1 00:00:17,920 --> 00:00:20,600 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:20,880 --> 00:00:23,400 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,840 --> 00:00:26,920 Speaker 1: This week, we're very pleased to welcome Chris Orwine, global 4 00:00:26,920 --> 00:00:29,480 Speaker 1: head of credit at Vanguard. How are you, Chris? 5 00:00:30,160 --> 00:00:31,520 Speaker 2: Doing well? Great to be here. 6 00:00:31,760 --> 00:00:33,239 Speaker 1: Thank you so much for joining us today. We're very 7 00:00:33,240 --> 00:00:35,760 Speaker 1: excited to dig into your market view and your outlook. 8 00:00:36,360 --> 00:00:39,760 Speaker 1: We're also delighted to welcome back Bloomberg's very own Lisa Lee, 9 00:00:39,760 --> 00:00:42,400 Speaker 1: who covers credit markets from London. Great to see you again, Lisa, 10 00:00:42,720 --> 00:00:46,880 Speaker 1: thanks for having me here and from Bloomberg Intelligence. Fantastic 11 00:00:46,920 --> 00:00:48,879 Speaker 1: to have Steve Flynn welcome. 12 00:00:49,120 --> 00:00:50,479 Speaker 2: Thank you. It's great to be here. 13 00:00:51,200 --> 00:00:53,199 Speaker 1: But let's start with you, Chris. It's great to have 14 00:00:53,200 --> 00:00:55,440 Speaker 1: you on the Credit Edge. Obviously, Vanguard is a very 15 00:00:55,480 --> 00:00:59,040 Speaker 1: important and large market participant, with over seven trillion dollars 16 00:00:59,080 --> 00:01:02,440 Speaker 1: in assets. Credit markets are at very tight levels in 17 00:01:02,520 --> 00:01:05,800 Speaker 1: terms of spread investment grade bonds lowest in two years, 18 00:01:06,400 --> 00:01:08,840 Speaker 1: which means you're not really getting paid very much for 19 00:01:09,000 --> 00:01:12,720 Speaker 1: the risk. Meanwhile, we keep seeing record levels of issuance. 20 00:01:12,840 --> 00:01:15,280 Speaker 1: Companies have a lot more refinancing to this year, and 21 00:01:15,280 --> 00:01:18,679 Speaker 1: they're taking advantage of window to sell a lot of debt, 22 00:01:20,040 --> 00:01:23,080 Speaker 1: and then we're watching the economy, you know, maybe slow 23 00:01:23,160 --> 00:01:24,720 Speaker 1: down a bit this year, which will have an impact 24 00:01:24,800 --> 00:01:28,600 Speaker 1: on earnings, and then rates remain very high. Perhaps they 25 00:01:28,640 --> 00:01:31,400 Speaker 1: won't come down as fast or as hard as some 26 00:01:31,760 --> 00:01:34,880 Speaker 1: markets seem to be betting. It's also supposed to be 27 00:01:34,880 --> 00:01:37,160 Speaker 1: the year of the bond again, although returns haven't been 28 00:01:37,160 --> 00:01:40,559 Speaker 1: great this month, with duration and low quality junk performing worst. 29 00:01:41,080 --> 00:01:44,960 Speaker 1: Let's start there, Chris, in this environment, is credit fairly priced? 30 00:01:45,000 --> 00:01:47,000 Speaker 1: Are you being compensated enough for all the risks of 31 00:01:47,080 --> 00:01:50,160 Speaker 1: downgrades to faults and bankruptcies? Where do we go from here? 32 00:01:50,760 --> 00:01:54,080 Speaker 3: We would argue that credit in the short run is 33 00:01:54,160 --> 00:01:59,040 Speaker 3: fairly valued and may have some opportunities, and the biggest 34 00:01:59,160 --> 00:02:03,640 Speaker 3: driver of that is the timing of the recession call 35 00:02:04,800 --> 00:02:08,640 Speaker 3: and the depth of the recession. So our official view 36 00:02:08,960 --> 00:02:11,800 Speaker 3: is a risk of a shallow recession in the second 37 00:02:11,840 --> 00:02:15,680 Speaker 3: half of the year. But what mitigates that risk now 38 00:02:15,880 --> 00:02:23,040 Speaker 3: is a FED that uncharacteristically is being very proactive, potentially 39 00:02:23,120 --> 00:02:28,080 Speaker 3: preemptive to support economic growth. And so the old adage 40 00:02:28,080 --> 00:02:31,440 Speaker 3: of don't fight the Fed. The FED is underwriting risk 41 00:02:31,480 --> 00:02:37,040 Speaker 3: taking effectively with not an official easing bias, but looking 42 00:02:37,280 --> 00:02:40,400 Speaker 3: to cut rates in the future. And so in a 43 00:02:40,480 --> 00:02:46,520 Speaker 3: world where inflation is around target and the FED willing 44 00:02:46,600 --> 00:02:51,720 Speaker 3: to cut, we do feel that valuation should be on 45 00:02:51,800 --> 00:02:54,440 Speaker 3: the full side, which they are. They're about the twentieth 46 00:02:54,480 --> 00:02:59,840 Speaker 3: percentile over twenty years, but they don't necessarily have to widen. 47 00:03:00,360 --> 00:03:03,120 Speaker 3: And so when we look at corporate bonds and credit, 48 00:03:03,760 --> 00:03:08,959 Speaker 3: with the all and yields attractive and with corporate fundamentals 49 00:03:09,000 --> 00:03:15,920 Speaker 3: generally healthy even with heavy supply, a technical position within 50 00:03:15,919 --> 00:03:18,920 Speaker 3: the corporate bond market is relatively healthy in terms of 51 00:03:19,000 --> 00:03:25,680 Speaker 3: net supply that we can see credit perform okay, not 52 00:03:25,800 --> 00:03:30,639 Speaker 3: extraordinary outperformance in the first half of the year. If 53 00:03:30,639 --> 00:03:34,240 Speaker 3: we look beyond that, our concerns begin to grow. 54 00:03:35,240 --> 00:03:37,560 Speaker 1: So let's go and talk about rates, Chris, I mean, 55 00:03:37,640 --> 00:03:39,360 Speaker 1: how many rate cuts you expect this year and when 56 00:03:39,360 --> 00:03:40,360 Speaker 1: do they start? 57 00:03:41,480 --> 00:03:48,160 Speaker 3: So our best guess is the May and June timeframe 58 00:03:48,320 --> 00:03:50,840 Speaker 3: is where we would get the first cut. We think 59 00:03:50,920 --> 00:03:55,880 Speaker 3: the March marches is probably a bit premature. Waller's laid 60 00:03:55,920 --> 00:03:59,480 Speaker 3: out a number of number of thresholds that need to 61 00:03:59,520 --> 00:04:04,480 Speaker 3: be maintained, inflation staying at these levels, labor markets continuing 62 00:04:04,520 --> 00:04:09,480 Speaker 3: to weaken, growth a little bit below trend. We think 63 00:04:09,680 --> 00:04:12,520 Speaker 3: it's fifty to fifty, maybe a little bit less. But 64 00:04:12,720 --> 00:04:17,400 Speaker 3: they can actually cut in in March. We don't think 65 00:04:17,400 --> 00:04:21,520 Speaker 3: that has a huge impact though on corporate bonds, and 66 00:04:21,800 --> 00:04:24,119 Speaker 3: we're looking at it where if they were to ease 67 00:04:24,160 --> 00:04:26,960 Speaker 3: in March or anytime in the second quarter, we don't 68 00:04:27,000 --> 00:04:32,040 Speaker 3: think that is really disruptive. However, we believe that the 69 00:04:32,160 --> 00:04:36,840 Speaker 3: later they do their first cut, the risk of recession 70 00:04:36,880 --> 00:04:37,920 Speaker 3: begins to increase. 71 00:04:38,400 --> 00:04:39,279 Speaker 2: You know, the FED. 72 00:04:40,320 --> 00:04:43,200 Speaker 3: If we look at the inverted curve, it's been inverted 73 00:04:43,360 --> 00:04:46,000 Speaker 3: for quite a period of time now and we're getting 74 00:04:46,040 --> 00:04:48,560 Speaker 3: into a danger zone. I think the FED recognizes this, 75 00:04:48,600 --> 00:04:50,920 Speaker 3: and that's why they're thinking about getting going with cuts 76 00:04:50,920 --> 00:04:54,800 Speaker 3: and doing it gradual. That the risk of further labor 77 00:04:54,839 --> 00:04:59,640 Speaker 3: market weakening by the middle of the year is what 78 00:04:59,720 --> 00:05:04,760 Speaker 3: could be the driver of the shallow recession. So in 79 00:05:04,880 --> 00:05:08,040 Speaker 3: rate levels, we view the rate call a bit challenging 80 00:05:08,080 --> 00:05:11,960 Speaker 3: now simply because the market has priced in it was 81 00:05:12,040 --> 00:05:14,880 Speaker 3: up to seven cuts in the next year now down 82 00:05:14,960 --> 00:05:21,280 Speaker 3: to about six. That's a fairly aggressive path for a 83 00:05:21,320 --> 00:05:25,440 Speaker 3: world with a shallow recession. So we don't think that 84 00:05:25,480 --> 00:05:29,720 Speaker 3: there's great values in long duration although we are biased 85 00:05:29,760 --> 00:05:34,320 Speaker 3: to be longer duration and a steepening given that the 86 00:05:34,360 --> 00:05:38,240 Speaker 3: FED is beginning an easing cycle, but that is mitigated 87 00:05:38,320 --> 00:05:40,800 Speaker 3: or lessened in a way simply because a lot has 88 00:05:40,800 --> 00:05:45,400 Speaker 3: been priced in and that our recession outlook is shallow 89 00:05:46,600 --> 00:05:48,680 Speaker 3: for the second half of the year, as well as 90 00:05:48,720 --> 00:05:52,560 Speaker 3: the idea that the neutral rate is higher than it's 91 00:05:52,600 --> 00:05:53,360 Speaker 3: been in the past. 92 00:05:54,040 --> 00:05:55,839 Speaker 1: So when you talk about concerns for the second half, 93 00:05:55,880 --> 00:05:58,280 Speaker 1: you know, good first half, a potentially bad second half. 94 00:05:58,279 --> 00:06:01,760 Speaker 1: What are those concerns and is it, you know, a 95 00:06:01,839 --> 00:06:05,040 Speaker 1: big increase in defaults and where the pain points for credit? 