets, 557 00:30:59,720 --> 00:31:02,000 Speaker 2: so we have the ability to do some private things 558 00:31:02,040 --> 00:31:06,080 Speaker 2: when we see that there's good structures and good companies. 559 00:31:06,120 --> 00:31:08,360 Speaker 2: But for the most part, I mean we're you know, 560 00:31:08,440 --> 00:31:13,040 Speaker 2: our main high yield fund a hit is forty Act 561 00:31:13,480 --> 00:31:16,520 Speaker 2: you know mutual fund and so forty act mutual funds 562 00:31:16,600 --> 00:31:20,600 Speaker 2: don't want to do private things, so it's just not 563 00:31:20,680 --> 00:31:24,240 Speaker 2: a part of the market where we where we focus 564 00:31:24,840 --> 00:31:25,640 Speaker 2: and any concern. 565 00:31:25,680 --> 00:31:27,760 Speaker 3: As the private market gets bigger and bigger, right, we're 566 00:31:27,760 --> 00:31:30,160 Speaker 3: seeing bigger and bigger deals there that that'll be less 567 00:31:30,400 --> 00:31:32,600 Speaker 3: opportunity for the public high old market. 568 00:31:34,040 --> 00:31:36,080 Speaker 2: Yeah, and that's partly why the high old market hasn't 569 00:31:36,120 --> 00:31:39,240 Speaker 2: grown over the last few years. So companies that would 570 00:31:39,320 --> 00:31:41,440 Speaker 2: have had to come to high yield have found a 571 00:31:41,480 --> 00:31:45,560 Speaker 2: better market to go to in private credit. And this 572 00:31:45,760 --> 00:31:47,320 Speaker 2: used to be small deals. You know, they used to 573 00:31:47,360 --> 00:31:50,760 Speaker 2: be three or four hundred million dollar transactions that were 574 00:31:50,840 --> 00:31:53,040 Speaker 2: kind of too small for high yield and maybe it 575 00:31:53,040 --> 00:31:56,560 Speaker 2: would have been done in the loan market that found 576 00:31:56,600 --> 00:31:59,360 Speaker 2: a really good place to borrow from private credit made 577 00:31:59,360 --> 00:32:02,280 Speaker 2: a lot of sense. But then that more private credit grew, 578 00:32:02,760 --> 00:32:06,600 Speaker 2: the funds got bigger, the returns were good, so that 579 00:32:06,720 --> 00:32:10,120 Speaker 2: begets more funds and you know, more flows, and so 580 00:32:10,160 --> 00:32:12,480 Speaker 2: the deals were able to get bigger and bigger, and 581 00:32:12,520 --> 00:32:16,719 Speaker 2: so we then saw billion dollar financings done in private 582 00:32:16,760 --> 00:32:21,480 Speaker 2: credit and two billion dollar financings and five billion dollar financings, 583 00:32:21,520 --> 00:32:25,760 Speaker 2: you know. So it's just that that was high yield 584 00:32:26,160 --> 00:32:28,320 Speaker 2: and then it kind of moved to private credit, and 585 00:32:28,720 --> 00:32:31,440 Speaker 2: it could easily move back, you know, those financings could 586 00:32:31,440 --> 00:32:34,000 Speaker 2: come back to high yield. But it hasn't that, you know, 587 00:32:34,200 --> 00:32:37,920 Speaker 2: hasn't been where a lot of those private equity sponsored 588 00:32:37,920 --> 00:32:41,240 Speaker 2: financings have happened. They've happened in private credit or in loans, 589 00:32:41,720 --> 00:32:43,480 Speaker 2: you know, and not in high yield high yield. There's 590 00:32:43,640 --> 00:32:47,640 Speaker 2: been more publicly listed companies with kind of permanent double 591 00:32:47,640 --> 00:32:49,480 Speaker 2: B risk buckets. 592 00:32:50,160 --> 00:32:52,200 Speaker 1: What do you make of the current storm in private 593 00:32:52,200 --> 00:32:54,959 Speaker 1: credit with all the redemptions and the worry about BDCs 594 00:32:55,000 --> 00:32:56,760 Speaker 1: and the fact that you know, there's this kind of 595 00:32:57,440 --> 00:33:01,080 Speaker 1: aversion now developing on the retail side. Maybe they didn't 596 00:33:01,080 --> 00:33:03,240 Speaker 1: know what they were getting into, but is it something 597 00:33:03,240 --> 00:33:06,480 Speaker 1: that might ripple out into more more broad into credit markets. 