1 00:00:18,320 --> 00:00:20,880 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:20,920 --> 00:00:23,560 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg, 3 00:00:24,440 --> 00:00:27,040 Speaker 1: and I'm Tim Rimington, a senior credit analyst covering basic 4 00:00:27,080 --> 00:00:30,520 Speaker 1: materials here at Bloomberg Intelligence. This week, we're very pleased 5 00:00:30,520 --> 00:00:32,800 Speaker 1: to welcome James Turner, who is co head of the 6 00:00:32,800 --> 00:00:37,239 Speaker 1: European Fundamental fixed income business at Blackrock. James, great to 7 00:00:37,280 --> 00:00:37,879 Speaker 1: have you with us. 8 00:00:37,880 --> 00:00:40,400 Speaker 2: How are you very good? Thanks and that great deity. 9 00:00:40,600 --> 00:00:42,960 Speaker 3: James has been with Blackrock for over seven years now, 10 00:00:43,000 --> 00:00:45,839 Speaker 3: starting out as the head of European Leverage Finance and 11 00:00:45,880 --> 00:00:49,400 Speaker 3: Portfolio Management, where he oversaw high yield long short credit 12 00:00:49,560 --> 00:00:52,080 Speaker 3: loans and clos all of which we hope to get 13 00:00:52,080 --> 00:00:56,440 Speaker 3: some insight into into today's discussion. Prior to black Rock, 14 00:00:56,520 --> 00:00:58,960 Speaker 3: James spent almost seventeen years at oak Tree, where he 15 00:00:59,000 --> 00:01:02,279 Speaker 3: was portfolio manager for European and Global high yield as 16 00:01:02,320 --> 00:01:05,760 Speaker 3: well as European loan and COLO strategies. I always like 17 00:01:05,840 --> 00:01:08,040 Speaker 3: it when our guests share my interest in high yield, 18 00:01:08,200 --> 00:01:10,800 Speaker 3: but James's background does one better as he also has 19 00:01:10,840 --> 00:01:13,800 Speaker 3: a degree in chemical engineering. But maybe we should leave 20 00:01:13,840 --> 00:01:18,119 Speaker 3: the discussion of the changing economics of industrial industrial molecular 21 00:01:18,160 --> 00:01:20,040 Speaker 3: chemistry until after we've finished taping. 22 00:01:20,720 --> 00:01:23,440 Speaker 1: Indeed we will so just to get us started. Credit 23 00:01:23,480 --> 00:01:25,800 Speaker 1: markets are hot, with bond spreads at the titles in 24 00:01:25,840 --> 00:01:28,479 Speaker 1: twenty seven years, as demands soores and net new supply 25 00:01:28,600 --> 00:01:32,160 Speaker 1: remains thin. Elevated US political and macro risk has pushed 26 00:01:32,160 --> 00:01:36,399 Speaker 1: global credit investors into other regions, especially Europe, to diversify 27 00:01:36,440 --> 00:01:40,000 Speaker 1: their portfolios, but that brings its own challenges also political. 28 00:01:40,280 --> 00:01:42,440 Speaker 1: Just look at all the volatility recently in the UK, 29 00:01:42,840 --> 00:01:45,679 Speaker 1: Brands and Holland, plus there's the trade war to contend with, 30 00:01:45,959 --> 00:01:48,640 Speaker 1: and countries across the region are having to significantly boost 31 00:01:48,680 --> 00:01:51,960 Speaker 1: their spending on defense. At the same time, globally in 32 00:01:52,000 --> 00:01:55,680 Speaker 1: credit markets we are seeing more distress, defaults and bankruptcy, 33 00:01:55,840 --> 00:01:58,080 Speaker 1: but you wouldn't know it looking at the price. So 34 00:01:58,560 --> 00:02:00,640 Speaker 1: James break it down for us, how do you position 35 00:02:00,680 --> 00:02:05,120 Speaker 1: yourself given all the volatility, rising macro risk, turbulent geopolitics, 36 00:02:05,120 --> 00:02:06,960 Speaker 1: but also very tight credit spreads. 37 00:02:07,160 --> 00:02:08,760 Speaker 2: Well, I think and all of those things you say 38 00:02:08,760 --> 00:02:12,680 Speaker 2: are completely right obviously, and it's a market where I 39 00:02:12,680 --> 00:02:15,200 Speaker 2: think what we need to look at is that's where 40 00:02:15,200 --> 00:02:17,040 Speaker 2: we sometimes take a step back and we need to 41 00:02:17,040 --> 00:02:19,840 Speaker 2: look through some of the noise, not be whips ORed 42 00:02:19,880 --> 00:02:23,079 Speaker 2: around by every headline that we see, because actually, ultimately 43 00:02:23,120 --> 00:02:26,280 Speaker 2: we're investing in fundamental credit and we're looking at the 44 00:02:26,320 --> 00:02:29,440 Speaker 2: companies on a corporate basis like that. But the market, 45 00:02:29,440 --> 00:02:33,120 Speaker 2: as you say, has also taken a very willingness to 46 00:02:33,160 --> 00:02:36,600 Speaker 2: look through the noise. At the moment, the insatial demand 47 00:02:36,680 --> 00:02:40,040 Speaker 2: for income has just kept technical is extremely strong from 48 00:02:40,040 --> 00:02:42,079 Speaker 2: that point of view, and having said that, there are 49 00:02:42,160 --> 00:02:44,960 Speaker 2: some signs or a little bit of stress in the market, 50 00:02:45,280 --> 00:02:49,679 Speaker 2: and certainly from the point of view of we want 51 00:02:49,720 --> 00:02:53,120 Speaker 2: to be able to be nimble really and when the 52 00:02:53,200 --> 00:02:55,400 Speaker 2: spreads go a little bit tighter, we might reduce risk 53 00:02:55,440 --> 00:02:57,400 Speaker 2: a little bit and then wait for the opportunity in 54 00:02:57,440 --> 00:03:02,040 Speaker 2: the spreads widen out a little bit. It's really taking 55 00:03:02,080 --> 00:03:04,720 Speaker 2: advantage of those dips still really very much by the 56 00:03:05,000 --> 00:03:09,600 Speaker 2: mentality in quality credit and making sure that we're looking 57 00:03:09,600 --> 00:03:12,679 Speaker 2: at the opportunities every time that happens, but not being 58 00:03:12,720 --> 00:03:16,120 Speaker 2: too scared to act when it happens, but not also 59 00:03:16,240 --> 00:03:18,399 Speaker 2: being too risk on the moment. Because as you say, 60 00:03:18,440 --> 00:03:21,520 Speaker 2: there is some stress in the market. 61 00:03:22,440 --> 00:03:25,120 Speaker 3: So what are your dislikes and likes at the moment? 62 00:03:25,240 --> 00:03:29,639 Speaker 3: You know, when we're looking at sectors, asset classes, country exposure. 63 00:03:30,840 --> 00:03:33,040 Speaker 2: Well, I think it's quite there's no sector that we 64 00:03:33,560 --> 00:03:37,000 Speaker 2: actually dismiss. I think there's always opportunities within every sector, 65 00:03:37,000 --> 00:03:39,400 Speaker 2: but there certainly sectors that are facing more challenges at 66 00:03:39,440 --> 00:03:42,160 Speaker 2: the moment. And you might say, you know, auto's I 67 00:03:42,160 --> 00:03:45,920 Speaker 2: think is one that's well trodden over as facing some stress, 68 00:03:45,920 --> 00:03:48,200 Speaker 2: and that's been facing some difficulties for a while because 69 00:03:48,240 --> 00:03:52,040 Speaker 2: of the transition from VICE to EV and that's only 70 00:03:52,040 --> 00:03:54,320 Speaker 2: made worse by some of the tariff announcements and also 71 00:03:54,880 --> 00:03:57,200 Speaker 2: some extent the import's coming in in the EUV market 72 00:03:57,240 --> 00:04:00,680 Speaker 2: as well, especially into Europe. Having said that, you know, 73 00:04:01,080 --> 00:04:04,600 Speaker 2: the majority of autos and auto suppliers are likely not 74 00:04:04,640 --> 00:04:07,560 