96 00:06:05,640 --> 00:06:09,560 Speaker 3: You know, the biggest issue with this is that twenty 97 00:06:09,720 --> 00:06:13,640 Speaker 3: three was the easy year in a sense, so the 98 00:06:14,600 --> 00:06:17,520 Speaker 3: slow down in the labor market came from a reduction 99 00:06:17,640 --> 00:06:21,560 Speaker 3: in job openings, so job openings to unemployment rate. We 100 00:06:21,600 --> 00:06:24,080 Speaker 3: didn't really get a change in unemployment, but we did 101 00:06:24,120 --> 00:06:27,480 Speaker 3: get a fall off in openings. If we project that 102 00:06:27,600 --> 00:06:31,200 Speaker 3: pace out, it's only about another six months or so 103 00:06:31,240 --> 00:06:33,800 Speaker 3: we're going to be at a point that any further 104 00:06:33,920 --> 00:06:39,800 Speaker 3: weakening in the labor market will result in higher unemployment rates, 105 00:06:39,839 --> 00:06:45,320 Speaker 3: and ultimately that comes from pressures on corporate margins as 106 00:06:45,320 --> 00:06:49,560 Speaker 3: well as earnings, and we don't see that in the 107 00:06:49,600 --> 00:06:51,480 Speaker 3: first half of the year as much in the second 108 00:06:51,480 --> 00:06:54,720 Speaker 3: half in the year, and so we believe that what 109 00:06:54,880 --> 00:07:01,240 Speaker 3: would precipitate that shallow recession is that corporations are just 110 00:07:01,360 --> 00:07:05,400 Speaker 3: not hiring with a modest increase in layoffs coming from 111 00:07:05,400 --> 00:07:08,160 Speaker 3: the idea that margins week in a bit and earnings 112 00:07:08,160 --> 00:07:12,080 Speaker 3: aren't growing as fast as as companies would like to see. 113 00:07:12,880 --> 00:07:15,920 Speaker 1: So does that mean downgrades of investment grade credit? Does 114 00:07:15,920 --> 00:07:19,480 Speaker 1: it mean more defaults by high yield not? 115 00:07:19,640 --> 00:07:23,400 Speaker 3: Initially we saw a lot more upgrades and downgrades in 116 00:07:23,520 --> 00:07:26,880 Speaker 3: twenty three. You know, what we're looking at is corporate 117 00:07:26,880 --> 00:07:32,200 Speaker 3: fundamentals that are relatively healthy the triple B space they 118 00:07:32,320 --> 00:07:35,720 Speaker 3: have where the leverage has increased. Oftentimes investors look to 119 00:07:35,760 --> 00:07:39,000 Speaker 3: that is in non cyclical companies who are in essentially 120 00:07:39,040 --> 00:07:40,000 Speaker 3: a de leveraging mode. 121 00:07:40,040 --> 00:07:41,640 Speaker 2: We expect that to continue. 122 00:07:42,400 --> 00:07:47,000 Speaker 3: Where we would see vulnerabilities are in a rated industrial 123 00:07:47,040 --> 00:07:52,240 Speaker 3: credits that have the capacity to lever up, possibly through acquisitions, 124 00:07:53,000 --> 00:07:56,800 Speaker 3: where we would see spreads evaluations are quite tight, i 125 00:07:56,800 --> 00:08:00,680 Speaker 3: would say, quite poor, with the risk of a leveraging 126 00:08:00,720 --> 00:08:04,120 Speaker 3: transaction that would result in a downgrade in a weakening 127 00:08:04,400 --> 00:08:09,080 Speaker 3: economic environment, and so where we see vulnerabilities are in 128 00:08:09,360 --> 00:08:16,200 Speaker 3: higher rated industrial credits simply from MNA activity. We do 129 00:08:16,320 --> 00:08:20,280 Speaker 3: believe that triple B issuers are very committed to triple 130 00:08:20,640 --> 00:08:23,480 Speaker 3: the triple B ratings. Certainly they've levered up over the 131 00:08:23,520 --> 00:08:27,800 Speaker 3: past decade, really optimizing their balance sheet, reternal and equity 132 00:08:27,840 --> 00:08:31,680 Speaker 3: cost of capital type of arguments, and we would expect 133 00:08:31,720 --> 00:08:35,720 Speaker 3: that we wouldn't see large amounts of downgrades in a 134 00:08:35,800 --> 00:08:37,720 Speaker 3: shallow recession in the coming year. 135 00:08:38,480 --> 00:08:38,640 Speaker 2: Now. 136 00:08:38,679 --> 00:08:42,880 Speaker 3: A sector we do like is banks. Banks tend to 137 00:08:42,920 --> 00:08:45,839 Speaker 3: issue inside of ten years, inside of five years. In particular, 138 00:08:46,360 --> 00:08:50,440 Speaker 3: it's actually one area where valuations are not stretched. Valuations 139 00:08:50,440 --> 00:08:54,800 Speaker 3: are about fiftieth percentile and a steeper yield curve, strong 140 00:08:54,920 --> 00:09:00,520 Speaker 3: fundamentals within banks and valuations that are fiftieth percentile. With 141 00:09:00,600 --> 00:09:05,400 Speaker 3: the added benefit that when the FED begins to cut rates, 142 00:09:06,120 --> 00:09:07,520 Speaker 3: we should see a movement. 143 00:09:07,600 --> 00:09:08,439 Speaker 2: And this is a big. 144 00:09:08,320 --> 00:09:11,160 Speaker 3: Question out there in the market today out of money 145 00:09:11,200 --> 00:09:15,480 Speaker 3: fund assets which are at record highs, into we would 146 00:09:15,559 --> 00:09:19,760 Speaker 3: argue short to intermediate term bond funds, and they will 147 00:09:19,800 --> 00:09:24,640 Speaker 3: look to once yields are meaningfully materially higher than money funds, 148 00:09:25,000 --> 00:09:27,280 Speaker 3: look to lock in those yields in a period where 149 00:09:27,320 --> 00:09:30,880 Speaker 3: positive excess returns and bonds are in place, and so 150 00:09:31,000 --> 00:09:34,440 Speaker 3: within IG, that's where the opportunities and risks are. In 151 00:09:34,480 --> 00:09:38,719 Speaker 3: our view now, when it comes to high yield, we 152 00:09:38,760 --> 00:09:41,040 Speaker 3: would argue that the high yield market today is not 153 00:09:41,080 --> 00:09:43,960 Speaker 3: the high yield market of ten, fifteen, twenty years ago. 154 00:09:44,200 --> 00:09:50,280 Speaker 3: The credit quality is significantly higher, fundamentals are stronger, and 155 00:09:50,360 --> 00:09:53,840 Speaker 3: we've seen that with the benign economic environment with exceptionally 156 00:09:53,880 --> 00:09:56,400 Speaker 3: low default rates in the one to two percent range. 157 00:09:56,679 --> 00:10:00,640 Speaker 3: We do expect those to rise over the coming year. 158 00:10:00,760 --> 00:10:03,920 Speaker 3: Certainly would rise in a recession, but if we were 159 00:10:03,920 --> 00:10:07,760 Speaker 3: to see typical recession seven eight, nine, ten percent of 160 00:10:07,800 --> 00:10:10,520 Speaker 3: fault rates, we don't expect it to be that way. 161 00:10:10,640 --> 00:10:13,320 Speaker 3: So we would expect the fault rates to be lower 162 00:10:13,360 --> 00:10:15,680 Speaker 3: than what you would see in a normal garden variety 163 00:10:15,720 --> 00:10:18,480 Speaker 3: of recession, maybe in the three to five percent range, 164 00:10:19,040 --> 00:10:23,600 Speaker 3: and downgrades, certainly within I yield and IG to be 165 00:10:23,640 --> 00:10:25,520 Speaker 3: lower than what we have seen historically. 166 00:10:26,160 --> 00:10:28,240 Speaker 1: Just going back to the banks, so briefly, christ they 167 00:10:28,240 --> 00:10:30,160 Speaker 1: have been issuing a ton of debt this month, and 168 00:10:30,200 --> 00:10:32,000 Speaker 1: they probably do a few more deals because there are 169 00:10:32,000 --> 00:10:35,000 Speaker 1: a couple other big banks to come. But does your 170 00:10:35,120 --> 00:10:37,959 Speaker 1: interests in your liking of that sector extend to the 171 00:10:38,000 --> 00:10:40,360 Speaker 1: regional banks, which are may be more exposed to commercial 172 00:10:40,400 --> 00:10:41,520 Speaker 1: real estate pressures. 173 00:10:42,080 --> 00:10:44,800 Speaker 3: You know, it does extend. Now we're more selective in 174 00:10:44,840 --> 00:10:49,280 Speaker 3: regionals than the large money center banks. The issue is 175 00:10:49,320 --> 00:10:52,319 Speaker 3: when we look at real estate we've looked at this deeply, 176 00:10:52,800 --> 00:10:56,360 Speaker 3: is that a lot of the price adjustments are taking 177 00:10:56,400 --> 00:11:01,600 Speaker 3: place as we speak, and the process of realizing these 178 00:11:01,640 --> 00:11:06,000 Speaker 3: losses crystallizing them does take place over number a number 179 00:11:06,000 --> 00:11:08,720 Speaker 3: of years, whether it's in a bank or whether it's 180 00:11:08,760 --> 00:11:12,920 Speaker 3: in a commercial mortgage backed security. And so our view 181 00:11:13,120 --> 00:11:19,920 Speaker 3: is that the concentration of commercial real estate is generally 182 00:11:19,960 --> 00:11:23,720 Speaker 3: in the small community like banks, so our concerns would 183 00:11:23,720 --> 00:11:27,600 Speaker 3: be in that space. But the characteristic about those banks 184 00:11:27,640 --> 00:11:31,560 Speaker 3: is that they don't really issue in the markets. And 185 00:11:31,720 --> 00:11:35,160 Speaker 3: so the higher credit quality or the larger banks, the 186 00:11:35,200 --> 00:11:38,679 Speaker 3: middle sized banks, and the very large banks actually generally 187 00:11:38,760 --> 00:11:43,640 Speaker 3: don't have that much commercial real estate experience. And even 188 00:11:43,679 --> 00:11:46,800 Speaker 3: in stress scenarios, we believe that is more of an 189 00:11:46,800 --> 00:11:51,600 Speaker 3: earnings hit than a rating event. And we would argue 190 00:11:51,640 --> 00:11:56,600 Speaker 3: that in a scenario where the curve steepens from lower 191 00:11:57,160 --> 00:12:01,440 Speaker 3: short rates policy rate coming down down that that would 192 00:12:01,480 --> 00:12:05,840 Speaker 3: be beneficial to banks and so selective in the regional space, 193 00:12:06,280 --> 00:12:08,920 Speaker 3: and we certainly like the large money center banks. 