598 00:33:06,480 --> 00:33:06,880 Speaker 3: Do you think? 599 00:33:07,920 --> 00:33:09,840 Speaker 2: Yeah, I mean it's an interesting thing to watch, and 600 00:33:09,880 --> 00:33:12,440 Speaker 2: we are watching because I'm not a participant really in 601 00:33:12,480 --> 00:33:15,760 Speaker 2: private credits, but this is I mean, I've been doing 602 00:33:15,760 --> 00:33:17,959 Speaker 2: this for thirty something years and my first job out 603 00:33:18,000 --> 00:33:20,400 Speaker 2: of business school was lending money to middle market companies. 604 00:33:21,000 --> 00:33:23,760 Speaker 2: So it reminds me a lot of the sort of 605 00:33:23,800 --> 00:33:25,680 Speaker 2: credit lending that I used to do as a baby 606 00:33:26,360 --> 00:33:28,920 Speaker 2: investor back in the day. You know. And there's nothing 607 00:33:28,920 --> 00:33:31,640 Speaker 2: wrong with lending the middle market companies. I mean, there's 608 00:33:31,720 --> 00:33:35,960 Speaker 2: lots of reasons they prefer to be in the private 609 00:33:36,040 --> 00:33:39,480 Speaker 2: market rather than in the liquid high yield market. You know, 610 00:33:39,520 --> 00:33:44,560 Speaker 2: I mean, give an entrepreneur or a private equity sponsor 611 00:33:45,240 --> 00:33:49,720 Speaker 2: a case study about distress for control or loan to own, 612 00:33:49,840 --> 00:33:52,720 Speaker 2: and you know, you'll see why they want private credit. Also, 613 00:33:52,760 --> 00:33:56,000 Speaker 2: they had nowhere else to go post GFC that banks 614 00:33:56,040 --> 00:33:59,680 Speaker 2: basically pulled back from lending to that cohort. And you 615 00:33:59,680 --> 00:34:01,720 Speaker 2: know then and they were regulated. Banks were regulated to 616 00:34:01,760 --> 00:34:05,520 Speaker 2: such an extent that they really couldn't make leverage loans 617 00:34:05,560 --> 00:34:09,279 Speaker 2: even if they wanted to. And so, you know, then 618 00:34:09,840 --> 00:34:13,280 Speaker 2: those lenders who were provided capital to middle market companies, 619 00:34:13,600 --> 00:34:17,319 Speaker 2: they were in a really good position. They were there 620 00:34:17,600 --> 00:34:21,400 Speaker 2: when nobody else wanted to or could provide financing for 621 00:34:21,520 --> 00:34:26,880 Speaker 2: middle market companies, so that those were understandably good times 622 00:34:27,360 --> 00:34:31,440 Speaker 2: to be providing, you know, private capital. And also rates 623 00:34:31,440 --> 00:34:34,239 Speaker 2: were super low and made leverage easier to manage by 624 00:34:34,280 --> 00:34:39,840 Speaker 2: those issuers. So the returns were good for investors. Borrowers 625 00:34:39,920 --> 00:34:43,800 Speaker 2: were you know, well served, and the funds were structured 626 00:34:44,640 --> 00:34:47,759 Speaker 2: rightly for that kind of risk. You know, if they 627 00:34:47,760 --> 00:34:49,840 Speaker 2: had leverage, it was the right type of leverage, and 628 00:34:49,880 --> 00:34:52,960 Speaker 2: the money was locked up in you know, long term 629 00:34:53,320 --> 00:34:56,839 Speaker 2: draw down sort of structures. So but then it goes 630 00:34:56,880 --> 00:34:58,799 Speaker 2: to a bit of a theme of what we've talked 631 00:34:58,840 --> 00:35:02,280 Speaker 2: about today. And you know, anytime you have a successful 632 00:35:02,320 --> 00:35:06,279 Speaker 2: strategy in terms of money being made for both investors 633 00:35:06,280 --> 00:35:09,680 Speaker 2: and managers who are in who are lending in the market, 634 00:35:09,760 --> 00:35:12,640 Speaker 2: you have others who want to join and enter the market, 635 00:35:12,719 --> 00:35:17,400 Speaker 2: and you know, money flows in and voila private credit 636 00:35:17,560 --> 00:35:20,720 Speaker 2: name is created and you know, we saw huge growth. 