Speaker 2: to default over time, so actually it does create opportunities, 75 00:04:07,640 --> 00:04:09,920 Speaker 2: but that it is obviously a sector that also has 76 00:04:09,960 --> 00:04:12,160 Speaker 2: its higher than are higher than fair share of defaults 77 00:04:12,160 --> 00:04:14,280 Speaker 2: and credit stress in it. So it's a matter of 78 00:04:14,360 --> 00:04:17,880 Speaker 2: really careful credit selection there. And really what we look for, 79 00:04:17,920 --> 00:04:22,039 Speaker 2: I suppose is companies that have almost the more premium 80 00:04:22,080 --> 00:04:24,159 Speaker 2: the better in many ways, because one of the things 81 00:04:24,240 --> 00:04:27,040 Speaker 2: we've noticed, especially with terrasts, are the more premium you are, 82 00:04:27,440 --> 00:04:30,200 Speaker 2: the better you are able to pass through your price increases, 83 00:04:30,720 --> 00:04:32,680 Speaker 2: and there's no you know, we can see that the 84 00:04:32,760 --> 00:04:35,479 Speaker 2: luxury car companies are better at doing that than say, 85 00:04:35,680 --> 00:04:39,000 Speaker 2: more commoditized car companies, all those competing in a very 86 00:04:39,600 --> 00:04:43,680 Speaker 2: evy heavy market. The other sector, and one you know, 87 00:04:43,920 --> 00:04:47,440 Speaker 2: but perhaps closer both of our hearts from history is chemicals, 88 00:04:47,480 --> 00:04:50,760 Speaker 2: which I think is actually a very challenged sector in Europe. 89 00:04:51,600 --> 00:04:53,680 Speaker 2: And I think that that's it's almost unique to Europe 90 00:04:53,680 --> 00:04:55,479 Speaker 2: a little bit how challenged it is because of the 91 00:04:55,480 --> 00:05:00,720 Speaker 2: feedstock costs that Europe experiences in terms of its reliance 92 00:05:00,720 --> 00:05:03,000 Speaker 2: on nap there is a raw material for its petrochemicals, 93 00:05:03,839 --> 00:05:05,920 Speaker 2: but also even just the gas prices being so high, 94 00:05:05,960 --> 00:05:09,320 Speaker 2: you know, three times the price of gas in the US, 95 00:05:09,320 --> 00:05:11,520 Speaker 2: and just from a feed stock perspective, that makes it 96 00:05:11,560 --> 00:05:15,560 Speaker 2: a very difficult market to be competitive in. So you 97 00:05:15,600 --> 00:05:17,360 Speaker 2: really have to be very high on the cost curve 98 00:05:17,400 --> 00:05:21,360 Speaker 2: to be internationally competitive. And that's combining a point as well, 99 00:05:21,400 --> 00:05:24,760 Speaker 2: where you're seeing increased supply across the world generally at 100 00:05:24,800 --> 00:05:26,840 Speaker 2: a time when demand is quite sluggage, so as that 101 00:05:27,160 --> 00:05:30,560 Speaker 2: there's operating rates for it becomes quite hard to make 102 00:05:30,960 --> 00:05:35,080 Speaker 2: good margins. At the other side, I think the other 103 00:05:35,120 --> 00:05:39,560 Speaker 2: sector that's perhaps almost a stealth sector, or perhaps almost 104 00:05:39,720 --> 00:05:41,800 Speaker 2: sometimes the most dangerous sector as well. It has some 105 00:05:41,839 --> 00:05:45,560 Speaker 2: opportunities that it's healthcare and often sort of a safe 106 00:05:46,240 --> 00:05:48,719 Speaker 2: or regarded as a safe sector, but actually it's almost 107 00:05:48,760 --> 00:05:50,840 Speaker 2: masquerading as a safe sector because actually sometimes when you 108 00:05:50,920 --> 00:05:53,400 Speaker 2: look deeper into it, some of the challenges from the 109 00:05:53,480 --> 00:05:55,880 Speaker 2: regulatory point of view, from a pricing point of view, 110 00:05:56,120 --> 00:05:57,919 Speaker 2: and the cost past three point of view are actually 111 00:05:57,960 --> 00:05:59,919 Speaker 2: really quite challenging for that sector. So again you have 112 00:06:00,040 --> 00:06:02,200 Speaker 2: be very careful in that segment as well, not that 113 00:06:02,240 --> 00:06:04,279 Speaker 2: there's not opportunities there, but it's just a sexor that 114 00:06:04,320 --> 00:06:05,600 Speaker 2: you need to be really quite careful. 115 00:06:08,160 --> 00:06:12,880 Speaker 3: So keeping the focus on chemicals for a second, you know, 116 00:06:12,960 --> 00:06:16,320 Speaker 3: whereabouts in the credit spectrum do you see the most 117 00:06:16,360 --> 00:06:19,920 Speaker 3: sort of bang for your buck, you know, managing that 118 00:06:20,080 --> 00:06:25,160 Speaker 3: risk while still getting exposure to what may one day 119 00:06:25,320 --> 00:06:26,520 Speaker 3: be a potential recovery. 120 00:06:29,400 --> 00:06:31,240 Speaker 2: I think what you look for is a position that 121 00:06:31,279 --> 00:06:34,000 Speaker 2: you have whereas cost advantage, where you're the lowest cost producer. 122 00:06:34,000 --> 00:06:36,120 Speaker 2: And it sounds obvious, but actually you need to look 123 00:06:36,120 --> 00:06:38,640 Speaker 2: into all the plants and understand exactly where they are 124 00:06:38,640 --> 00:06:41,479 Speaker 2: on the cost curve, and then maybe also the level 125 00:06:41,520 --> 00:06:46,240 Speaker 2: of specialty within the chemical company themselves. Clearly, the more 126 00:06:46,279 --> 00:06:50,440 Speaker 2: specialized you are, the less competition you potentially have and 127 00:06:50,480 --> 00:06:53,599 Speaker 2: the more bespoke your products are to enable you to 128 00:06:53,640 --> 00:06:57,680 Speaker 2: pass through increase price cost cost increases when and make 129 00:06:57,720 --> 00:06:59,839 Speaker 2: sure you get you keep your margins, and also you 130 00:06:59,839 --> 00:07:03,680 Speaker 2: are operating rates also potentially those companies with long term 131 00:07:03,680 --> 00:07:07,200 Speaker 2: contracts as well supply agreements that make sure that they 132 00:07:07,240 --> 00:07:10,000 Speaker 2: always are reducing at high operating rates because it is 133 00:07:10,520 --> 00:07:12,800 Speaker 2: really quiet and economies of scale business. 134 00:07:12,520 --> 00:07:17,760 Speaker 3: As well, you and far between. Then, one of the 135 00:07:17,800 --> 00:07:22,600 Speaker 3: things we've heard from chemical CEOs this year is about 136 00:07:23,000 --> 00:07:26,440 Speaker 3: the fiscal simnius in Europe coming down the pipeline in 137 00:07:26,480 --> 00:07:31,040 Speaker 3: twenty twenty six. We've had ANXIS BSF others talking about 138 00:07:31,040 --> 00:07:34,680 Speaker 3: how that may bring a boost to chemicals demand and 139 00:07:34,760 --> 00:07:39,800 Speaker 3: also generally European industrials which have been sort of beaten 140 00:07:39,880 --> 00:07:42,680 Speaker 3: up a bit over the last years since the Russian 141 00:07:42,680 --> 00:07:46,400 Speaker 3: invasion of Ukraine. What are your thoughts on that we 142 00:07:46,440 --> 00:07:49,600 Speaker 3: haven't really seen any impact so far. Are you hopeful 143 00:07:49,680 --> 00:07:51,840 Speaker 3: that we'll see a change in twenty twenty six. 144 00:07:53,560 --> 00:07:55,640 Speaker 2: I think we are, and that's our base case that 145 00:07:55,680 --> 00:07:58,800 Speaker 2: at some point in twenty six we will see demand 146 00:07:58,840 --> 00:08:02,680 Speaker 2: pick up across the industrial segments based on this infrastructure 147 