194 00:12:10,480 --> 00:12:13,559 Speaker 4: So taking a step back and back into id in 195 00:12:13,640 --> 00:12:18,800 Speaker 4: high yield levised loans returned phenomenally last year. Do you 196 00:12:18,800 --> 00:12:21,680 Speaker 4: expect that to continue and once the outlook for floating 197 00:12:21,760 --> 00:12:26,480 Speaker 4: rate given your thoughts on rates and maybe a shallow 198 00:12:26,480 --> 00:12:30,319 Speaker 4: recession of a second half, Yes, that. 199 00:12:30,400 --> 00:12:33,880 Speaker 3: Is an area that we are more defensive on. So 200 00:12:35,360 --> 00:12:38,440 Speaker 3: when I talked about in bond space and high yield, 201 00:12:38,480 --> 00:12:42,839 Speaker 3: the market today is much higher credit quality than it 202 00:12:42,840 --> 00:12:47,000 Speaker 3: would have been fifteen years ago. In loan space, it's 203 00:12:47,040 --> 00:12:50,440 Speaker 3: actually lower quality, and so there's been a convergence between 204 00:12:50,679 --> 00:12:57,040 Speaker 3: the fundamental credit quality of a loan relative to a bond, 205 00:12:57,640 --> 00:13:02,040 Speaker 3: and loans typically had senior priority with a lot of 206 00:13:02,040 --> 00:13:05,079 Speaker 3: debt underneath them. That isn't the case as much today 207 00:13:05,559 --> 00:13:08,600 Speaker 3: as in the past. And so where we would see 208 00:13:09,200 --> 00:13:15,960 Speaker 3: downgrades and possibly defaults would be in loan only issures 209 00:13:16,800 --> 00:13:19,960 Speaker 3: who have been more stressed from the rise and short rates, 210 00:13:21,880 --> 00:13:25,360 Speaker 3: meaning interest costs are going up, interest coverage going down, 211 00:13:26,240 --> 00:13:29,040 Speaker 3: and so we believe that credit fundamentals and loan only 212 00:13:29,360 --> 00:13:32,960 Speaker 3: investors need to be selective. The double whammy in the 213 00:13:32,960 --> 00:13:35,840 Speaker 3: scenario is in a top of a time of tougher 214 00:13:36,880 --> 00:13:41,880 Speaker 3: economic conditions, the credit quality stressed, but also that the 215 00:13:41,920 --> 00:13:45,000 Speaker 3: FED is cutting policy rates, investors may actually want to 216 00:13:45,000 --> 00:13:48,400 Speaker 3: own more duration and not be in floating rate instruments, 217 00:13:49,160 --> 00:13:52,920 Speaker 3: and so we are much less constructive on loans than 218 00:13:52,960 --> 00:13:56,440 Speaker 3: we are in high yield now when we think about 219 00:13:56,559 --> 00:14:01,360 Speaker 3: overall high yield to investment grade, are very defensive within 220 00:14:01,440 --> 00:14:05,319 Speaker 3: high yield today, and that would be overall allocations to 221 00:14:05,400 --> 00:14:09,320 Speaker 3: high yield. So although we still like credit in this 222 00:14:09,400 --> 00:14:13,760 Speaker 3: window of soft landing theme FED supporting risk taking, we've 223 00:14:13,760 --> 00:14:18,000 Speaker 3: preferred to do that in higher quality, meaning investment grade, 224 00:14:19,360 --> 00:14:22,800 Speaker 3: than in high yield space, and then within high yield. 225 00:14:23,360 --> 00:14:25,880 Speaker 3: Generally we like double bees over single bees. If you 226 00:14:25,920 --> 00:14:29,960 Speaker 3: look at risk adjusted returns, double be's actually of all 227 00:14:30,040 --> 00:14:33,760 Speaker 3: rating buckets are the most attractive, and so overweights to 228 00:14:33,880 --> 00:14:39,280 Speaker 3: double bees underweights to single bees. Defensive on loans as 229 00:14:39,320 --> 00:14:41,720 Speaker 3: well as looking for types of issuers that will be 230 00:14:41,800 --> 00:14:47,320 Speaker 3: less cyclical in a recessionary scenario environment has been our 231 00:14:48,160 --> 00:14:50,560 Speaker 3: approach to investment grade as well as high yield. 232 00:14:51,680 --> 00:14:53,560 Speaker 4: When you look at high yield and levish loans and 233 00:14:53,600 --> 00:14:58,320 Speaker 4: you're very defensive there and have some caution the unsecure 234 00:14:58,400 --> 00:15:02,200 Speaker 4: bond market, has it really been opened? Secondly, in knows 235 00:15:02,200 --> 00:15:05,480 Speaker 4: sort of the junior debt given the economic outlet. Are 236 00:15:05,520 --> 00:15:07,960 Speaker 4: you thinking that that's kind of be shut out for 237 00:15:08,000 --> 00:15:10,400 Speaker 4: a while or is it about time maybe this year 238 00:15:10,680 --> 00:15:14,000 Speaker 4: where that market comes back slowly or maybe roaring back. 239 00:15:14,640 --> 00:15:17,680 Speaker 3: Yeah, I mean the high yield bond market, we haven't 240 00:15:17,680 --> 00:15:20,080 Speaker 3: seen the issuance that we'd like to see. It's not 241 00:15:20,160 --> 00:15:22,640 Speaker 3: because the demand isn't there, it's just that the issuers 242 00:15:22,680 --> 00:15:27,720 Speaker 3: haven't been in to the in the issuing at levels, 243 00:15:27,920 --> 00:15:30,480 Speaker 3: the need for capital, the rates, and what are options 244 00:15:30,480 --> 00:15:31,240 Speaker 3: that they can do. 245 00:15:31,840 --> 00:15:33,080 Speaker 2: We do expect to see. 246 00:15:33,000 --> 00:15:38,960 Speaker 3: Higher issuance within within bond space this year than we 247 00:15:39,040 --> 00:15:41,640 Speaker 3: had in the past, but we don't expect to see 248 00:15:41,760 --> 00:15:44,680 Speaker 3: huge amounts of issuance that would somehow overwhelm the market 249 00:15:44,720 --> 00:15:47,880 Speaker 3: in a technical condition in terms of down in the 250 00:15:47,920 --> 00:15:52,960 Speaker 3: capital structure type of loans. That's really around the confidence 251 00:15:52,960 --> 00:15:57,440 Speaker 3: in the economy, and I think that having a vibrant 252 00:15:57,440 --> 00:16:01,280 Speaker 3: market in that area when most investors feel that we're 253 00:16:01,400 --> 00:16:04,800 Speaker 3: later in the cycle, is going to be a tougher 254 00:16:04,880 --> 00:16:08,000 Speaker 3: sale than being up in quality. So I don't think 255 00:16:08,040 --> 00:16:13,080 Speaker 3: that our views are terribly different than a typical market participant. Now, 256 00:16:13,280 --> 00:16:17,160 Speaker 3: given the economic cycle, the biggest challenge with the economic 257 00:16:17,280 --> 00:16:21,560 Speaker 3: cycle is the ability to pull off a soft landing 258 00:16:22,640 --> 00:16:26,280 Speaker 3: is going to be dependent on how similar the world 259 00:16:26,360 --> 00:16:31,320 Speaker 3: is today than POSTGFC. So POSTGFC, we were in a 260 00:16:31,360 --> 00:16:36,200 Speaker 3: world of very stable inflation around two percent, didn't move 261 00:16:36,240 --> 00:16:39,720 Speaker 3: all that much, and growth was one point eight one 262 00:16:39,720 --> 00:16:41,720 Speaker 3: point seven somewhere in that range. It was sort of 263 00:16:41,720 --> 00:16:46,200 Speaker 3: a fairly benign environment that left the FED on a hold. 264 00:16:47,440 --> 00:16:49,320 Speaker 3: So to pull this off, the fed's going to have 265 00:16:49,360 --> 00:16:52,280 Speaker 3: to get lucky that the world is more like that 266 00:16:52,480 --> 00:16:55,680 Speaker 3: environment than the new world that we've experienced. And there 267 00:16:55,720 --> 00:16:57,640 Speaker 3: is a chance because we know that a lot of 268 00:16:57,640 --> 00:17:01,120 Speaker 3: the excess growth and inflation came from supply chain as 269 00:17:01,160 --> 00:17:04,320 Speaker 3: well as maybe fiscal transfers that are transitory in nature. 270 00:17:05,440 --> 00:17:07,960 Speaker 3: But it takes more than that for the FED. It 271 00:17:08,000 --> 00:17:11,320 Speaker 3: actually takes them to go early and that's where the 272 00:17:11,400 --> 00:17:15,480 Speaker 3: risk lies. And it does appear that based on the 273 00:17:15,520 --> 00:17:18,720 Speaker 3: scenarios or environments that wall are laid out, that the 274 00:17:18,760 --> 00:17:21,120 Speaker 3: FED is willing to take that risk and a risk 275 00:17:21,200 --> 00:17:25,560 Speaker 3: management approach early and slow. If they things see the 276 00:17:25,600 --> 00:17:30,520 Speaker 3: things continue but that's risky. If they're too early, we 277 00:17:30,600 --> 00:17:33,840 Speaker 3: get a reacceleration. And so when we think about high 278 00:17:33,920 --> 00:17:38,000 Speaker 3: yield as well as IG and credit in general, we 279 00:17:38,040 --> 00:17:40,320 Speaker 3: feel there's a window here, but this window is likely 280 00:17:40,359 --> 00:17:40,960 Speaker 3: to close. 281 00:17:42,359 --> 00:17:43,320 Speaker 2: Either the FED. 282 00:17:44,160 --> 00:17:48,640 Speaker 3: Doesn't go and cuts get pushed back into the year, 283 00:17:49,320 --> 00:17:52,600 Speaker 3: and the further CU cuts get pushed back, then the 284 00:17:52,680 --> 00:17:55,880 Speaker 3: risk of recession rises. Or if they were to go 285 00:17:55,960 --> 00:18:00,320 Speaker 3: early and the economic numbers support it, but then to 286 00:18:00,440 --> 00:18:04,000 Speaker 3: turn to higher growth or higher inflation and they have 287 00:18:04,080 --> 00:18:09,240 Speaker 3: to reverse, then they are back into removing cuts from 288 00:18:09,320 --> 00:18:11,919 Speaker 3: the market, and you get a backup in rates, and 289 00:18:11,960 --> 00:18:15,000 Speaker 3: then your credit gets pressured. Here, So I would look 290 00:18:15,119 --> 00:18:19,520 Speaker 3: at somewhat of a Goldilock's environment that doesn't have a 291 00:18:19,560 --> 00:18:21,560 Speaker 3: shelf life that's going to last a year or two, 292 00:18:23,680 --> 00:18:26,320 Speaker 3: but there's a window here where the economics are coming 293 00:18:26,359 --> 00:18:28,919 Speaker 3: in in a range that seems like it's good for 294 00:18:28,960 --> 00:18:31,200 Speaker 3: the FED, with the FED supporting risk assets. 