637 00:35:21,440 --> 00:35:24,080 Speaker 2: So the problem is not with the borrowing or the 638 00:35:24,120 --> 00:35:27,360 Speaker 2: companies or the part of the market. It's a perfectly 639 00:35:27,400 --> 00:35:31,040 Speaker 2: normal way for companies like this to finance themselves. It's 640 00:35:31,080 --> 00:35:34,040 Speaker 2: really just with the huge inflows of capital and that 641 00:35:34,120 --> 00:35:35,480 Speaker 2: test manager discipline. 642 00:35:36,000 --> 00:35:38,839 Speaker 1: And do you think that they did get undisciplined that I. 643 00:35:38,760 --> 00:35:41,759 Speaker 2: Think, I know, No, we don't know, right, who knows 644 00:35:41,800 --> 00:35:44,799 Speaker 2: if you're not a manager, you don't know. Again, I 645 00:35:44,840 --> 00:35:47,200 Speaker 2: think it's it's just a we've got to see how 646 00:35:47,239 --> 00:35:50,880 Speaker 2: this all plays through. And I mean, at the core, 647 00:35:51,719 --> 00:35:55,000 Speaker 2: it just these companies. It bears a lot of resemblance 648 00:35:55,040 --> 00:35:57,960 Speaker 2: to the loan market, so you can apply some of 649 00:35:58,000 --> 00:36:01,160 Speaker 2: the same trends you know to the loan market. So 650 00:36:01,239 --> 00:36:04,880 Speaker 2: I just think investors and managers they should approach it 651 00:36:04,880 --> 00:36:06,680 Speaker 2: like they would the loan market or the high yeld 652 00:36:06,680 --> 00:36:11,040 Speaker 2: market of earlier days. And it can be perfectly fine risk, 653 00:36:11,640 --> 00:36:15,359 Speaker 2: assuming that the credit's been underwritten and managed well. But 654 00:36:15,480 --> 00:36:17,719 Speaker 2: it's just that it has to be underwritten and managed well. 655 00:36:18,080 --> 00:36:21,720 Speaker 2: And that means both in the structure and the leverage 656 00:36:21,719 --> 00:36:24,800 Speaker 2: that's put on the fund and the liquidity that's offered, 657 00:36:24,880 --> 00:36:27,120 Speaker 2: all of that has to fit be fit for purpose. 658 00:36:28,000 --> 00:36:30,920 Speaker 1: As you said at the beginning, capital groups are large 659 00:36:30,960 --> 00:36:35,200 Speaker 1: firm You need scale, you need liquidity. How difficult is 660 00:36:35,239 --> 00:36:37,440 Speaker 1: it to find that right now in the in the 661 00:36:37,520 --> 00:36:39,359 Speaker 1: high yield and the leverage loan market. I mean, can 662 00:36:39,360 --> 00:36:41,879 Speaker 1: you can you get big deals done? 663 00:36:43,520 --> 00:36:45,399 Speaker 2: Yeah? I mean can we put money to work in 664 00:36:45,440 --> 00:36:47,319 Speaker 2: the markets? Is that what you mean by deals done? 665 00:36:47,400 --> 00:36:49,759 Speaker 1: Yeah? And how easy is it? How difficult? I mean, 666 00:36:49,880 --> 00:36:52,640 Speaker 1: it seems historically that the accusation has always been. 667 00:36:52,560 --> 00:36:53,360 Speaker 3: This not very liquid. 