00:08:02,680 --> 00:08:06,880 Speaker 2: spend and the boost from Germany, but it is going 148 00:08:06,880 --> 00:08:08,840 Speaker 2: to take a little bit of time to come through, 149 00:08:08,880 --> 00:08:11,760 Speaker 2: and I think in that intermediate time we're going to 150 00:08:11,760 --> 00:08:15,600 Speaker 2: see some companies struggle through that period. So again get 151 00:08:15,640 --> 00:08:17,120 Speaker 2: to your tour point, what do we look for in 152 00:08:17,160 --> 00:08:20,240 Speaker 2: a company as well? Is that every time really you 153 00:08:20,280 --> 00:08:23,880 Speaker 2: look at a chemical company, especially more quality cyclical type company, 154 00:08:23,880 --> 00:08:25,640 Speaker 2: you have to be sure that it can see through 155 00:08:25,680 --> 00:08:28,040 Speaker 2: a cycle, and so you need to look for the 156 00:08:28,080 --> 00:08:30,200 Speaker 2: appropriate leverage levels. You need to look to make sure 157 00:08:30,240 --> 00:08:32,120 Speaker 2: the cash flow is sufficient to get through a cycle 158 00:08:32,480 --> 00:08:37,240 Speaker 2: and its ability to potentially delay capex and enter that 159 00:08:37,280 --> 00:08:40,240 Speaker 2: point well invested, so it doesn't end up with operational 160 00:08:40,320 --> 00:08:41,600 Speaker 2: difficulties through that period. 161 00:08:45,080 --> 00:08:49,680 Speaker 3: And more broadly, on the theme of the industrial recession 162 00:08:50,640 --> 00:08:53,640 Speaker 3: in Europe, do you think that the physical stimulus will 163 00:08:53,679 --> 00:08:56,360 Speaker 3: be enough to sort of to end it, to end 164 00:08:56,360 --> 00:08:59,880 Speaker 3: this sort of elongated recession we've seen in European and 165 00:09:00,600 --> 00:09:04,240 Speaker 3: or are the pressures facing it in do we actually 166 00:09:04,280 --> 00:09:07,800 Speaker 3: need more policy support to keep industry in Europe? 167 00:09:10,600 --> 00:09:15,480 Speaker 2: Well, I think we're very hopeful that it will stimulate 168 00:09:15,559 --> 00:09:17,439 Speaker 2: the industry from that point of view, and I think 169 00:09:17,440 --> 00:09:19,520 Speaker 2: there's good reasons to think it will, and there are 170 00:09:19,600 --> 00:09:22,959 Speaker 2: other things that also need to be Infrastructure does need 171 00:09:23,000 --> 00:09:25,800 Speaker 2: to be improved generally in Europe. There's a lot of 172 00:09:25,880 --> 00:09:28,559 Speaker 2: investors lined up to make sure that that is the case. 173 00:09:28,640 --> 00:09:31,640 Speaker 2: So I think we're hopeful that that will happen. And actually, 174 00:09:31,920 --> 00:09:34,640 Speaker 2: I think when we look at estimates, we potentially think 175 00:09:34,640 --> 00:09:37,040 Speaker 2: that even people are a little bit conservative about how 176 00:09:37,120 --> 00:09:42,160 Speaker 2: much that that stimulus will actually improve the economies, particularly 177 00:09:42,200 --> 00:09:45,000 Speaker 2: in Germany. And then potentially, you know, if we're hopeful 178 00:09:45,040 --> 00:09:47,640 Speaker 2: as well, we may at some point see rebuilding in 179 00:09:47,720 --> 00:09:51,880 Speaker 2: Ukraine which might help as well. And we're hopeful that 180 00:09:51,880 --> 00:09:54,600 Speaker 2: that will help towards the latter half of twenty six. 181 00:09:54,720 --> 00:09:56,360 Speaker 2: But as I said, I think it's going to feel 182 00:09:56,400 --> 00:09:59,120 Speaker 2: like a long time until it actually starts feeding into 183 00:09:59,120 --> 00:10:00,000 Speaker 2: the industrial economy. 184 00:10:01,400 --> 00:10:03,000 Speaker 1: I'd like to go back, jameson what you said at 185 00:10:03,040 --> 00:10:05,880 Speaker 1: the top of the call about being careful about your 186 00:10:05,920 --> 00:10:08,360 Speaker 1: credit selection, you know, not too risk on buying the 187 00:10:08,360 --> 00:10:11,440 Speaker 1: dips in quality credit and again being nimble. That's that's 188 00:10:11,480 --> 00:10:14,880 Speaker 1: what a lot of our guests would say. But at 189 00:10:14,880 --> 00:10:16,960 Speaker 1: the same time, you know, that's fairly easy for me 190 00:10:17,000 --> 00:10:19,600 Speaker 1: to say if I'm a smaller fund, you know, managing 191 00:10:19,600 --> 00:10:22,040 Speaker 1: a couple of one hundred million maybe, but a huge, 192 00:10:22,640 --> 00:10:26,360 Speaker 1: you know, elephant in the room, multi trillion dollar asset 193 00:10:26,360 --> 00:10:28,480 Speaker 1: manager like black Rock, how do you manage that? I mean, 194 00:10:28,520 --> 00:10:30,840 Speaker 1: how do you execute on that? But given you know 195 00:10:30,880 --> 00:10:32,920 Speaker 1: you're looking, you're being selected, but you have a lot 196 00:10:32,960 --> 00:10:33,920 Speaker 1: of money to put to work. 197 00:10:35,600 --> 00:10:40,240 Speaker 2: Well, we have i would say market leading access from 198 00:10:40,240 --> 00:10:43,040 Speaker 2: a point of view in terms of number of traders 199 00:10:43,040 --> 00:10:45,200 Speaker 2: that we have, the access that we have to banks 200 00:10:45,200 --> 00:10:49,559 Speaker 2: with a very large counterparty of many of the institutions, 201 00:10:49,600 --> 00:10:52,240 Speaker 2: and we make sure that we get wall crossed on 202 00:10:52,559 --> 00:10:54,800 Speaker 2: a lot of deals as well, so that we have 203 00:10:56,040 --> 00:10:58,840 Speaker 2: access to think about the deals in advance, especially in 204 00:10:58,880 --> 00:11:02,240 Speaker 2: the primary market. And then also we have diversity across 205 00:11:02,280 --> 00:11:06,319 Speaker 2: our portfolios. We have some portfolios that maybe are a 206 00:11:06,360 --> 00:11:08,560 Speaker 2: little bit more buy and hold type portfolios, then we 207 00:11:08,600 --> 00:11:10,600 Speaker 2: have some more active portfolios, so we have a range 208 00:11:10,600 --> 00:11:13,800 Speaker 2: of portfolios. And also the other thing is that comes 209 00:11:13,840 --> 00:11:16,160 Speaker 2: down to it is actually at the moment, with the 210 00:11:16,200 --> 00:11:19,160 Speaker 2: technicals that we see in the market, it comes down 211 00:11:19,200 --> 00:11:21,560 Speaker 2: to again being good at that credit selection. Because if 212 00:11:21,559 --> 00:11:24,079 Speaker 2: you're early to spot problems or your early to spot 213 00:11:24,080 --> 00:11:27,960 Speaker 2: to advantages. Then actually usually the liquidity is there actually 214 00:11:27,960 --> 00:11:30,920 Speaker 2: for you. It's really when a situation becomes very stressed 215 00:11:30,920 --> 00:11:32,800 Speaker 2: that you find that the liquidity to drives up. So 216 00:11:32,920 --> 00:11:36,760 Speaker 2: actually it's a key skill being early to the party, 217 00:11:36,800 --> 00:11:39,199 Speaker 2: and that's why we invest a lot in credit research 218 00:11:39,240 --> 00:11:39,600 Speaker 2: as well. 219 00:11:40,520 --> 00:11:43,079 Speaker 1: Do you see any signs, though more broadly, of miss 220 00:11:43,080 --> 00:11:47,280 Speaker 1: priced risk? Are there bubbles developing given the very very 221 00:11:47,280 --> 00:11:49,439 Speaker 1: strong technicals. I mean, there is so much more demand 222 00:11:49,440 --> 00:11:51,600 Speaker 1: than net new supply of the debt. 223 00:11:51,440 --> 00:11:54,040 Speaker 2: That's true, and I think this comes from less insatiable 224 00:11:54,400 --> 00:11:58,400 Speaker 2: demand for income at the moment. If you look at 225 00:11:59,200 --> 00:12:03,920 Speaker 2: where you know that there is some stress in the 226 00:12:04,080 --> 00:12:06,400 Speaker 2: higher market, of some stress in the loan market. But 227 00:12:06,480 --> 00:12:09,080 Speaker 2: having said that, if you look across the piece and 228 00:12:09,160 --> 00:12:14,440 Speaker 2: you consider quite how fast interest rates rose, actually companies 229 00:12:14,480 --> 00:12:18,120 Speaker 2: did quite well through it. They're in a relatively good position. 