295 00:18:31,560 --> 00:18:33,080 Speaker 2: And then if we think about a high yield. 296 00:18:32,960 --> 00:18:35,119 Speaker 3: It's more of just a levered play on those themes 297 00:18:36,359 --> 00:18:39,880 Speaker 3: where you're going to have a lot more beta associated 298 00:18:39,920 --> 00:18:41,960 Speaker 3: with a lot more radiosocratic risk. If we were to 299 00:18:41,960 --> 00:18:43,120 Speaker 3: get a recession. 300 00:18:43,840 --> 00:18:46,359 Speaker 1: On the defensive high yield viewer Chris, are you not 301 00:18:46,600 --> 00:18:49,240 Speaker 1: sort of risk of losing outs on some big returns 302 00:18:49,240 --> 00:18:51,520 Speaker 1: like you know, those who went into last year very 303 00:18:51,560 --> 00:18:54,720 Speaker 1: defensive and triple c's, you know, rallied, they're off the charts. 304 00:18:54,760 --> 00:18:57,920 Speaker 1: Everything risk did really, really well, and if you were cautious, 305 00:18:58,920 --> 00:19:03,160 Speaker 1: your portfolio underperformed against the index. You know, in this 306 00:19:03,320 --> 00:19:06,480 Speaker 1: In this scenario you're laying out with sort of load defaults. 307 00:19:07,520 --> 00:19:09,560 Speaker 1: It doesn't look that risky. And then on top of that, 308 00:19:09,600 --> 00:19:12,520 Speaker 1: you've got the massive demand for yield and not a 309 00:19:12,520 --> 00:19:15,520 Speaker 1: lot of supply. So is there not a case a 310 00:19:15,560 --> 00:19:19,720 Speaker 1: strong case to be you know, more risk taking. 311 00:19:20,680 --> 00:19:24,040 Speaker 3: It is the only area within high yield. If we 312 00:19:24,080 --> 00:19:26,520 Speaker 3: look at the spread of high yield to investment grade 313 00:19:26,560 --> 00:19:30,480 Speaker 3: triple b's to double be's very tight. Overall double B 314 00:19:30,600 --> 00:19:34,240 Speaker 3: single B where most of high yield issuances to investment 315 00:19:34,280 --> 00:19:39,880 Speaker 3: grade very tight. There's room for compression, not a lot, though, 316 00:19:40,080 --> 00:19:43,919 Speaker 3: maybe twenty five basis points double B single B to 317 00:19:43,960 --> 00:19:48,080 Speaker 3: investment grade and maybe fifty to seventy five for the 318 00:19:48,240 --> 00:19:52,240 Speaker 3: entire high yield universe, which includes triple c's. So what 319 00:19:52,359 --> 00:19:55,280 Speaker 3: that's saying is the only area in high yield that 320 00:19:55,320 --> 00:19:59,479 Speaker 3: has some juice left in it is Triple c's, but 321 00:19:59,600 --> 00:20:02,960 Speaker 3: it is is the one rating bucket that is most 322 00:20:03,160 --> 00:20:08,800 Speaker 3: levered to the economic outlook. And with our view that 323 00:20:09,520 --> 00:20:16,280 Speaker 3: if we're saying if soft landing no landing type of 324 00:20:16,280 --> 00:20:20,600 Speaker 3: thing where we get reacceleration or shallow recession, you know, 325 00:20:20,960 --> 00:20:23,520 Speaker 3: we lean more towards shallow recession in the second half 326 00:20:23,520 --> 00:20:27,560 Speaker 3: of the year, which would be tougher on triple c's 327 00:20:28,880 --> 00:20:31,879 Speaker 3: than it would be on double b's and so, but 328 00:20:32,000 --> 00:20:34,440 Speaker 3: we are certainly exposed that if we were to get 329 00:20:34,480 --> 00:20:39,359 Speaker 3: that evasive or not evasive, but that very difficult to 330 00:20:39,359 --> 00:20:42,040 Speaker 3: pull off. Elusive is the word I'm thinking of, elusive 331 00:20:42,119 --> 00:20:47,159 Speaker 3: type of soft landing. We should expect to see triple 332 00:20:47,200 --> 00:20:51,280 Speaker 3: c's tighten into fairly tight levels to higher rated high 333 00:20:51,320 --> 00:20:55,800 Speaker 3: yield buckets, as well as continued tightening within IG space. 334 00:20:56,400 --> 00:20:59,000 Speaker 3: But as I talked about earlier, that's difficult to pull 335 00:20:59,040 --> 00:21:03,159 Speaker 3: off and requires a little bit of lock, meaning a 336 00:21:03,200 --> 00:21:07,520 Speaker 3: world similar to POSTGFC economic as well as a FED 337 00:21:08,280 --> 00:21:12,800 Speaker 3: that is willing to take chances and cut early and consistently. 338 00:21:13,080 --> 00:21:15,359 Speaker 1: Yeah, okay, and just back on NIG for a second. 339 00:21:15,960 --> 00:21:17,639 Speaker 1: On the sectors that you like we did a bit 340 00:21:17,640 --> 00:21:20,560 Speaker 1: of a search on the Bloomberg terminal on your portfolios. 341 00:21:21,400 --> 00:21:22,919 Speaker 1: There seems to be a little bit of a bias 342 00:21:22,920 --> 00:21:26,480 Speaker 1: towards telecoms. We have a TMT expert here, Steve Flyn 343 00:21:26,520 --> 00:21:28,800 Speaker 1: from Bloomberg Intelligence. Is that a sector that you that 344 00:21:28,840 --> 00:21:30,879 Speaker 1: you particularly like right now or is it just your 345 00:21:30,960 --> 00:21:32,600 Speaker 1: naturally overweight because they've got so much debt. 346 00:21:34,200 --> 00:21:36,800 Speaker 3: Well, there's two themes. They fit into our themes. The 347 00:21:36,840 --> 00:21:40,879 Speaker 3: sectors we end up liking our financials as well as 348 00:21:40,920 --> 00:21:44,240 Speaker 3: consumer non cyclicals in the triple B area, and so 349 00:21:44,840 --> 00:21:47,800 Speaker 3: telecom sort of fits that, Pharma fits that, and so 350 00:21:48,000 --> 00:21:51,840 Speaker 3: companies that have already levered that are non cyclical and 351 00:21:51,920 --> 00:21:55,480 Speaker 3: basis who have committed to deleveraging tend to be a 352 00:21:55,480 --> 00:21:59,480 Speaker 3: good story. And so you're seeing sectors in triple B 353 00:21:59,560 --> 00:22:04,360 Speaker 3: industrys that fit that mold. And then the financial story 354 00:22:04,440 --> 00:22:06,680 Speaker 3: already talked about in the A and above bucket. So 355 00:22:06,760 --> 00:22:08,480 Speaker 3: I would argue that there are the two themes that 356 00:22:08,520 --> 00:22:13,040 Speaker 3: we have in investment grade space. Along with fren end 357 00:22:13,359 --> 00:22:16,000 Speaker 3: has room to tighten the one to five year maturity range. 358 00:22:17,080 --> 00:22:19,760 Speaker 5: Yeah, And if you look at the largest names in communications, 359 00:22:19,800 --> 00:22:22,320 Speaker 5: there's some of the largest names in Investment Grade Index 360 00:22:22,960 --> 00:22:26,080 Speaker 5: AT and T Verizon. They are looking to de leverage 361 00:22:26,119 --> 00:22:28,280 Speaker 5: their balanceing and improve their leverage ratios over the next 362 00:22:28,320 --> 00:22:30,800 Speaker 5: couple of years. And then even a company like T Mobile, 363 00:22:30,840 --> 00:22:32,800 Speaker 5: which is at their leverage ratio, is in a good 364 00:22:32,800 --> 00:22:34,800 Speaker 5: position to maintain that leverage ratio. 365 00:22:34,920 --> 00:22:39,280 Speaker 2: So I agree, yep, that's the thinking behind it. Yeah. 366 00:22:39,280 --> 00:22:42,760 Speaker 3: The danger is in the A rated bucket where opportunities 367 00:22:42,800 --> 00:22:44,840 Speaker 3: may be too good to turn up for a company 368 00:22:45,200 --> 00:22:48,719 Speaker 3: who goes into a releveraging and then they become actually 369 00:22:48,760 --> 00:22:50,920 Speaker 3: excellent buy. So if you have a low A who 370 00:22:50,960 --> 00:22:53,040 Speaker 3: becomes a high triple B or a mid triple B 371 00:22:53,160 --> 00:22:56,280 Speaker 3: who's committed to de leveraging, they end up being the 372 00:22:56,320 --> 00:22:59,119 Speaker 3: stories that we like, underweight in the A bucket, overweight 373 00:22:59,119 --> 00:22:59,280 Speaker 3: in the. 374 00:22:59,240 --> 00:23:00,000 Speaker 2: Triple B bucket. 375 00:23:01,240 --> 00:23:03,600 Speaker 4: Chris, you also do global credits, so can we move 376 00:23:03,600 --> 00:23:07,359 Speaker 4: on to outside the US And I'm based in London, 377 00:23:07,400 --> 00:23:11,120 Speaker 4: and how do you think through European credit ID high 378 00:23:11,160 --> 00:23:15,720 Speaker 4: yield leverage loans and maybe even further afield. China emerging 379 00:23:15,760 --> 00:23:18,719 Speaker 4: markets one of the best values there. What are you 380 00:23:18,800 --> 00:23:20,919 Speaker 4: excited about are cautious about? 381 00:23:21,760 --> 00:23:28,960 Speaker 3: I would say Europe is cheap to US, and so 382 00:23:29,240 --> 00:23:34,680 Speaker 3: generally we like Europe. However, Europe is a bit challenged 383 00:23:34,760 --> 00:23:38,560 Speaker 3: with higher recession risk in the near term, and so 384 00:23:38,720 --> 00:23:39,480 Speaker 3: that lessons. 385 00:23:39,600 --> 00:23:43,000 Speaker 2: So when I think about. 