668 00:36:54,719 --> 00:36:56,960 Speaker 2: Yeah, that has been the that has been the you know, 669 00:36:57,120 --> 00:36:59,640 Speaker 2: the kind of refrain when it comes to high yield 670 00:36:59,640 --> 00:37:01,960 Speaker 2: for all long, long time, that it's not liquid. I 671 00:37:02,000 --> 00:37:04,840 Speaker 2: would tell you that's not true. It's very liquid. And 672 00:37:05,280 --> 00:37:07,640 Speaker 2: we have good stats on how much we're able to 673 00:37:07,680 --> 00:37:11,839 Speaker 2: trade and how much our portfolio can turn over if 674 00:37:11,880 --> 00:37:14,600 Speaker 2: you will, in a year, and we are one of 675 00:37:14,640 --> 00:37:17,480 Speaker 2: the largest high yeld investors in the world, so we 676 00:37:17,520 --> 00:37:20,839 Speaker 2: have pretty good stats on this. But it has it's 677 00:37:20,880 --> 00:37:24,000 Speaker 2: hard work, right, and you have to be prepared for 678 00:37:24,160 --> 00:37:28,239 Speaker 2: offering liquidity when it's needed and you don't want to 679 00:37:28,280 --> 00:37:32,160 Speaker 2: demand it when it's not. You know there, and you 680 00:37:32,239 --> 00:37:36,720 Speaker 2: have to have a super big, experienced trading desk who 681 00:37:36,960 --> 00:37:39,279 Speaker 2: has the deepest experience in the asset class. And this 682 00:37:39,360 --> 00:37:42,040 Speaker 2: is where specialization comes into play. As I mentioned earlier, 683 00:37:42,080 --> 00:37:44,960 Speaker 2: I think, you know, be knowing your game and your 684 00:37:45,040 --> 00:37:47,440 Speaker 2: lane and sticking with it I think is super important. 685 00:37:47,520 --> 00:37:51,799 Speaker 2: You sit on our trading desk and you'd be absolutely 686 00:37:52,440 --> 00:37:55,239 Speaker 2: you know, blown away by the kind of conversations and 687 00:37:55,280 --> 00:37:59,160 Speaker 2: the sort of access that we have. But that doesn't 688 00:37:59,239 --> 00:38:02,960 Speaker 2: happen overnight. It comes from decades of experience trading through markets, 689 00:38:03,520 --> 00:38:06,440 Speaker 2: you know, you need to know where to find liquidity 690 00:38:07,040 --> 00:38:11,040 Speaker 2: and you know, be able to provide it when it's demanded, 691 00:38:11,040 --> 00:38:15,200 Speaker 2: et cetera. So yeah, it's not as liquid as IG market. 692 00:38:15,320 --> 00:38:18,799 Speaker 2: Of course, it's probably the least liquid thing we do 693 00:38:18,840 --> 00:38:23,720 Speaker 2: in bond investing, maybe exception of munis and some asset 694 00:38:23,719 --> 00:38:28,080 Speaker 2: back staff, which is less liquid still, but we've learned 695 00:38:28,120 --> 00:38:30,600 Speaker 2: to manage it and we don't see it as an 696 00:38:30,640 --> 00:38:33,839 Speaker 2: impediment to returns, and we're still able to generate really 697 00:38:33,840 --> 00:38:37,040 Speaker 2: good returns that beat the market and beat passive because 698 00:38:37,080 --> 00:38:39,560 Speaker 2: of our expertise in trading. 699 00:38:40,200 --> 00:38:42,880 Speaker 1: Are their portfolio traits being done like there's an ig. 700 00:38:43,440 --> 00:38:47,280 Speaker 2: Yep, yep? This is not a one trick sort of situation. 701 00:38:47,400 --> 00:38:50,239 Speaker 2: You've got to figure out every possible way to eke 702 00:38:50,280 --> 00:38:53,880 Speaker 2: out an advantage, and so whatever there is that's available, 703 00:38:54,360 --> 00:38:58,000 Speaker 2: you have to understand it, master it, and use it. 704 00:38:58,600 --> 00:39:00,719 Speaker 1: And I'm glad you mentioned Active because we had a 705 00:39:00,800 --> 00:39:05,000 Speaker 1: long chat recently with a systematic trader who made some 706 00:39:05,040 --> 00:39:06,880 Speaker 1: good points about how you know a lot of this 707 00:39:06,960 --> 00:39:11,200 Speaker 1: can be done by robot. Now, so what's the pitch 708 00:39:11,280 --> 00:39:13,160 Speaker 1: for Active in this environment? 