230 00:12:18,640 --> 00:12:21,240 Speaker 2: The fact that the refinancing market, the tech market is 231 00:12:21,280 --> 00:12:23,360 Speaker 2: open and the technicals are so strong is to some 232 00:12:23,400 --> 00:12:27,720 Speaker 2: extent self reinforcing as well, because actually companies can refinance 233 00:12:27,760 --> 00:12:31,800 Speaker 2: it reasonable rates. Actually, to some extent, coupons are now 234 00:12:31,840 --> 00:12:34,559 Speaker 2: starting to at least decline in Europe now, so actually 235 00:12:34,559 --> 00:12:38,720 Speaker 2: refinancing is becoming easier for some companies as well, and 236 00:12:38,760 --> 00:12:45,440 Speaker 2: that helps their cash flow. So it is so actually 237 00:12:45,520 --> 00:12:47,760 Speaker 2: when we look at the spreads at the moment, we're 238 00:12:47,760 --> 00:12:50,360 Speaker 2: looking at them and we're thinking they are at the 239 00:12:50,400 --> 00:12:53,440 Speaker 2: tighter end. But having said that, there are good reasons 240 00:12:53,440 --> 00:12:55,240 Speaker 2: for them to be at the tighter end as well. 241 00:12:56,440 --> 00:12:58,920 Speaker 2: And well, and the other thing is when we look 242 00:12:58,920 --> 00:13:01,040 Speaker 2: at spreads as well, and with this as a well 243 00:13:01,040 --> 00:13:04,000 Speaker 2: trodden argument, but people are also looking at the yields 244 00:13:04,040 --> 00:13:06,400 Speaker 2: and it's a long time since we've seen yields as 245 00:13:06,400 --> 00:13:11,560 Speaker 2: good as this in the market in the past, and 246 00:13:11,600 --> 00:13:15,360 Speaker 2: it's pushing people, I think as well. The corporate credit 247 00:13:15,559 --> 00:13:20,160 Speaker 2: is looking extremely attractive compared to sometimes the sovereign credit 248 00:13:20,200 --> 00:13:22,880 Speaker 2: because actually you have a choice where you can find 249 00:13:22,920 --> 00:13:26,040 Speaker 2: your yield. You either go potentially for duration in the 250 00:13:26,040 --> 00:13:28,839 Speaker 2: longer dated sovereigns, or you take a little bit of 251 00:13:28,840 --> 00:13:31,000 Speaker 2: a shorter and the bellue of the curve for some 252 00:13:31,040 --> 00:13:33,520 Speaker 2: of the corporate credit. And the decision at the moment 253 00:13:33,559 --> 00:13:35,920 Speaker 2: seems to be go for the corporate credit for good reason, 254 00:13:35,960 --> 00:13:37,840 Speaker 2: because companies are in a good state and it's not 255 00:13:37,840 --> 00:13:41,400 Speaker 2: really the volatility isn't really coming from the corporate volatility 256 00:13:41,440 --> 00:13:44,400 Speaker 2: is often coming from the sovereigns, and so that's actually 257 00:13:44,440 --> 00:13:47,959 Speaker 2: why I think we're also seeing this strong demand. Then 258 00:13:48,000 --> 00:13:51,520 Speaker 2: there's other areas in our portfolios, and what we might 259 00:13:51,760 --> 00:13:55,320 Speaker 2: consider the ideal portfolio at the moment in fixed income 260 00:13:55,880 --> 00:13:59,320 Speaker 2: is in many ways we have a core allocation to 261 00:13:59,640 --> 00:14:02,400 Speaker 2: invest great corporate credit, but then we're also looking at 262 00:14:02,440 --> 00:14:04,680 Speaker 2: the plus sectors to supplement some of that yield and 263 00:14:04,679 --> 00:14:07,840 Speaker 2: some of that income as well. We may have a 264 00:14:07,880 --> 00:14:09,559 Speaker 2: portion in high yield, we may have a portion in 265 00:14:09,640 --> 00:14:12,960 Speaker 2: emerging market debt. And particularly something that's particularly good value 266 00:14:12,960 --> 00:14:16,000 Speaker 2: at the moment we feel is COLO tranches, And you 267 00:14:16,040 --> 00:14:19,520 Speaker 2: can really choose and pick your risk spectrum when you're 268 00:14:19,560 --> 00:14:22,680 Speaker 2: looking at COLO transers. You can go into triple A 269 00:14:22,760 --> 00:14:24,600 Speaker 2: and you're being well rewarded there, or if you've got 270 00:14:24,600 --> 00:14:26,520 Speaker 2: a little bit more risk tolerance, you can go down 271 00:14:26,560 --> 00:14:29,960 Speaker 2: into the double B or even potentially single B tranches 272 00:14:30,000 --> 00:14:33,080 Speaker 2: of clos and really you're getting a very good spread 273 00:14:33,120 --> 00:14:36,000 Speaker 2: and you'll pick up there. And that can you construct 274 00:14:36,000 --> 00:14:38,520 Speaker 2: a portfolio from that point of view in a risk 275 00:14:38,560 --> 00:14:42,360 Speaker 2: controlled way. It can be to whatever the clients or 276 00:14:42,440 --> 00:14:49,520 Speaker 2: underlying investors risk tolerance. Is it really produces a very good, 277 00:14:49,560 --> 00:14:54,600 Speaker 2: diverse portfolio where you're getting a nice yield and reasonable spreads. 278 00:14:55,160 --> 00:14:57,680 Speaker 3: Just going back to the comment you're making about credit 279 00:14:57,720 --> 00:15:00,600 Speaker 3: markets being in a pretty good position, I just wanted 280 00:15:00,640 --> 00:15:03,000 Speaker 3: to get your thoughts on where you think default rates 281 00:15:03,000 --> 00:15:06,400 Speaker 3: are heading and your comments there about being nimble, you know, 282 00:15:06,440 --> 00:15:10,920 Speaker 3: do you see more of the stress situations as opportunities? 283 00:15:10,920 --> 00:15:15,640 Speaker 3: Are you able to get in ahead of enemies, you know, 284 00:15:15,720 --> 00:15:17,640 Speaker 3: join creditor groups. 