386 00:23:42,560 --> 00:23:46,560 Speaker 3: Europe, I would say modest overweight is we're where we 387 00:23:46,720 --> 00:23:52,639 Speaker 3: like to be in European relative to us within the 388 00:23:52,680 --> 00:23:58,720 Speaker 3: emerging market space, we really don't get involved in Chinese corporates, 389 00:23:59,520 --> 00:24:06,040 Speaker 3: and the big reason there is the transparency around the 390 00:24:06,119 --> 00:24:08,920 Speaker 3: disclosure and the rating buckets is a bit of a 391 00:24:09,000 --> 00:24:13,800 Speaker 3: challenge for us, and so having confidence in these names 392 00:24:14,400 --> 00:24:18,800 Speaker 3: while the economy is going through a massive restructuring and 393 00:24:18,880 --> 00:24:20,719 Speaker 3: if you see a lot of the issues either in 394 00:24:20,840 --> 00:24:24,520 Speaker 3: banks or in developers, sort are two tough sectors in 395 00:24:24,600 --> 00:24:30,679 Speaker 3: China today. Within emerging markets, you know that what we 396 00:24:30,880 --> 00:24:33,120 Speaker 3: like best in emerging markets is a little bit more 397 00:24:33,119 --> 00:24:38,720 Speaker 3: on the rate side. So local rates in emerging market 398 00:24:38,720 --> 00:24:41,560 Speaker 3: countries we like a lot. We feel that one the 399 00:24:41,800 --> 00:24:47,320 Speaker 3: level of their policy rate is quite elevated and that 400 00:24:47,600 --> 00:24:51,960 Speaker 3: they would have further to cut to normalize. Some might 401 00:24:52,000 --> 00:24:55,080 Speaker 3: do it a bit before the FED, some might do 402 00:24:55,119 --> 00:24:57,200 Speaker 3: it around the time of the FED or slightly after 403 00:24:57,240 --> 00:25:00,280 Speaker 3: the FED if we're talking about Mexico. But we feel 404 00:25:00,320 --> 00:25:06,120 Speaker 3: that local rates in an EM very attractive within portfolios 405 00:25:06,119 --> 00:25:09,000 Speaker 3: who can do that level at that you know, within 406 00:25:09,040 --> 00:25:13,879 Speaker 3: an EM. Over the last few months, we had a 407 00:25:13,960 --> 00:25:18,840 Speaker 3: large underweight to investment grade EM got to quite rich levels. 408 00:25:19,040 --> 00:25:23,199 Speaker 3: So if we think of average em IG to US corporates, 409 00:25:23,960 --> 00:25:26,280 Speaker 3: maybe you pick up thirty forty basis points while it 410 00:25:26,320 --> 00:25:29,520 Speaker 3: got to about flat to even through and we felt 411 00:25:29,520 --> 00:25:31,520 Speaker 3: that they were very rich. We are beginning to see 412 00:25:31,600 --> 00:25:36,440 Speaker 3: values come back in investment grade space, and that's an 413 00:25:36,440 --> 00:25:39,119 Speaker 3: area that we would be looking to add to in 414 00:25:39,119 --> 00:25:42,480 Speaker 3: investment great emerging markets. High yield tends to be a 415 00:25:42,560 --> 00:25:46,000 Speaker 3: very story basis and so you have a lot of 416 00:25:46,000 --> 00:25:49,520 Speaker 3: distress names that distort any of the series around time 417 00:25:49,600 --> 00:25:53,440 Speaker 3: series of credit spreads, and so that's really just bottom 418 00:25:53,520 --> 00:25:58,760 Speaker 3: up deep analysis. However, if we think back over the 419 00:25:58,760 --> 00:26:03,439 Speaker 3: cycle becoming cycle, that EM generally does better when the 420 00:26:03,480 --> 00:26:07,520 Speaker 3: FED is easy, and so as an overall allocation in funds, 421 00:26:09,800 --> 00:26:11,439 Speaker 3: we feel like we're in a bit of a pause now, 422 00:26:11,520 --> 00:26:14,160 Speaker 3: a little lower EM than we've had based on valuations, 423 00:26:14,640 --> 00:26:16,119 Speaker 3: but we would look to see when we get some 424 00:26:16,200 --> 00:26:20,439 Speaker 3: normalization there with a FED cutting cycle. That is a 425 00:26:20,480 --> 00:26:24,320 Speaker 3: sector that we do like in funds that can invest 426 00:26:24,359 --> 00:26:25,920 Speaker 3: in any emergent markets. 427 00:26:27,240 --> 00:26:30,520 Speaker 4: The last few years, it feels like geopltical risk and 428 00:26:30,600 --> 00:26:34,360 Speaker 4: uncertainty has really ticked up. So when you look at 429 00:26:34,400 --> 00:26:37,760 Speaker 4: investing abroad and around the globe, how do you assess 430 00:26:37,840 --> 00:26:40,040 Speaker 4: geopolitical risk or do you at all? Is it something 431 00:26:40,040 --> 00:26:42,480 Speaker 4: that just can't factor in. 432 00:26:43,880 --> 00:26:49,479 Speaker 3: It's certainly something that we look at and we felt 433 00:26:49,480 --> 00:26:51,560 Speaker 3: in the Middle East, you know, a region of the 434 00:26:51,600 --> 00:26:54,800 Speaker 3: world sadly that has a lot of geopolitical risks that 435 00:26:54,840 --> 00:26:59,280 Speaker 3: if we were to go back six months or so, 436 00:26:59,359 --> 00:27:02,480 Speaker 3: we didn't feel is priced at all attractively, and that 437 00:27:02,600 --> 00:27:04,600 Speaker 3: was part of the reason under the investment grade. There 438 00:27:04,640 --> 00:27:07,640 Speaker 3: is a lot of investment grade emerging market or Middle 439 00:27:07,680 --> 00:27:12,400 Speaker 3: Eastern issuers in the Emerging Market index, and so if 440 00:27:12,440 --> 00:27:14,879 Speaker 3: that's risk is out there, we tend to think of 441 00:27:14,920 --> 00:27:19,800 Speaker 3: that up a little bit opportunistically when investors forget about 442 00:27:19,880 --> 00:27:22,960 Speaker 3: it and they bid up the price, probably not because 443 00:27:23,000 --> 00:27:25,679 Speaker 3: it's likely to come back. Sadly, it comes back in 444 00:27:25,760 --> 00:27:28,800 Speaker 3: certain regions of the world. 445 00:27:27,880 --> 00:27:28,080 Speaker 2: You know. 446 00:27:28,200 --> 00:27:34,280 Speaker 3: Apart from that, generally it doesn't drive things as much. 447 00:27:34,480 --> 00:27:36,600 Speaker 3: So it tends to be a tactical way to lean 448 00:27:36,640 --> 00:27:38,760 Speaker 3: into trades or out of trades, Like I talked about, 449 00:27:39,000 --> 00:27:42,320 Speaker 3: So the big China US trade war type of stuff, 450 00:27:42,400 --> 00:27:46,040 Speaker 3: or you know, friction between China and the US, that's 451 00:27:46,040 --> 00:27:49,840 Speaker 3: here for here to stay, let's not going away, And 452 00:27:50,960 --> 00:27:54,600 Speaker 3: so we factor that into decision making. And if investors 453 00:27:54,600 --> 00:27:56,600 Speaker 3: don't seem to be pricing that risk in in certain 454 00:27:56,640 --> 00:28:00,280 Speaker 3: sectors and it comes back, then that's an opportunity to 455 00:28:00,280 --> 00:28:01,639 Speaker 3: to either lean into a trade or. 456 00:28:01,640 --> 00:28:02,600 Speaker 2: Away from a trade. 457 00:28:03,080 --> 00:28:07,159 Speaker 3: But certainly it's one of many things we look at oftentimes, 458 00:28:07,200 --> 00:28:09,800 Speaker 3: though not the primary driver of our investment decisions. 459 00:28:10,200 --> 00:28:14,560 Speaker 1: When you look at am Della credit the spreads of 460 00:28:14,640 --> 00:28:17,320 Speaker 1: the Titus in two thousand and seven, at the same time, 461 00:28:17,320 --> 00:28:22,119 Speaker 1: you're going into strong dollar environment, potentially a another Trump 462 00:28:22,240 --> 00:28:25,000 Speaker 1: presidency which hasn't been good for the in the past. 463 00:28:25,440 --> 00:28:27,480 Speaker 1: Are you Are you more cautious now than you were? 464 00:28:28,840 --> 00:28:31,480 Speaker 3: We certainly were on valuations now. The only thing I'll 465 00:28:31,520 --> 00:28:34,919 Speaker 3: caution on the time series that the mix of names 466 00:28:34,960 --> 00:28:37,960 Speaker 3: today is different than what it would have been twenty 467 00:28:38,040 --> 00:28:41,120 Speaker 3: years ago. There's a lot more higher quality of investment 468 00:28:41,120 --> 00:28:44,160 Speaker 3: great emerging markets Middle Eastern issuers for example. So it's 469 00:28:44,200 --> 00:28:48,680 Speaker 3: not an apples to apples comparison, But the valuations had 470 00:28:48,760 --> 00:28:53,160 Speaker 3: us leaning away from investment great credit as they cheapened up. 471 00:28:53,520 --> 00:28:57,680 Speaker 3: We're looking to add that back now the Trump presidency. 472 00:28:58,880 --> 00:29:05,959 Speaker 3: You know, are are debate on Trump Biden, likely know 473 00:29:07,120 --> 00:29:11,080 Speaker 3: cadidates from the leading parties. We have a concern a 474 00:29:11,120 --> 00:29:13,800 Speaker 3: little bit on the fiscal side here. So there may 475 00:29:13,800 --> 00:29:16,920 Speaker 3: be a competition of who could promise the most tax 476 00:29:16,960 --> 00:29:19,720 Speaker 3: cuts or additional government benefits in this race in a 477 00:29:19,800 --> 00:29:23,200 Speaker 3: world where government deficits are at six percent of GDP 478 00:29:23,800 --> 00:29:27,840 Speaker 3: without a recession, and so a lot of our focus 479 00:29:28,000 --> 00:29:31,040 Speaker 3: there has been on what would that mean in a 480 00:29:31,120 --> 00:29:38,280 Speaker 3: world where we don't get any fiscal contraction or discipline. 