709 00:39:14,280 --> 00:39:17,239 Speaker 2: Yeah, I mean there's high old markets don't really lend 710 00:39:17,239 --> 00:39:19,200 Speaker 2: themselves well to passive. I mean, you just look at 711 00:39:19,239 --> 00:39:21,800 Speaker 2: the passive vehicles that are out there, and they don't 712 00:39:21,920 --> 00:39:26,360 Speaker 2: beat the market. Active has beaten them the market in 713 00:39:26,440 --> 00:39:29,080 Speaker 2: high yield for as long as I can remember. So 714 00:39:29,520 --> 00:39:31,480 Speaker 2: it just doesn't work in high yield. And maybe someday 715 00:39:31,480 --> 00:39:34,160 Speaker 2: that'll change if you have you know, a lot more 716 00:39:34,600 --> 00:39:38,800 Speaker 2: better ways of buying and trading risk, but it doesn't 717 00:39:39,080 --> 00:39:40,600 Speaker 2: lend itself to it right now. And I think a 718 00:39:40,640 --> 00:39:43,719 Speaker 2: lot of these companies, first of all, there's so many CUSIPs, 719 00:39:43,800 --> 00:39:46,279 Speaker 2: right they think about the high yield market and the 720 00:39:46,600 --> 00:39:50,239 Speaker 2: debt markets in particular, the number of CUSIPs are way 721 00:39:50,280 --> 00:39:53,040 Speaker 2: way higher than it then on the equity side, So 722 00:39:53,080 --> 00:39:55,560 Speaker 2: you've got that issue. And then there still are a 723 00:39:55,560 --> 00:39:58,840 Speaker 2: lot of private companies that issue in the bond market, 724 00:39:58,880 --> 00:40:01,200 Speaker 2: and high yield is more public than it's been in 725 00:40:01,239 --> 00:40:02,880 Speaker 2: a long time, but there's still a lot of private 726 00:40:02,880 --> 00:40:08,759 Speaker 2: companies where information flow isn't as good, and you know, 727 00:40:09,200 --> 00:40:12,799 Speaker 2: it just doesn't seem to be an area where there's 728 00:40:12,880 --> 00:40:17,120 Speaker 2: obvious ways that you can do it systematically. There definitely 729 00:40:17,160 --> 00:40:20,799 Speaker 2: advantages to systematic themes and to using It's just like 730 00:40:20,840 --> 00:40:23,160 Speaker 2: I said, you've got to use every tool that you 731 00:40:23,239 --> 00:40:27,200 Speaker 2: have to try to improve your your ability to just 732 00:40:27,200 --> 00:40:30,400 Speaker 2: eke out small basis points of alpha alpha. But you know, 733 00:40:30,440 --> 00:40:32,240 Speaker 2: there's still a whole lot of the high yield market 734 00:40:32,320 --> 00:40:36,439 Speaker 2: that happens. Yeah, you know, away from what you could 735 00:40:36,480 --> 00:40:40,360 Speaker 2: expect logically, expect some sort of a quote unquote robot 736 00:40:40,400 --> 00:40:41,000 Speaker 2: to be able to do. 737 00:40:42,000 --> 00:40:44,760 Speaker 3: I'd argue there's no good replacement for an experience bottoms 738 00:40:44,800 --> 00:40:46,400 Speaker 3: up credit, single name credit analyst. 739 00:40:47,400 --> 00:40:50,120 Speaker 2: I agree, a single name bottoms up credit analyst is 740 00:40:50,120 --> 00:40:52,840 Speaker 2: worth their weight in gold, and gold is pretty valuable 741 00:40:52,920 --> 00:40:53,279 Speaker 2: right now. 742 00:40:54,640 --> 00:40:57,160 Speaker 1: We can be the robots final But let's see. But 743 00:40:57,360 --> 00:40:59,080 Speaker 1: in terms of the rest of the world kind of 744 00:40:59,120 --> 00:41:02,040 Speaker 1: there's been a big sort of push to diversify geographically. 745 00:41:02,080 --> 00:41:04,480 Speaker 1: I'm wondering how you see other markets. There's certainly that 746 00:41:04,560 --> 00:41:07,000 Speaker 1: liquidity is in the US, but what other opportunities are 747 00:41:07,000 --> 00:41:08,239 Speaker 1: out there. 