285 00:15:18,920 --> 00:15:24,240 Speaker 2: So I think we've seen slightly elevated default rates in 286 00:15:24,560 --> 00:15:28,600 Speaker 2: European high yield for example, recently, but having said that, 287 00:15:29,120 --> 00:15:33,080 Speaker 2: we've also seen extremely high recovery. So actually, when you 288 00:15:33,080 --> 00:15:36,600 Speaker 2: look at the loss rate, it's potentially not as high 289 00:15:36,600 --> 00:15:38,640 Speaker 2: as you might imagine. So the recovery rate, for example, 290 00:15:38,640 --> 00:15:40,640 Speaker 2: on the European high yield market has been around seventy 291 00:15:40,680 --> 00:15:44,760 Speaker 2: percent this year. Traditionally people modeling around a forty percent 292 00:15:44,800 --> 00:15:47,640 Speaker 2: recovery for the European high yield market. So despite the 293 00:15:47,640 --> 00:15:50,200 Speaker 2: fact the default rates have gone up, the loss rates 294 00:15:50,200 --> 00:15:55,160 Speaker 2: haven't actually increased as much as you might imagine. I 295 00:15:55,240 --> 00:15:57,320 Speaker 2: think we've seen a number And the other other thing 296 00:15:57,360 --> 00:16:01,400 Speaker 2: is what counts as a default is sometimes not even 297 00:16:01,400 --> 00:16:04,040 Speaker 2: a situation where you're actually ending up losing capital either, 298 00:16:04,120 --> 00:16:06,000 Speaker 2: which I think is also why the default rates have 299 00:16:06,040 --> 00:16:10,840 Speaker 2: been quite high. So if you had potentially just an extension, 300 00:16:11,440 --> 00:16:13,960 Speaker 2: it would still count as a default for the statistics, 301 00:16:14,320 --> 00:16:17,480 Speaker 2: but actually it doesn't if you don't really ever lose 302 00:16:17,520 --> 00:16:19,840 Speaker 2: any capital from that point of view, So to some extent, 303 00:16:19,880 --> 00:16:22,520 Speaker 2: I think the default rates are they're higher, but the 304 00:16:22,560 --> 00:16:25,800 Speaker 2: loss rate is not as high I think going forward, 305 00:16:26,280 --> 00:16:30,000 Speaker 2: and most of the defaults have worked their way through 306 00:16:30,040 --> 00:16:34,080 Speaker 2: the system, I think from here we'll see a decline 307 00:16:34,080 --> 00:16:40,400 Speaker 2: in the default rate in Europe. And the other thing 308 00:16:40,440 --> 00:16:43,120 Speaker 2: about it though, is also is that we've seen the 309 00:16:43,120 --> 00:16:46,360 Speaker 2: default rate rise a little bit, but we've also seen 310 00:16:47,160 --> 00:16:49,760 Speaker 2: that the spreads are already reflecting that in the names 311 00:16:49,800 --> 00:16:52,440 Speaker 2: that are likely to fault or unknown defaults in the future. 312 00:16:52,800 --> 00:16:56,240 Speaker 2: So actually the capital loss the defaults recognizing has already 313 00:16:56,280 --> 00:16:59,120 Speaker 2: been taken in the market. But it's also why we 314 00:16:59,160 --> 00:17:01,360 Speaker 2: see so much at the moment as well in the 315 00:17:01,360 --> 00:17:04,159 Speaker 2: spread of the market. So when you look at the 316 00:17:04,200 --> 00:17:07,520 Speaker 2: triple C segment, it actually is over a thousand spread 317 00:17:07,520 --> 00:17:10,439 Speaker 2: at the moment. It's extremely high, and that's really some 318 00:17:10,480 --> 00:17:12,240 Speaker 2: of the names that we know are going to fault 319 00:17:12,240 --> 00:17:14,960 Speaker 2: over the next few months already reflecting that in the price. 320 00:17:15,240 --> 00:17:18,600 Speaker 2: So a lot of any of the expectations we've already 321 00:17:18,640 --> 00:17:25,400 Speaker 2: seen in returns. But for the majority of companies as well, 322 00:17:25,880 --> 00:17:28,120 Speaker 2: you know, the market is wide open. There's no refinancing 323 00:17:28,240 --> 00:17:32,480 Speaker 2: risk on a company that is that is performing at 324 00:17:32,480 --> 00:17:37,280 Speaker 2: the moment. And that's again I think where the market 325 00:17:37,280 --> 00:17:39,520 Speaker 2: has changed a little bit over the last six months 326 00:17:39,560 --> 00:17:41,840 Speaker 2: is that in terms of how people are acting, no 327 00:17:41,880 --> 00:17:45,399 Speaker 2: one really has so much tolerance for companies that are 328 00:17:45,400 --> 00:17:48,240 Speaker 2: getting into a stress situation. So what you see is 329 00:17:48,720 --> 00:17:55,680 Speaker 2: you see people really coalescing around the middle, the high 330 00:17:55,680 --> 00:17:58,800 Speaker 2: single BEE categories, the low double B. There's a lot 331 00:17:58,800 --> 00:18:01,240 Speaker 2: of demand for that, not so much demand for triple 332 00:18:01,280 --> 00:18:03,159 Speaker 2: C at the moment, because as we know, we're in 333 00:18:03,200 --> 00:18:06,359 Speaker 2: a little bit of a trickier time at the moment, 334 00:18:06,400 --> 00:18:08,439 Speaker 2: and no one really wants to have to buy a 335 00:18:08,480 --> 00:18:10,800 Speaker 2: company which needs to grow into its balance sheet because 336 00:18:10,800 --> 00:18:12,440 Speaker 2: the growth is not sure that it's there. 337 00:18:14,920 --> 00:18:19,040 Speaker 3: On the recovery's point, I mean, seventy versus forty percent, 338 00:18:19,040 --> 00:18:21,119 Speaker 3: that's a really big difference. What's driving that. 339 00:18:23,640 --> 00:18:25,359 Speaker 2: I think it's because a lot of the defaults have 340 00:18:25,480 --> 00:18:31,280 Speaker 2: been situations where there's a secured element of the capital 341 00:18:31,280 --> 00:18:34,320 Speaker 2: structure and there's an unsecured element of the capital structure. 342 00:18:34,640 --> 00:18:37,280 Speaker 2: The secured element is much larger in comparison to the 343 00:18:37,359 --> 00:18:40,280 Speaker 2: unsecured in most cases, and the secured element is actually 344 00:18:40,359 --> 00:18:44,560 Speaker 2: recovered very well through potentially an lemy or a distressed exchange. 345 00:18:45,000 --> 00:18:48,399 Speaker 2: The subordinator is not recovered quite so well, but it's 346 00:18:48,440 --> 00:18:52,320 Speaker 2: a much smaller percentage of the capital structure. So actually, 347 00:18:53,119 --> 00:18:55,320 Speaker 2: if you looked at the dispersion, I think it would 348 00:18:55,320 --> 00:18:57,720 Speaker 2: actually be quite high, and there'd be a big, a 349 00:18:57,760 --> 00:19:01,040 Speaker 2: big divergence between if you're a secured creditor very high recovery, 350 00:19:01,440 --> 00:19:05,239 Speaker 2: unsecured credits are actually probably a very low recovery. But 351 00:19:05,280 --> 00:19:09,720 Speaker 2: that's really the market we're in at the moment. But 352 00:19:09,760 --> 00:19:11,880 Speaker 2: it's a positive development as well for how your market 353 00:19:11,920 --> 00:19:14,359 Speaker 2: because if you look back in history, secured bonds were 354 00:19:14,359 --> 00:19:16,720 Speaker 2: a relatively new thing after the Financial crisis. That were 355 00:19:16,800 --> 00:19:20,840 Speaker 2: very few before the financial crisis. So when you look 356 00:19:20,880 --> 00:19:23,200 Speaker 2: at the recovery rate now, it's gradually, I think been 357 00:19:23,359 --> 00:19:25,760 Speaker 2: increasing a little bit as you see more secured bonds 358 00:19:25,960 --> 00:19:27,240 Speaker 2: in the higher your market. 359 00:19:27,840 --> 00:19:30,040 Speaker 1: Sounds like you're also avoiding triple cs, which you know 360 00:19:30,080 --> 00:19:33,359 Speaker 1: they have performed well. Spreads have remained slightly wide to 361 00:19:33,400 --> 00:19:35,960 Speaker 1: the rest of the market, indicating the risk, but they've 362 00:19:36,000 --> 00:19:38,320 Speaker 1: done you know, so by avoiding them, you're you're going 363 00:19:38,359 --> 00:19:42,720 Speaker 1: to sacrifice return potentially. Do you worry about underperforming if 364 00:19:42,760 --> 00:19:44,000 Speaker 1: you if you miss out on triple c's. 365 00:19:45,320 --> 00:19:47,240 Speaker 2: I don't think it's a question that actually it's not 366 00:19:47,280 --> 00:19:49,880 Speaker 2: a really a question of necessarily just avoiding them. Were 367 00:19:49,960 --> 00:19:53,520 Speaker 2: still selectively by them. But I think actually the bar 368 00:19:53,640 --> 00:19:56,480 Speaker 2: is a little bit higher at the moment. In the past, 369 00:19:56,480 --> 00:19:58,960 Speaker 2: when you could see obvious growth and you could see 370 00:20:00,200 --> 00:20:03,600 Speaker 2: easy cash flow generation and very low financing rates, it 371 00:20:03,800 --> 00:20:08,200 Speaker 2: was easier to understand that a business could grow into 372 00:20:08,240 --> 00:20:10,640 Speaker 2: its capital structure a little bit more, which is typically 373 00:20:10,680 --> 00:20:13,160 Speaker 2: what many triple seeds need to do. And I think 374 00:20:13,160 --> 00:20:15,560 Speaker 2: the bar is just now a little bit higher to 375 00:20:15,640 --> 00:20:19,360 Speaker 2: do that. But selectively we do so are quite see opportunities, 376 00:20:19,359 --> 00:20:22,320 Speaker 2: and we certainly do buy triple seeds. 