481 00:29:39,000 --> 00:29:41,680 Speaker 3: It wasn't long ago when there is more fiscal risk 482 00:29:41,720 --> 00:29:44,480 Speaker 3: premium in treasuries that seemed to go away when the 483 00:29:44,480 --> 00:29:48,640 Speaker 3: Fed pivoted. We don't think that fiscal concerns is a 484 00:29:48,680 --> 00:29:52,080 Speaker 3: done deal. It's coming back, and the risk is could 485 00:29:52,120 --> 00:29:55,320 Speaker 3: come back during the campaign. And so that's certainly an 486 00:29:55,400 --> 00:30:01,160 Speaker 3: area that we are discussing now visa the the world. 487 00:30:03,200 --> 00:30:04,480 Speaker 2: We don't see this as. 488 00:30:04,320 --> 00:30:08,120 Speaker 3: Being that big of an issue, you know there we've 489 00:30:08,120 --> 00:30:10,240 Speaker 3: been through it once before. Tends to be at the 490 00:30:10,280 --> 00:30:14,080 Speaker 3: margin those types of things, the policy actions, and so 491 00:30:14,440 --> 00:30:16,360 Speaker 3: it would fall into let's say maybe a little bit 492 00:30:16,400 --> 00:30:18,760 Speaker 3: of geopolitical concerns. I'm not sure if it goes to 493 00:30:18,880 --> 00:30:22,080 Speaker 3: risk and so forth, but we would say it's more 494 00:30:22,200 --> 00:30:30,400 Speaker 3: around what is government spending in twenty twenty five, you know, 495 00:30:30,480 --> 00:30:33,800 Speaker 3: with the balance of power, the White House controlling the Congress, 496 00:30:33,840 --> 00:30:36,520 Speaker 3: what parties in place, and so forth. So that's an 497 00:30:36,560 --> 00:30:39,160 Speaker 3: area that investors should be focused on as the year 498 00:30:39,240 --> 00:30:39,760 Speaker 3: moves along. 499 00:30:39,960 --> 00:30:40,320 Speaker 2: That's it. 500 00:30:40,400 --> 00:30:42,600 Speaker 1: Yeah, Okay, So when you look at everything that you 501 00:30:42,600 --> 00:30:45,400 Speaker 1: look at GREZ, which is obviously a lot, and you're 502 00:30:45,440 --> 00:30:48,800 Speaker 1: considering the outlook for this year, all across the globe, 503 00:30:48,800 --> 00:30:51,680 Speaker 1: all as the classes, including structured finance, what is the 504 00:30:51,720 --> 00:30:54,680 Speaker 1: single best opportunity for credit investors right now? 505 00:30:55,520 --> 00:31:00,960 Speaker 3: I like front end spreads, front end financials at this stage, 506 00:31:02,360 --> 00:31:05,960 Speaker 3: the big thing there is one you have evaluation cushion. 507 00:31:06,960 --> 00:31:12,280 Speaker 3: They will do well in little delayed tightening. I think 508 00:31:12,280 --> 00:31:15,400 Speaker 3: we'll do well if you get fed tightening, shallow recession, 509 00:31:15,440 --> 00:31:16,960 Speaker 3: all the money that will come out of money funds 510 00:31:17,000 --> 00:31:21,640 Speaker 3: to buy short and intermediate. I would say within credit space, 511 00:31:22,120 --> 00:31:25,600 Speaker 3: that is our number one call that we like high 512 00:31:25,600 --> 00:31:31,520 Speaker 3: grade on the front end, local markets within EM, local 513 00:31:31,600 --> 00:31:33,800 Speaker 3: rates within EM would be another high one that I 514 00:31:33,840 --> 00:31:37,280 Speaker 3: talked about. That's not exactly credit, but it's connected in 515 00:31:37,720 --> 00:31:41,240 Speaker 3: around the policy cycle, and I think it's just we're 516 00:31:41,280 --> 00:31:45,640 Speaker 3: in a world where investors have to be vigilant, you know. 517 00:31:45,760 --> 00:31:49,640 Speaker 3: Right now we inflected from a tightening to an easing 518 00:31:50,360 --> 00:31:54,920 Speaker 3: with the hopes of soft landing. But soft landings are difficult, 519 00:31:54,960 --> 00:31:58,280 Speaker 3: and so we are likely to see another inflection point 520 00:31:58,320 --> 00:32:01,160 Speaker 3: sometime around the middle of the year where we move 521 00:32:01,200 --> 00:32:05,440 Speaker 3: off to Wow, economy is a little bit stronger, won't 522 00:32:05,480 --> 00:32:08,040 Speaker 3: be getting as many cuts. That's the world that could 523 00:32:08,040 --> 00:32:09,920 Speaker 3: pressure a little bit of risk assets. We don't think 524 00:32:09,920 --> 00:32:15,000 Speaker 3: it'll be too much within in credit space, or you know, 525 00:32:15,080 --> 00:32:17,040 Speaker 3: we always think we can get a soft landing and 526 00:32:17,080 --> 00:32:20,200 Speaker 3: we end up getting a recession, and we lean more 527 00:32:20,240 --> 00:32:23,120 Speaker 3: in that direction, but shallow recession. When we think about 528 00:32:23,160 --> 00:32:25,880 Speaker 3: the second half of the year, which would certainly have 529 00:32:25,960 --> 00:32:29,280 Speaker 3: credit under perform, but we're not thinking at levels that 530 00:32:29,320 --> 00:32:31,840 Speaker 3: you would have in garden variety of recession and certainly 531 00:32:31,880 --> 00:32:36,000 Speaker 3: not GFC like levels. And so the underperformance and correctly. 532 00:32:35,880 --> 00:32:38,440 Speaker 1: Not big losses then for credit this year. 533 00:32:38,320 --> 00:32:40,760 Speaker 3: Yeah, if you look at it, you know, the credit index, 534 00:32:40,880 --> 00:32:43,560 Speaker 3: if you think GFC or COVID, we went out to 535 00:32:43,600 --> 00:32:45,800 Speaker 3: three fifty average breads one twenty. 536 00:32:45,920 --> 00:32:49,000 Speaker 2: Yeah, if you go back, this goes way back. 537 00:32:49,040 --> 00:32:51,760 Speaker 3: But if you think of the recession after the dot 538 00:32:51,800 --> 00:32:54,240 Speaker 3: com or got to a two fifteen two hundred and 539 00:32:54,240 --> 00:32:57,120 Speaker 3: two fifteen in that range, we're in the one seventy 540 00:32:57,160 --> 00:33:00,240 Speaker 3: five two hundred baby and that type of range, which 541 00:33:00,240 --> 00:33:02,760 Speaker 3: certainly would be under performance. But remember last year we 542 00:33:02,800 --> 00:33:06,080 Speaker 3: got to one sixty twice that overall credit spreads and 543 00:33:06,080 --> 00:33:09,440 Speaker 3: we rallied back in. And there's two reasons. One shallow 544 00:33:09,520 --> 00:33:15,640 Speaker 3: recession and then two fundamentals are relatively healthy in corporates, 545 00:33:15,960 --> 00:33:17,840 Speaker 3: and then three there's this huge pool of money and 546 00:33:17,880 --> 00:33:21,440 Speaker 3: money funds that could come into the marketplace. However you 547 00:33:21,480 --> 00:33:24,520 Speaker 3: think about it though, even in that scenario, and that 548 00:33:24,840 --> 00:33:26,680 Speaker 3: would be our base case, but we do have to 549 00:33:26,680 --> 00:33:28,560 Speaker 3: think of, you know, shallower recessions. 550 00:33:28,600 --> 00:33:29,320 Speaker 2: Could it be worse. 551 00:33:30,040 --> 00:33:32,360 Speaker 3: And one thing that we do spend a lot of 552 00:33:32,400 --> 00:33:35,320 Speaker 3: time on is if you think through COVID was very 553 00:33:35,360 --> 00:33:38,480 Speaker 3: short lived that downturn, and there was a lot of 554 00:33:38,520 --> 00:33:43,080 Speaker 3: policy support, but we had ten years of low rates, 555 00:33:44,000 --> 00:33:46,840 Speaker 3: very low rates, zero real rates, and so there were 556 00:33:46,880 --> 00:33:51,920 Speaker 3: a lot of behavior's decisions made within the economy that 557 00:33:53,200 --> 00:33:58,040 Speaker 3: haven't tested like a real recession. And so whether these 558 00:33:58,040 --> 00:34:00,680 Speaker 3: are the private markets, for example, where a lot of 559 00:34:00,720 --> 00:34:03,840 Speaker 3: capital has flown, is that going to be an area 560 00:34:03,840 --> 00:34:08,040 Speaker 3: of risk based on the size. We don't believe it 561 00:34:08,080 --> 00:34:09,880 Speaker 3: will be. So I've done a lot of work on that. 562 00:34:09,960 --> 00:34:12,600 Speaker 3: If you look at the number of people employed in 563 00:34:12,640 --> 00:34:16,680 Speaker 3: those types of sectors or companies, we don't see it 564 00:34:16,760 --> 00:34:20,280 Speaker 3: being that large. We actually don't see the private markets 565 00:34:20,280 --> 00:34:24,360 Speaker 3: bleeding into the public markets to fairly ring fenced and disperse. 566 00:34:25,600 --> 00:34:27,520 Speaker 3: But you know, we could be wrong on those views, 567 00:34:27,560 --> 00:34:29,680 Speaker 3: and it's something that we watch carefully that in a 568 00:34:29,719 --> 00:34:35,680 Speaker 3: recessionary environment, things can appear worse for some period of 569 00:34:35,719 --> 00:34:38,680 Speaker 3: time as the problems that might have been let's say, 570 00:34:38,719 --> 00:34:42,800 Speaker 3: papered over from easy policy, whether it's monetary or fiscal policy, 571 00:34:44,120 --> 00:34:46,719 Speaker 3: have to be cleansed from the system. And so as 572 00:34:46,719 --> 00:34:49,080 Speaker 3: we enter that, that's another era we'll be watching carefully. 