748 00:41:08,560 --> 00:41:11,840 Speaker 2: Yeah, the liquidity is in the US. The most of 749 00:41:11,880 --> 00:41:14,440 Speaker 2: our trading is in the US. But this is just 750 00:41:14,480 --> 00:41:19,919 Speaker 2: a part of you know, worldwide global markets. And so 751 00:41:20,120 --> 00:41:24,160 Speaker 2: I mean, there's a really big emerging market debt market 752 00:41:24,200 --> 00:41:29,239 Speaker 2: that is of interest. There's a big you know, European 753 00:41:29,640 --> 00:41:33,160 Speaker 2: market that is of interest, So you've got to look 754 00:41:33,160 --> 00:41:37,919 Speaker 2: wherever there are opportunities. But your point is a good one, 755 00:41:37,920 --> 00:41:40,799 Speaker 2: and that most of the liquidity, and specifically in high 756 00:41:40,880 --> 00:41:44,000 Speaker 2: yield highield credit, it's mostly US market. 757 00:41:44,840 --> 00:41:47,239 Speaker 1: Is there a point of which foreign demand for US 758 00:41:47,280 --> 00:41:52,400 Speaker 1: credit might begin to suffer, you know, partly on the politics, 759 00:41:52,440 --> 00:41:55,080 Speaker 1: but also on the fact that yields are higher in 760 00:41:55,120 --> 00:41:57,400 Speaker 1: places like Japan, So there's really really no need to 761 00:41:57,440 --> 00:41:58,399 Speaker 1: have to stretch that much. 762 00:41:59,320 --> 00:42:01,840 Speaker 2: Could be I mean, I mean it's not yet seen. 763 00:42:02,000 --> 00:42:04,640 Speaker 2: We don't see outflows because of that. There still is 764 00:42:04,680 --> 00:42:08,440 Speaker 2: a whole lot of demand for US assets, and there's 765 00:42:08,520 --> 00:42:12,640 Speaker 2: you know, I have conversations with potential investors in the market, 766 00:42:12,680 --> 00:42:15,960 Speaker 2: potential clients, and they really are looking for opportunities. They're 767 00:42:16,000 --> 00:42:19,160 Speaker 2: looking for time to buy high yield. You know, it's 768 00:42:19,200 --> 00:42:22,120 Speaker 2: this one of those asset classes where people kind of 769 00:42:22,160 --> 00:42:26,080 Speaker 2: want to wait until spreads are wide and yields are 770 00:42:26,120 --> 00:42:29,160 Speaker 2: high and then they're going to jump in. The problem is, 771 00:42:29,880 --> 00:42:32,120 Speaker 2: you know, we just haven't seen that, right. The markets 772 00:42:32,120 --> 00:42:35,279 Speaker 2: have been pretty tightly range bound when it comes to 773 00:42:35,360 --> 00:42:39,360 Speaker 2: high yield, and so there hasn't been a real obvious 774 00:42:39,400 --> 00:42:42,960 Speaker 2: opportunity for someone who hasn't already invested in high yield 775 00:42:43,400 --> 00:42:46,080 Speaker 2: to say now is the time and to buy. But 776 00:42:46,120 --> 00:42:49,360 Speaker 2: there's so much desire to do that because of the 777 00:42:49,800 --> 00:42:51,520 Speaker 2: you know, what we've seen and we've learned in past 778 00:42:52,040 --> 00:42:56,080 Speaker 2: moments of sort of crisis where markets gap out but 779 00:42:56,120 --> 00:42:58,920 Speaker 2: then they inevitably come back in. And so there's just 780 00:42:58,960 --> 00:43:02,960 Speaker 2: a lot of man for high yield that isn't yet satiated, 781 00:43:02,960 --> 00:43:05,239 Speaker 2: and they will. You know, investors want to put money 782 00:43:05,239 --> 00:43:07,600 Speaker 2: in when the market is you know, when the timing 783 00:43:07,680 --> 00:43:11,560 Speaker 2: is right and they're weight they're waiting to come in 784 00:43:11,640 --> 00:43:13,719 Speaker 2: rather than the opposite. 785 00:43:14,000 --> 00:43:16,520 Speaker 1: And where's the best relative value right now? The best 786 00:43:16,520 --> 00:43:17,680 Speaker 1: opportunities you think. 787 00:43:21,680 --> 00:43:25,279 Speaker 2: Within high yield or within markets over well, in the 788 00:43:25,320 --> 00:43:29,080 Speaker 2: area you cover so high yield and loans yep. I 789 00:43:29,120 --> 00:43:31,720 Speaker 2: talked about where we're overweight. I think those are opportunities. 