377 00:20:23,960 --> 00:20:27,920 Speaker 3: And on the point is, you know we've seen quite 378 00:20:27,920 --> 00:20:29,840 Speaker 3: a few in recent years. Do you think this trend 379 00:20:29,920 --> 00:20:33,280 Speaker 3: is going to continue? I mean, market environment relatively benign. 380 00:20:33,560 --> 00:20:35,600 Speaker 3: Is this the time that sponsors come and you know, 381 00:20:35,680 --> 00:20:38,600 Speaker 3: sort of kick the can down the road a bit more. 382 00:20:39,000 --> 00:20:41,040 Speaker 2: Yeah, and kicking the can down the road has a 383 00:20:41,760 --> 00:20:44,760 Speaker 2: negative connotation in some ways, but actually for cycical businesses 384 00:20:44,760 --> 00:20:49,679 Speaker 2: that can work quite well sometimes, and there's clearly a 385 00:20:49,720 --> 00:20:53,080 Speaker 2: temptation to do it if you can see an opportunity 386 00:20:53,119 --> 00:20:57,160 Speaker 2: to create value sometimes. I think the difficulty I mean, 387 00:20:57,760 --> 00:21:00,280 Speaker 2: I think we'll see more of them in Europe. Having 388 00:21:00,320 --> 00:21:03,480 Speaker 2: said that, it's harder to execute an lemy in Europe, 389 00:21:03,520 --> 00:21:05,520 Speaker 2: and there are some more obstacles to it in Europe 390 00:21:05,520 --> 00:21:08,560 Speaker 2: than there are in the US. So I'm sure where 391 00:21:08,600 --> 00:21:10,680 Speaker 2: the US has gone to some extent, Europe will follow, 392 00:21:10,760 --> 00:21:13,120 Speaker 2: but I don't think in quite the same volume, because 393 00:21:13,160 --> 00:21:17,359 Speaker 2: there are jurisdictional issues and even the legal framework is 394 00:21:17,400 --> 00:21:19,640 Speaker 2: a little bit harder to navigate anywhere in Europe from 395 00:21:19,640 --> 00:21:20,280 Speaker 2: that point of view. 396 00:21:21,400 --> 00:21:24,320 Speaker 1: And how do you protect yourself against the threat of 397 00:21:24,800 --> 00:21:27,080 Speaker 1: being subordinated. I mean, you're obviously the biggest and one 398 00:21:27,080 --> 00:21:29,000 Speaker 1: of the biggest funds out there, so is that just 399 00:21:29,000 --> 00:21:30,040 Speaker 1: just a scale issue. 400 00:21:33,080 --> 00:21:36,000 Speaker 2: I mean, when we get into a restructuring, we'll obviously 401 00:21:36,600 --> 00:21:38,480 Speaker 2: want to take an active part in it if we 402 00:21:38,560 --> 00:21:42,040 Speaker 2: have reasonable position and clearly act in our best interest 403 00:21:42,080 --> 00:21:44,000 Speaker 2: from that point of view. But I think the biggest 404 00:21:44,000 --> 00:21:47,240 Speaker 2: way to protect really against it is making those good 405 00:21:47,280 --> 00:21:49,280 Speaker 2: credit calls in the first place and not really getting 406 00:21:49,280 --> 00:21:51,720 Speaker 2: into a situation where you're going likely to be entering 407 00:21:51,720 --> 00:21:54,399 Speaker 2: into a LEM. I think one of the things that 408 00:21:55,080 --> 00:21:58,040 Speaker 2: we're also would be very wary of is entering into 409 00:21:58,040 --> 00:22:02,560 Speaker 2: an LEM as a secured creditor. Has been a very 410 00:22:02,560 --> 00:22:05,919 Speaker 2: difficult position to be in. I think if we were 411 00:22:06,200 --> 00:22:08,920 Speaker 2: in an LEM, or we're at risk of going to LM, 412 00:22:09,119 --> 00:22:10,800 Speaker 2: we're to be in the secure position. 413 00:22:12,240 --> 00:22:15,400 Speaker 1: Can you talk a bit about the defense spend over 414 00:22:15,440 --> 00:22:18,840 Speaker 1: in Europe. We've heard people on the private side get 415 00:22:18,920 --> 00:22:21,480 Speaker 1: quite interested in the potential for investing there. You know, 416 00:22:21,520 --> 00:22:25,560 Speaker 1: it's obviously going to require a lot of spending by 417 00:22:26,080 --> 00:22:30,080 Speaker 1: governments and defense companies and everything else, But what's the 418 00:22:30,200 --> 00:22:32,720 Speaker 1: what's the credit investment angle for you? 419 00:22:33,200 --> 00:22:35,840 Speaker 2: It's a sector that's clearly going to benefit from increased 420 00:22:36,400 --> 00:22:39,480 Speaker 2: spending across Europe. I think it's well, you know, well 421 00:22:39,640 --> 00:22:45,919 Speaker 2: well trodden route. Now, there are clearly some ESG requirements 422 00:22:45,920 --> 00:22:48,680 Speaker 2: that we have to meet on defense companies, and again 423 00:22:49,240 --> 00:22:51,760 Speaker 2: they're well known in terms of controversial weapons and certain 424 00:22:51,800 --> 00:22:57,200 Speaker 2: guidelines that we receive from investors, but also it's away 425 00:22:57,200 --> 00:22:59,840 Speaker 2: from just the defense as well. I think it's trying 426 00:22:59,880 --> 00:23:02,600 Speaker 2: to take advantage of all of the infrastructure spend that 427 00:23:02,640 --> 00:23:07,120 Speaker 2: we talked about as well, so that there are many 428 00:23:07,160 --> 00:23:09,320 Speaker 2: industries I think going to benefit from that. We just 429 00:23:09,359 --> 00:23:11,920 Speaker 2: have to make sure that we time it right and 430 00:23:12,000 --> 00:23:13,520 Speaker 2: we look at it carefully, and we look at those 431 00:23:13,520 --> 00:23:15,760 Speaker 2: that would really likely to benefit for example. I mean, 432 00:23:16,160 --> 00:23:18,320 Speaker 2: again it's a very big sector and there are some 433 00:23:18,520 --> 00:23:21,119 Speaker 2: going to be some winners and losers. But within the 434 00:23:21,200 --> 00:23:24,600 Speaker 2: utilities sector, for example, I think everything to do with 435 00:23:24,720 --> 00:23:28,800 Speaker 2: the AI build up is going to require more infrastructure 436 00:23:28,840 --> 00:23:31,680 Speaker 2: spend from that point of view, you know, as simple 437 00:23:31,680 --> 00:23:34,840 Speaker 2: as things. Looking at companies that produce copper cables for example, 438 00:23:35,200 --> 00:23:37,520 Speaker 2: are likely to be beneficiaries of that. So we're looking 439 00:23:37,560 --> 00:23:40,960 Speaker 2: for the maybe the second order companies as well that 440 00:23:41,000 --> 00:23:43,160 Speaker 2: are going to benefit from some of that infrastructure spend 441 00:23:43,240 --> 00:23:44,439 Speaker 2: and some of that defense spend. 