573 00:34:49,120 --> 00:34:51,360 Speaker 3: If that scenari scenario were to play out. 574 00:34:52,120 --> 00:34:54,600 Speaker 1: Just two points of clarity for our listeners on the 575 00:34:54,640 --> 00:34:58,520 Speaker 1: short and front end bank call front end, by which 576 00:34:58,520 --> 00:35:00,799 Speaker 1: you mean what one to three is longer than that? 577 00:35:01,040 --> 00:35:03,640 Speaker 3: Help I would I would say one to five years, 578 00:35:04,440 --> 00:35:07,920 Speaker 3: and generally anywhere in those types of ranges is attractive 579 00:35:08,480 --> 00:35:08,799 Speaker 3: and on. 580 00:35:08,800 --> 00:35:12,480 Speaker 1: The ig spread, you think it could exceed one seventy 581 00:35:12,480 --> 00:35:13,120 Speaker 1: five this year. 582 00:35:15,400 --> 00:35:17,200 Speaker 3: I think I think it would be stretched. We would 583 00:35:17,280 --> 00:35:20,440 Speaker 3: need to get a full recession to get out that 584 00:35:20,800 --> 00:35:23,719 Speaker 3: out out to that level. You know, our view is 585 00:35:23,800 --> 00:35:27,680 Speaker 3: that shallow recession doesn't take us out that wide. You 586 00:35:27,719 --> 00:35:31,000 Speaker 3: know right now we're actually ninety five are we talking 587 00:35:31,120 --> 00:35:33,120 Speaker 3: you know one twenty five to one fifty those types 588 00:35:33,160 --> 00:35:35,120 Speaker 3: of ranges, that's very possible in a world of a 589 00:35:35,160 --> 00:35:38,880 Speaker 3: shallow recession. We would say a deeper recession takes us 590 00:35:38,880 --> 00:35:40,760 Speaker 3: out to the one seventy five to two hundred. 591 00:35:41,400 --> 00:35:42,799 Speaker 2: But we do. 592 00:35:42,800 --> 00:35:46,680 Speaker 3: Believe that it's something that it's very It's a challenging time. 593 00:35:47,160 --> 00:35:48,920 Speaker 3: You know, you have the FED who's doing something that 594 00:35:48,960 --> 00:35:53,200 Speaker 3: it typically doesn't do, try to be proactive around cutting 595 00:35:55,320 --> 00:35:58,440 Speaker 3: in a world with lout with not lots of imbalances, 596 00:35:58,840 --> 00:36:02,640 Speaker 3: and so how that plays out. Can the FED pull 597 00:36:02,719 --> 00:36:05,480 Speaker 3: this off? We feel like the as I said, the 598 00:36:05,719 --> 00:36:10,520 Speaker 3: first half of the year is probably more of the 599 00:36:10,520 --> 00:36:13,440 Speaker 3: same where credit does okay, and it's something for the 600 00:36:13,440 --> 00:36:16,000 Speaker 3: second half year we'd have to watch carefully about which 601 00:36:16,239 --> 00:36:19,640 Speaker 3: way we inflect. Are we going to inflect to shallow recession. 602 00:36:20,040 --> 00:36:22,160 Speaker 3: Then that's a scenario where the gains of the first 603 00:36:22,160 --> 00:36:23,920 Speaker 3: half could be given back in the second half with 604 00:36:23,960 --> 00:36:28,479 Speaker 3: wider spreads. And then or do we go into Boy, 605 00:36:28,560 --> 00:36:31,439 Speaker 3: the economy just doesn't seem to want to slow down 606 00:36:31,640 --> 00:36:34,759 Speaker 3: fed Maybe they cut once or twice, they stop and 607 00:36:34,800 --> 00:36:36,480 Speaker 3: we're in a world where credit does okay in that 608 00:36:36,560 --> 00:36:39,080 Speaker 3: scenario and spreads or arrange bound. 609 00:36:39,640 --> 00:36:41,600 Speaker 1: So before we talk to Steve Flynn, Bloomboone Talent is 610 00:36:41,600 --> 00:36:43,439 Speaker 1: in a bit more detail about telecoms, I just wanted 611 00:36:43,440 --> 00:36:46,360 Speaker 1: to get you to sum up the one thing that 612 00:36:46,440 --> 00:36:49,239 Speaker 1: keeps you awake at night, Chris, what's the biggest worry. 613 00:36:49,239 --> 00:36:51,520 Speaker 1: It doesn't seem like you're worried about defaults or bankruptcies 614 00:36:51,760 --> 00:36:54,080 Speaker 1: or blow up in private credit or even commercial real estate, 615 00:36:54,120 --> 00:36:57,600 Speaker 1: which is worrying a lot of listeners. But do you 616 00:36:57,640 --> 00:37:00,960 Speaker 1: have one big thing that really worries you? 617 00:37:00,960 --> 00:37:04,200 Speaker 3: You know, I think the big there's two derailers to 618 00:37:04,239 --> 00:37:07,759 Speaker 3: our in themes, one which doesn't keep me up. But 619 00:37:07,840 --> 00:37:12,839 Speaker 3: if we had a sudden recession, nothing appears to be 620 00:37:12,880 --> 00:37:16,960 Speaker 3: in place for that, So that would be something that 621 00:37:17,040 --> 00:37:21,640 Speaker 3: you would get massive valuation changes, meaning a bull steepening 622 00:37:21,680 --> 00:37:26,480 Speaker 3: of size and then widening credit spreads, and we don't 623 00:37:26,520 --> 00:37:30,759 Speaker 3: think the you know, the setup is right for that today. 624 00:37:31,120 --> 00:37:35,920 Speaker 3: That risk grows over time. The second is that inflation 625 00:37:36,120 --> 00:37:43,600 Speaker 3: comes back, is the Fed can't tighten and increases recession risk, 626 00:37:44,040 --> 00:37:48,359 Speaker 3: or they tightened once or twice and not enough work 627 00:37:48,400 --> 00:37:51,600 Speaker 3: has been done to bring inflation down to two percent, 628 00:37:51,719 --> 00:37:54,760 Speaker 3: because then we could be back into our world, maybe 629 00:37:54,800 --> 00:37:58,080 Speaker 3: not as bad as twenty two. Twenty twenty two is 630 00:37:58,160 --> 00:38:00,719 Speaker 3: quite a year for this stock market, well not in 631 00:38:00,719 --> 00:38:03,160 Speaker 3: a good way for the stock market as well as 632 00:38:03,360 --> 00:38:06,640 Speaker 3: fixed income. That you get into a world where it's 633 00:38:06,719 --> 00:38:10,160 Speaker 3: risk off all around. So if I think about that, 634 00:38:10,360 --> 00:38:12,200 Speaker 3: you know, our central tendency is this, how do we 635 00:38:12,320 --> 00:38:13,560 Speaker 3: veer away from those two? 636 00:38:13,680 --> 00:38:14,959 Speaker 2: And they're they're the two. 637 00:38:16,120 --> 00:38:18,880 Speaker 1: Great stuff. Chris Allwine, Global head of Credit at Vanguard. 638 00:38:18,920 --> 00:38:20,520 Speaker 1: Great to have you on the show. Thanks so much, 639 00:38:21,200 --> 00:38:22,520 Speaker 1: great good it's great to be here. 640 00:38:22,520 --> 00:38:23,279 Speaker 2: Thank you very much. 641 00:38:23,680 --> 00:38:24,960 Speaker 1: Also, I want to say a big thanks to Lisa 642 00:38:25,000 --> 00:38:27,719 Speaker 1: Lee with Bloomberg News in London. Brilliant to see you again. Cheers, 643 00:38:28,200 --> 00:38:28,640 Speaker 1: Thank you. 644 00:38:29,480 --> 00:38:30,040 Speaker 2: Read all of. 645 00:38:30,040 --> 00:38:32,760 Speaker 1: Lisa's great scoops on the Bloomberg Terminal and of course 646 00:38:32,800 --> 00:38:37,839 Speaker 1: at Bloomberg dot com. So Steve Flynn, Bloomberg Intelligence, thank 647 00:38:37,880 --> 00:38:40,040 Speaker 1: you very much for coming on. You look at telecoms. 648 00:38:40,560 --> 00:38:44,560 Speaker 1: Dish has been a massive distressed situation. They're moving assets around, 649 00:38:44,600 --> 00:38:47,600 Speaker 1: the bonds a dropping, bondholders are suing. What's the situation. 650 00:38:48,200 --> 00:38:53,080 Speaker 5: Yeah, there's definitely a lot going on here. So Echo 651 00:38:53,160 --> 00:38:56,640 Speaker 5: Star acquired Dish on December thirty one, the last day 652 00:38:56,920 --> 00:38:59,120 Speaker 5: of the year. And the combined company has a very 653 00:38:59,120 --> 00:39:02,319 Speaker 5: complicated cap structure. There's about twenty three billion dollars of 654 00:39:02,400 --> 00:39:06,240 Speaker 5: debt issued from three different entities, and you're talking about 655 00:39:06,320 --> 00:39:11,000 Speaker 5: unsecured bonds, convertible bonds, secured obligations. So there's a lot 656 00:39:11,000 --> 00:39:13,680 Speaker 5: of different parts in the capital structure. And now both 657 00:39:13,719 --> 00:39:17,520 Speaker 5: these companies were controlled or now the combined companies controlled 658 00:39:17,520 --> 00:39:21,600 Speaker 5: by Charles Ergan. And what they've done now is take 659 00:39:21,600 --> 00:39:24,279 Speaker 5: a number of aggressive steps. And now why are they 660 00:39:24,320 --> 00:39:27,040 Speaker 5: doing these steps? Let's back up a second. Number one, 661 00:39:27,560 --> 00:39:29,680 Speaker 5: The combined company has, like I said, about twenty three 662 00:39:29,680 --> 00:39:32,320 Speaker 5: billion dollars of debt. They have about three billion dollars 663 00:39:32,320 --> 00:39:37,839 Speaker 5: of cash, yet there's significant cash outlays coming that's more 664 00:39:37,920 --> 00:39:40,480 Speaker 5: than the cash they have. They have bomb maturities, they 665 00:39:40,480 --> 00:39:44,719 Speaker 5: have buyouts of minority Spectrum partners. They have Spectrum payments 666 00:39:45,120 --> 00:39:49,200 Speaker 5: and likely continued free cash flow deficits as they build 667 00:39:49,239 --> 00:39:52,080 Speaker 5: out their wireless network and get more and more into 668 00:39:52,120 --> 00:39:54,480 Speaker 5: the wireless business. And think about it, when they're going 669 00:39:54,480 --> 00:39:58,600 Speaker 5: into wireless to competing against the three giants, ATT, Verizon, 670 00:39:58,880 --> 00:40:01,360 Speaker 5: and T Mobile UI. So this is a big challenge 671 00:40:01,400 --> 00:40:04,399 Speaker 5: for the company. And now what they've done is over 672 00:40:04,400 --> 00:40:07,880 Speaker 5: the past couple of weeks, they've done three aggressive moves. First, 673 00:40:08,440 --> 00:40:12,200 Speaker 5: they moved a lot of assets away from the Dish entities, 674 00:40:12,239 --> 00:40:17,000 Speaker 5: away from the Dish bondholders. This includes wireless spectrum licenses, 675 00:40:17,480 --> 00:40:21,840 Speaker 5: about three million pay TV subscribers, and also claim to 676 00:40:21,880 --> 00:40:25,280 Speaker 5: a large inner company loan, so that has been moved away. 677 00:40:25,719 --> 00:40:30,520 Speaker 5: These are assets taking away from the bondholders. Second, they 678 00:40:30,520 --> 00:40:35,560 Speaker 5: announced debtfor debt exchange, whereby they're trying to get some 679 00:40:35,600 --> 00:40:40,319 Speaker 5: of the convertible bondholders at Dish to exchange into new 680 00:40:40,400 --> 00:40:42,719 Speaker 5: secured bonds that are actually backed by the Spectrum that 681 00:40:42,760 --> 00:40:45,440 Speaker 5: they moved away from Dish. Now they're saying, okay, you 682 00:40:45,480 --> 00:40:47,480 Speaker 5: can move over into this new bond, but you know what, 683 00:40:47,480 --> 00:40:50,279 Speaker 5: you're going to take a big haircut to your principal outstanding, 684 00:40:50,880 --> 00:40:53,359 Speaker 5: and then a few days later they launched the same 685 00:40:53,400 --> 00:40:56,759 Speaker 5: type of deal with regard to the PATV business, So 686 00:40:56,800 --> 00:40:59,680 Speaker 5: they took about three million of the PayTV of the 687 00:40:59,680 --> 00:41:02,959 Speaker 5: set like TV subscribers, moved him into a separate ending. 