790 00:43:31,760 --> 00:43:36,759 Speaker 2: That's where we like to express interest. But I'm kind 791 00:43:36,760 --> 00:43:40,160 Speaker 2: of hoping that there will be some sectors that that 792 00:43:40,360 --> 00:43:43,040 Speaker 2: present opportunities that we're not seeing yet, you know. So 793 00:43:43,160 --> 00:43:46,480 Speaker 2: right now I'm looking around for things, looking for signs, 794 00:43:46,520 --> 00:43:51,200 Speaker 2: signs of things where there's a chance for prices, prices 795 00:43:51,239 --> 00:43:54,160 Speaker 2: to be lower for you know, for us to do 796 00:43:54,239 --> 00:43:57,680 Speaker 2: what we do, which is you know, bottoms up companies 797 00:43:57,680 --> 00:44:01,359 Speaker 2: that are good where prices have been on fairly you know, 798 00:44:01,680 --> 00:44:06,239 Speaker 2: marked down. So that's where I'm you know, looking there 799 00:44:06,280 --> 00:44:09,360 Speaker 2: isn't really you know, the high yeld markets are pretty calm, 800 00:44:10,239 --> 00:44:11,960 Speaker 2: as we've just talked about earlier, even with all the 801 00:44:11,960 --> 00:44:16,960 Speaker 2: stuff that's going on, it's been a pretty tame period 802 00:44:17,000 --> 00:44:19,960 Speaker 2: and returns have been good, and you know, defaults are 803 00:44:20,000 --> 00:44:24,359 Speaker 2: low and quality is high. So yeah, the excitement's really 804 00:44:24,400 --> 00:44:27,040 Speaker 2: not in high yield. It's it's elsewhere, and it's it's 805 00:44:27,160 --> 00:44:31,399 Speaker 2: us trying to keep a clean portfolio, have liquidity so 806 00:44:31,440 --> 00:44:35,440 Speaker 2: that we can take advantage of things that happen, you know, 807 00:44:35,640 --> 00:44:38,560 Speaker 2: maybe inside high yield, but potentially outside. 808 00:44:39,320 --> 00:44:43,600 Speaker 1: A veteran high yield bond manager, though, do you not 809 00:44:43,640 --> 00:44:46,640 Speaker 1: have to pinch yourself and wonder, you know, is this real? 810 00:44:46,680 --> 00:44:49,320 Speaker 1: I mean I'm constantly asked, and I can't even remember 811 00:44:49,600 --> 00:44:51,680 Speaker 1: how many years it's been going on, but when is 812 00:44:51,680 --> 00:44:53,120 Speaker 1: it going to end? You know, what's the end of 813 00:44:53,120 --> 00:44:55,719 Speaker 1: the cycle, what trig is it? And even even last 814 00:44:55,719 --> 00:44:57,480 Speaker 1: week I was on the radio and asked us this 815 00:44:57,640 --> 00:44:59,560 Speaker 1: and and I did use the phrase it is different 816 00:44:59,600 --> 00:45:03,440 Speaker 1: this time, and everybody left so is it really different 817 00:45:03,440 --> 00:45:03,879 Speaker 1: this time. 818 00:45:04,920 --> 00:45:07,719 Speaker 2: I mean, the facts are, you know, without trying to 819 00:45:07,760 --> 00:45:11,560 Speaker 2: put an obviously biased market participants view on it, which 820 00:45:11,600 --> 00:45:13,920 Speaker 2: I I guess maybe you and I both are James, 821 00:45:15,280 --> 00:45:17,800 Speaker 2: you know that the reality is it's hard to deny 822 00:45:17,880 --> 00:45:20,440 Speaker 2: the fact that the highield market is safer, you know, 823 00:45:20,600 --> 00:45:23,800 Speaker 2: it's shorter duration. One of our one of my peers, 824 00:45:23,800 --> 00:45:26,759 Speaker 2: did a little bit of work recently on how much 825 00:45:26,920 --> 00:45:29,080 Speaker 2: the fact that the high old market is shorter duration 826 00:45:29,640 --> 00:45:33,160 Speaker 2: means for spreads, and that's an interesting analysis. You know, 827 00:45:33,600 --> 00:45:37,480 Speaker 2: there's definitely not just duration curve, but there's credit curves 828 00:45:37,880 --> 00:45:41,120 Speaker 2: in high yield. And so if you're issuing shorter bonds, 829 00:45:41,719 --> 00:45:43,480 Speaker 2: used to be a ten year bond, now it's only 830 00:45:43,520 --> 00:45:47,760 Speaker 2: a six or seven year bond, that's worth some lower 831 00:45:47,760 --> 00:45:51,880 Speaker 2: spread that a should that is responsible for spreads being lower. 