442 00:23:46,480 --> 00:23:49,560 Speaker 3: You mentioned ESG there being a concern when it comes 443 00:23:49,600 --> 00:23:53,280 Speaker 3: to defense. Do you find en investors are getting a 444 00:23:53,320 --> 00:23:57,040 Speaker 3: bit more lenient on defense as part of a sort 445 00:23:57,040 --> 00:24:01,520 Speaker 3: of an ESG screen or blacklist since the since the 446 00:24:01,600 --> 00:24:02,960 Speaker 3: Russian invasion of Ukraine. 447 00:24:03,160 --> 00:24:04,800 Speaker 2: Well, I think there are some things that always going 448 00:24:04,840 --> 00:24:06,959 Speaker 2: to be hard lines. But having said that, you have 449 00:24:07,000 --> 00:24:10,560 Speaker 2: to also weigh up the country's ability to defend itself. 450 00:24:11,840 --> 00:24:15,960 Speaker 2: And perhaps there has been some softening of amongst some 451 00:24:16,480 --> 00:24:20,119 Speaker 2: constituents of the of the lines, but there's always going 452 00:24:20,160 --> 00:24:22,760 Speaker 2: to be some hard lines on the controversial weapons and 453 00:24:22,800 --> 00:24:24,800 Speaker 2: I think that those will continue to be There. 454 00:24:27,480 --> 00:24:29,600 Speaker 1: Is the investment opportunity more on the public side, do 455 00:24:29,640 --> 00:24:32,199 Speaker 1: you think, or was it direct lending private? How do 456 00:24:32,240 --> 00:24:34,000 Speaker 1: you kind of break that down? 457 00:24:34,359 --> 00:24:36,840 Speaker 2: I think it's all of the above. There's now I 458 00:24:36,840 --> 00:24:39,440 Speaker 2: suppose with the advent of direct lending, there's really now 459 00:24:40,080 --> 00:24:43,400 Speaker 2: a third option for particularly for things like LBOs as well. 460 00:24:43,400 --> 00:24:46,920 Speaker 2: But actually increasingly larger public companies are also looking in 461 00:24:47,080 --> 00:24:49,240 Speaker 2: even investment rate of looking for the direct lending market 462 00:24:49,280 --> 00:24:52,560 Speaker 2: every scene as well. The biggest beneficiary in many ways 463 00:24:52,640 --> 00:24:55,560 Speaker 2: is actually the LBO or the sponsor or the company, 464 00:24:55,600 --> 00:24:59,440 Speaker 2: because they actually have now a third reasonable and sizable 465 00:24:59,640 --> 00:25:02,560 Speaker 2: source of financing. And I think companies when they look 466 00:25:02,560 --> 00:25:05,440 Speaker 2: at their options will depending on the speed of execution 467 00:25:05,600 --> 00:25:09,720 Speaker 2: they need, or whether pricing is more important, or whether 468 00:25:09,800 --> 00:25:12,040 Speaker 2: such size or scale is more important, they'll look at 469 00:25:12,040 --> 00:25:14,200 Speaker 2: all the markets, and they'll probably weigh out their options. 470 00:25:14,240 --> 00:25:17,080 Speaker 2: If they're luckily enough to be able to take advantage 471 00:25:17,080 --> 00:25:19,320 Speaker 2: of all three of them, then I'm sure they will. 472 00:25:19,359 --> 00:25:22,640 Speaker 2: And we've seen different periods where direct lending has come 473 00:25:22,680 --> 00:25:24,800 Speaker 2: to the foe. Perhaps in twenty twenty two, when there 474 00:25:24,840 --> 00:25:27,639 Speaker 2: was the spreads were wider in the high yield and 475 00:25:27,720 --> 00:25:30,800 Speaker 2: loan markets and there was more certainty of execution by 476 00:25:30,800 --> 00:25:33,320 Speaker 2: going to the direct blending market, and then a spread 477 00:25:33,359 --> 00:25:35,879 Speaker 2: of titans. We've seen some of those deals then refinance 478 00:25:35,920 --> 00:25:39,000 Speaker 2: out into public markets again. I mean, arguably you could 479 00:25:39,000 --> 00:25:43,800 Speaker 2: say in twenty twenty two and this was a maybe 480 00:25:43,880 --> 00:25:46,199 Speaker 2: not an exceptional time, but it's not the norm. Is 481 00:25:46,240 --> 00:25:48,840 Speaker 2: that actually there probably was, Actually it was more expensive 482 00:25:48,840 --> 00:25:50,719 Speaker 2: to come to public markets at that time than it 483 00:25:50,800 --> 00:25:53,720 Speaker 2: was to come to the private markets at that time. 484 00:25:54,960 --> 00:25:57,680 Speaker 2: That's obviously since reverse somewhat as well. But I think 485 00:25:57,720 --> 00:26:01,840 Speaker 2: we see a lot of capital looking at you know, 486 00:26:01,920 --> 00:26:04,000 Speaker 2: not so many deals at the movement. So clearly there's 487 00:26:04,000 --> 00:26:05,720 Speaker 2: a lot of competition for those deals. 488 00:26:06,320 --> 00:26:08,680 Speaker 1: What about the relative value though for you as an investor. 489 00:26:08,800 --> 00:26:11,479 Speaker 1: We talked to some private credit firms. I mean, our 490 00:26:11,560 --> 00:26:13,960 Speaker 1: last guest from Blacksone was talking about a two hundred 491 00:26:14,000 --> 00:26:18,280 Speaker 1: basis point pickup to liquid credit on both high yield 492 00:26:18,280 --> 00:26:21,080 Speaker 1: and investment grades. So you know, that's that's pretty substantial 493 00:26:21,520 --> 00:26:23,359 Speaker 1: given how tight everything else is. I mean, does it 494 00:26:23,440 --> 00:26:25,639 Speaker 1: not make sense to you to I mean, you have 495 00:26:25,680 --> 00:26:29,360 Speaker 1: a lot of potentially locked up capital, it's less volatile, 496 00:26:29,440 --> 00:26:31,199 Speaker 1: you get a lot more return. Why not why not 497 00:26:31,240 --> 00:26:31,800 Speaker 1: go private? 498 00:26:33,760 --> 00:26:37,000 Speaker 2: I think when you look into it, and clearly Black 499 00:26:37,000 --> 00:26:41,520 Speaker 2: Book has the ability to, especially with the recent acquisition, 500 00:26:41,720 --> 00:26:46,360 Speaker 2: has the ability to go private and have private debt 501 00:26:46,400 --> 00:26:49,640 Speaker 2: capability or materially larger private debt capability now as well. 502 00:26:49,800 --> 00:26:51,480 Speaker 2: So we can look at all markets and I think 503 00:26:51,480 --> 00:26:53,520 Speaker 2: that that's really what we want to be able to do, 504 00:26:53,600 --> 00:26:56,879 Speaker 2: is we want to provide capital two companies wherever they 505 00:26:56,960 --> 00:26:58,960 Speaker 2: might want it, whether it's in the public markets or 506 00:26:59,000 --> 00:27:03,880 Speaker 2: the private markets. Again, but it's very nature. Seeing how 507 00:27:03,880 --> 00:27:07,000 Speaker 2: the two hundred basis points pick up is derived is 508 00:27:07,000 --> 00:27:09,000 Speaker 2: not necessarily clear just because of the nature of the 509 00:27:09,000 --> 00:27:13,639 Speaker 2: private markets, we don't see exactly exactly that pickup. But 510 00:27:13,680 --> 00:27:16,280 Speaker 2: I think also we need to distinguish a little bit 511 00:27:16,280 --> 00:27:18,600 Speaker 2: between the risk and where we sit on the risk 512 00:27:18,600 --> 00:27:20,720 Speaker 2: spectrum as well, because if you compare I don't think 513 00:27:20,720 --> 00:27:23,199 Speaker 2: comparing the European high old market to a lot of 514 00:27:24,320 --> 00:27:28,160 Speaker 2: sponsor direct lending deals is exactly comparable, only because when 515 00:27:28,160 --> 00:27:30,119 Speaker 2: you look at the high old market, it's seventy percent 516 00:27:30,720 --> 00:27:32,840 Speaker 2: double B. This is talking about the European HIGHERD markets. 