688 00:41:03,360 --> 00:41:06,440 Speaker 5: And now they're asking bondholders for the PayTV business to 689 00:41:06,600 --> 00:41:12,080 Speaker 5: swap to new secured bonds in this new PayTV editing. 690 00:41:12,840 --> 00:41:14,960 Speaker 5: But also some of those bonds are asking to take 691 00:41:15,080 --> 00:41:19,280 Speaker 5: large haircut to the principal ode. So what has happened. 692 00:41:19,360 --> 00:41:21,760 Speaker 5: A lot of these DISH bonds were trading at pretty 693 00:41:21,800 --> 00:41:26,839 Speaker 5: low levels prior to the merger due to the significant 694 00:41:26,840 --> 00:41:30,240 Speaker 5: liquidity needs at the company and some of the challenges 695 00:41:30,280 --> 00:41:32,520 Speaker 5: to the business. And so some of the bonds, like 696 00:41:32,560 --> 00:41:35,360 Speaker 5: for example, trading at about fifty cents in the dollar 697 00:41:36,040 --> 00:41:38,600 Speaker 5: a few weeks ago deal closes, they announce all these 698 00:41:38,600 --> 00:41:41,279 Speaker 5: aggressive moves and they've fallen about ten cents or more. 699 00:41:41,320 --> 00:41:43,040 Speaker 5: So some of them are even trading at forty cents 700 00:41:43,120 --> 00:41:45,440 Speaker 5: or less than forty cents in the dollar. So it's 701 00:41:45,440 --> 00:41:50,800 Speaker 5: a pretty complicated situation. You have news reports of various 702 00:41:50,840 --> 00:41:55,920 Speaker 5: creditor groups forming and challenging the moves of the company. 703 00:41:55,960 --> 00:41:59,000 Speaker 5: So this is still very early stages. I'm sure we're 704 00:41:59,040 --> 00:42:01,280 Speaker 5: gonna see lots of news flow on lots of actions 705 00:42:01,320 --> 00:42:02,600 Speaker 5: and potential lawsuits. 706 00:42:02,760 --> 00:42:04,319 Speaker 1: I think one of those sweats was announced on a 707 00:42:04,400 --> 00:42:06,040 Speaker 1: late on a Friday night just for a long weekend 708 00:42:06,040 --> 00:42:07,640 Speaker 1: as well, so they tried to dodge us, but we 709 00:42:07,680 --> 00:42:10,359 Speaker 1: still will track it watch on news flow. But what 710 00:42:10,400 --> 00:42:12,880 Speaker 1: I wanted to was really say is it's a huge issue. 711 00:42:12,920 --> 00:42:15,279 Speaker 1: It's one of the biggest issues in the high yield 712 00:42:15,360 --> 00:42:18,959 Speaker 1: index that we have very widely held. At what point 713 00:42:18,960 --> 00:42:21,000 Speaker 1: does it start to have a broader impacts on high 714 00:42:21,040 --> 00:42:21,560 Speaker 1: yield buns? 715 00:42:21,960 --> 00:42:24,440 Speaker 5: Well, yeah, I think you could start looking at the 716 00:42:24,480 --> 00:42:28,640 Speaker 5: sector and overall some of the more beaten up names 717 00:42:28,680 --> 00:42:31,200 Speaker 5: in high yield. Right, So, think about another company in 718 00:42:31,200 --> 00:42:35,840 Speaker 5: the communications sector, lumin Technologies. This is another company that's overlevered, 719 00:42:36,120 --> 00:42:39,960 Speaker 5: too much debt and complicated capital structured debt issued from 720 00:42:40,000 --> 00:42:44,360 Speaker 5: various entity secured, unsecured, and October thirty first, they announced 721 00:42:45,000 --> 00:42:48,600 Speaker 5: a large debt for debt exchange that they negotiated with 722 00:42:48,680 --> 00:42:53,920 Speaker 5: certain holders. Also included new bonds that they would issue 723 00:42:53,920 --> 00:42:57,719 Speaker 5: and get additional cash in. And there's a lot of 724 00:42:57,760 --> 00:43:01,760 Speaker 5: different credit groups form there are also challenging the company 725 00:43:02,040 --> 00:43:05,360 Speaker 5: now that deal was supposed to close by December thirty first, 726 00:43:05,960 --> 00:43:10,880 Speaker 5: they need agreement from the revolving credit facility lenders, and 727 00:43:10,960 --> 00:43:13,879 Speaker 5: now they've pushed that off to January thirty first, so 728 00:43:13,920 --> 00:43:17,479 Speaker 5: we're still waiting to see what happens there. So again, 729 00:43:17,520 --> 00:43:20,279 Speaker 5: I think this could be more common. Another big high 730 00:43:20,360 --> 00:43:23,279 Speaker 5: yeal name communications that has different layers of debt is 731 00:43:23,320 --> 00:43:24,839 Speaker 5: a company like all TCUSA. 732 00:43:25,000 --> 00:43:25,920 Speaker 2: It issues death. 733 00:43:25,760 --> 00:43:31,040 Speaker 5: From its main cable entity, the CSC Holdings Box, and there, 734 00:43:31,120 --> 00:43:33,640 Speaker 5: you know, you have lots of bonds that trade at 735 00:43:33,680 --> 00:43:35,279 Speaker 5: fifty to seventy cents in the dollars, some of the 736 00:43:35,360 --> 00:43:40,640 Speaker 5: unsecure bonds. The company did issue some senior bonds about 737 00:43:40,640 --> 00:43:42,799 Speaker 5: a week ago and they raised a couple of billion dollars, 738 00:43:42,840 --> 00:43:45,200 Speaker 5: so they definitely boosted the liquidity there. But I think 739 00:43:45,200 --> 00:43:46,960 Speaker 5: that's another one that, you know, has some of the 740 00:43:47,000 --> 00:43:50,840 Speaker 5: same characteristics that we've seen with alumin and a dish. 741 00:43:51,280 --> 00:43:53,320 Speaker 5: So that's another one to think about going forward. 742 00:43:53,400 --> 00:43:54,640 Speaker 1: And you got to kind of wonder, at what point 743 00:43:54,680 --> 00:43:57,880 Speaker 1: does this affect sentiment for you know, for that asset class, 744 00:43:57,960 --> 00:44:00,319 Speaker 1: you know, does it does it worry investing who got 745 00:44:00,360 --> 00:44:02,400 Speaker 1: so used to there being no defaults for so long, 746 00:44:03,160 --> 00:44:05,040 Speaker 1: you know, there's all these things potentially blowing up. 747 00:44:05,440 --> 00:44:05,640 Speaker 2: Yeah. 748 00:44:05,680 --> 00:44:09,000 Speaker 5: So communications is the widest sector in high yield, right, 749 00:44:09,040 --> 00:44:10,920 Speaker 5: so if you look at yield, if you look at spread, 750 00:44:11,360 --> 00:44:13,879 Speaker 5: it is the widest. Now there's some sector issues going 751 00:44:13,880 --> 00:44:17,799 Speaker 5: on here. Increase competition, you know, changing in the way 752 00:44:17,840 --> 00:44:20,120 Speaker 5: we view media, right, the landscape of everything moving from 753 00:44:20,200 --> 00:44:23,560 Speaker 5: cable to streaming and more and more competition for broadband. 754 00:44:23,560 --> 00:44:25,719 Speaker 5: So there's a lot of things going on. Sector is 755 00:44:25,719 --> 00:44:27,759 Speaker 5: always high only levered. There's a lot of debt, and 756 00:44:27,760 --> 00:44:29,800 Speaker 5: then now you have certain of these capital structures that 757 00:44:29,840 --> 00:44:31,160 Speaker 5: are feeling very, very heavy. 758 00:44:31,480 --> 00:44:32,839 Speaker 1: The only way we're going to make sense of it 759 00:44:32,880 --> 00:44:36,799 Speaker 1: is about reading Steven Flynn's research on the Bloomberg at 760 00:44:36,800 --> 00:44:39,440 Speaker 1: Bloomberg Intelligence. Thank you so much for joining us. 761 00:44:39,920 --> 00:44:40,319 Speaker 2: Thank you. 762 00:44:40,640 --> 00:44:42,600 Speaker 1: As I say, do check out Steve's research on the 763 00:44:42,640 --> 00:44:45,360 Speaker 1: Bloomberg Terminal. It's great stuff. We'll contact him directly if 764 00:44:45,400 --> 00:44:48,280 Speaker 1: you need more information. And thanks again to Chris Olwine, 765 00:44:48,400 --> 00:44:50,560 Speaker 1: Global head of Credit at Vanguard, and to Lisa Lee 766 00:44:50,560 --> 00:44:53,040 Speaker 1: from Bloomberg News. Read all of Lisa's great scoops on 767 00:44:53,080 --> 00:44:56,120 Speaker 1: the terminal and of course at Bloomberg dot com, and 768 00:44:56,200 --> 00:44:59,840 Speaker 1: please do subscribe wherever you get your podcasts. We're on Apple, Google, 769 00:44:59,840 --> 00:45:02,279 Speaker 1: the Spotify. Give us a review, tell your friends. Will 770 00:45:02,320 --> 00:45:06,600 Speaker 1: email me directly at jcrombieight at Bloomberg dot net. I'm 771 00:45:06,640 --> 00:45:09,279 Speaker 1: James Crombie. It's been a pleasure having you join us again. 772 00:45:09,400 --> 00:45:11,759 Speaker 1: Next time on the credit Edge.