832 00:45:53,239 --> 00:45:55,000 Speaker 2: And then you just have the fact that it's higher 833 00:45:55,080 --> 00:45:59,640 Speaker 2: quality rated that's worth some you know spread lower calculus. 834 00:45:59,680 --> 00:46:03,719 Speaker 2: And so you know, it's probably different because of the 835 00:46:03,719 --> 00:46:06,480 Speaker 2: composition of the market. I wouldn't say it's different in 836 00:46:06,560 --> 00:46:09,480 Speaker 2: terms of what risks there are. There's always going to 837 00:46:09,520 --> 00:46:13,400 Speaker 2: be risks to leverage companies and forgetting that is Folly, 838 00:46:13,880 --> 00:46:16,200 Speaker 2: So I think, you know, I think we are on 839 00:46:16,239 --> 00:46:18,440 Speaker 2: the same page, James. I mean, it's different because the 840 00:46:18,480 --> 00:46:21,960 Speaker 2: market is different, but the risks that are there are 841 00:46:21,960 --> 00:46:24,480 Speaker 2: always there and you have to constantly be on the lookout. 842 00:46:25,200 --> 00:46:27,239 Speaker 1: What's the biggest risk for you right now? 843 00:46:27,280 --> 00:46:30,520 Speaker 2: I think it's probably related to consumer labor market sort 844 00:46:30,560 --> 00:46:34,520 Speaker 2: of things, the basic blocking and tackling of cycles. You know, 845 00:46:34,719 --> 00:46:39,719 Speaker 2: I don't think it's anything beyond that. You know, we're 846 00:46:39,760 --> 00:46:44,239 Speaker 2: really carefully looking at the macro picture and are you know, 847 00:46:44,320 --> 00:46:47,960 Speaker 2: I think that is the area where every day do 848 00:46:48,000 --> 00:46:50,000 Speaker 2: you have to be aware of what's happening there. 849 00:46:51,360 --> 00:46:54,160 Speaker 1: Great stuff. Shannon Wood with Capital Group, many thanks for 850 00:46:54,200 --> 00:46:55,560 Speaker 1: joining us today on the Credit Edge. 851 00:46:56,120 --> 00:46:58,279 Speaker 2: Thank you pleasure to be here, and of. 852 00:46:58,200 --> 00:47:00,480 Speaker 1: Course very grateful to Steve Flynn with bom By Intelligence. 853 00:47:00,480 --> 00:47:02,920 Speaker 1: Thanks for joining us today. Thank you for more credit 854 00:47:02,920 --> 00:47:05,560 Speaker 1: market analysis and insight. Read all Steve's great work on 855 00:47:05,600 --> 00:47:09,120 Speaker 1: the Bloomberg terminal. Bloomberg Intelligence is part of our research department, 856 00:47:09,120 --> 00:47:12,760 Speaker 1: with five hundred analysts and strategists working across all markets. 857 00:47:13,000 --> 00:47:15,160 Speaker 1: Coverage your cludes over two thousand equities and credits and 858 00:47:15,160 --> 00:47:18,160 Speaker 1: outlooks on more than ninety industries and one hundred market indices, 859 00:47:18,160 --> 00:47:22,080 Speaker 1: currencies and commodities. Please do subscribe to The Credit Edge 860 00:47:22,080 --> 00:47:25,200 Speaker 1: wherever you get your podcasts. We're on Apple, Spotify, and 861 00:47:25,239 --> 00:47:28,279 Speaker 1: all other good podcast providers, including the Bloomberg terminal at 862 00:47:28,360 --> 00:47:31,240 Speaker 1: the pod Go. Give us a review, tell your friends, 863 00:47:31,560 --> 00:47:35,520 Speaker 1: or email me directly at jcromb eight at Bloomberg dot net. 864 00:47:36,239 --> 00:47:38,319 Speaker 1: I'm James Crombie. It's been a pleasure having you join 865 00:47:38,440 --> 00:47:54,080 Speaker 1: us again next week on the Credit Edge.