517 00:27:32,840 --> 00:27:36,359 Speaker 2: It's seventy percent double B. I don't think, and obviously 518 00:27:36,359 --> 00:27:38,520 Speaker 2: they're not rated, but I don't think most of the 519 00:27:38,560 --> 00:27:41,160 Speaker 2: direct lending deals would fall into the double B category. 520 00:27:41,480 --> 00:27:44,040 Speaker 2: They're more akin probably to the leverage loan syndicated loan 521 00:27:44,080 --> 00:27:49,480 Speaker 2: market in the single BEE category, as like sponsor deals. 522 00:27:50,000 --> 00:27:53,080 Speaker 2: So again comparing you need to make sure you're comparing 523 00:27:53,160 --> 00:27:54,960 Speaker 2: apples with apples. But I think the one thing we 524 00:27:55,000 --> 00:27:57,560 Speaker 2: want to be able to do is provide capital wherever 525 00:27:57,600 --> 00:28:01,320 Speaker 2: it's needed and in whatever form it's needed. And I've 526 00:28:01,359 --> 00:28:04,720 Speaker 2: no doubt in the future these three markets will coexist 527 00:28:04,760 --> 00:28:06,480 Speaker 2: as they do at the moment quite comfortably. 528 00:28:08,840 --> 00:28:12,560 Speaker 3: So you know, we've got this relatively benign and market environment, 529 00:28:12,760 --> 00:28:16,639 Speaker 3: and companies have new ways of financing themselves, you know, 530 00:28:16,680 --> 00:28:19,000 Speaker 3: often with the well spreads have come done quite a 531 00:28:19,000 --> 00:28:22,320 Speaker 3: bit this year. Do you see this, you know, as 532 00:28:22,359 --> 00:28:24,840 Speaker 3: the makings of a new wave of M and A 533 00:28:25,080 --> 00:28:28,520 Speaker 3: or LBOs coming to Europe and when do you think 534 00:28:28,560 --> 00:28:30,480 Speaker 3: we could see a pickup on that side. 535 00:28:32,200 --> 00:28:34,359 Speaker 2: Well, we hope, we hope to see a pick up 536 00:28:34,359 --> 00:28:37,400 Speaker 2: by now already, I think, but it's been a little 537 00:28:37,400 --> 00:28:38,880 Speaker 2: bit delayed, and I suspect it's going to be a 538 00:28:38,920 --> 00:28:41,320 Speaker 2: little bit delayed a little bit longer because really, when 539 00:28:42,720 --> 00:28:46,800 Speaker 2: I think when we talk to banks about their pipeline, 540 00:28:46,880 --> 00:28:49,400 Speaker 2: we talk about, particularly the M and A pipeline, I 541 00:28:49,400 --> 00:28:52,480 Speaker 2: think most deals take around, you know, at least minimum 542 00:28:52,480 --> 00:28:54,920 Speaker 2: three months, but more likely six months to materialize, and 543 00:28:54,920 --> 00:28:56,520 Speaker 2: I think we're still going to be seeing that the 544 00:28:56,560 --> 00:28:59,440 Speaker 2: pipeline is a little bit bear for the rest of 545 00:28:59,480 --> 00:29:02,640 Speaker 2: the year, which I think provide a very supportive backdrop 546 00:29:02,800 --> 00:29:05,480 Speaker 2: or spreads. Still, I think we're still going to see 547 00:29:05,480 --> 00:29:09,880 Speaker 2: these strong technicals and the market's ability. We're going to 548 00:29:09,880 --> 00:29:13,600 Speaker 2: see volatility, no doubt in terms of the headline news, 549 00:29:13,640 --> 00:29:15,280 Speaker 2: and we've just seen a little bit of about it 550 00:29:15,320 --> 00:29:18,600 Speaker 2: with the French elections, but the market seems to be 551 00:29:18,640 --> 00:29:20,880 Speaker 2: able to shrug it off quite easily, and I think 552 00:29:20,880 --> 00:29:23,840 Speaker 2: that will continue while this technical demands taste strong and 553 00:29:23,880 --> 00:29:28,320 Speaker 2: we don't have enough supply in the market, and I 554 00:29:28,360 --> 00:29:31,320 Speaker 2: don't think we can really, although we're seeing some I 555 00:29:31,320 --> 00:29:33,960 Speaker 2: think we are seeing some green shoots of recovery in 556 00:29:34,120 --> 00:29:35,640 Speaker 2: M and A, but I think that's mostly in the 557 00:29:35,680 --> 00:29:39,200 Speaker 2: corporate area as opposed to the LBO area. But I 558 00:29:39,240 --> 00:29:42,360 Speaker 2: also think that there are private equity companies that are 559 00:29:42,400 --> 00:29:45,360 Speaker 2: more keen now to make sure they are making some 560 00:29:45,400 --> 00:29:47,840 Speaker 2: exits because I think exits have been a difficult thing 561 00:29:47,880 --> 00:29:51,200 Speaker 2: and they need to return some capital to investors now. 562 00:29:52,640 --> 00:29:54,640 Speaker 2: So I think there is some pressure building from that 563 00:29:54,680 --> 00:29:57,239 Speaker 2: point of view, but I'm sure again they'll be doing 564 00:29:57,280 --> 00:29:59,800 Speaker 2: it at the right valuations when they when they when 565 00:29:59,800 --> 00:30:03,440 Speaker 2: they see fit. But I don't think the pipeline is 566 00:30:04,600 --> 00:30:06,520 Speaker 2: strong for the rest of the year, and so I 567 00:30:06,560 --> 00:30:09,000 Speaker 2: don't see you or see a huge pickup. 568 00:30:09,640 --> 00:30:12,720 Speaker 1: Give the new deal given those strong technicals. How tight 569 00:30:12,880 --> 00:30:13,560 Speaker 1: could spreads go? 570 00:30:13,720 --> 00:30:19,520 Speaker 2: James, Well, we're if you depending on metrics, at the moment, 571 00:30:19,520 --> 00:30:22,880 Speaker 2: we're really quite close to all time tights. It is 572 00:30:22,920 --> 00:30:28,000 Speaker 2: certainly post financial crisis. We're not actually especially like for like, 573 00:30:28,040 --> 00:30:31,640 Speaker 2: if you look credit rating adjusted, we're actually not at 574 00:30:31,680 --> 00:30:34,480 Speaker 2: the tights of the European market, at least compared to 575 00:30:34,800 --> 00:30:37,480 Speaker 2: two thousand and seven when it reached its tightest I'm 576 00:30:37,520 --> 00:30:42,280 Speaker 2: not saying we'll necessarily get there, but I think it 577 00:30:42,320 --> 00:30:46,240 Speaker 2: would be. I think where we are now is we're 578 00:30:46,480 --> 00:30:49,040 Speaker 2: effectively range bound. It doesn't mean we can't go a 579 00:30:49,080 --> 00:30:52,040 Speaker 2: little bit tighter from here, But then I don't see 580 00:30:52,080 --> 00:30:54,520 Speaker 2: us going, you know, much more than maybe ten or 581 00:30:54,520 --> 00:30:57,000 Speaker 2: twenty basis points tighter from here. I mean, that'd still be, 582 00:30:57,520 --> 00:31:01,880 Speaker 2: you know, a relatively material move in this market. And 583 00:31:01,920 --> 00:31:03,960 Speaker 2: then I suspect would see, you know, if we see 584 00:31:03,960 --> 00:31:05,760 Speaker 2: a wave of supplies we did in June, we'll see 585 00:31:05,760 --> 00:31:07,920 Speaker 2: the market going a little bit wider. Again, it's a 586 00:31:08,040 --> 00:31:09,160 Speaker 2: very strong market. 587 00:31:08,920 --> 00:31:11,880 Speaker 1: At the moment, But is there a relative value Europe 588 00:31:12,040 --> 00:31:14,600 Speaker 1: versus US still? I mean, it sounds like it based 589 00:31:14,600 --> 00:31:16,760 Speaker 1: on some of the stuff you're saying, particularly on recoveries 590 00:31:16,800 --> 00:31:18,400 Speaker 1: which are much lower in the US. 591 00:31:20,720 --> 00:31:22,200 Speaker 2: They're much lower in the US, but the default rate 592 00:31:22,240 --> 00:31:24,000 Speaker 2: is actually lower in the US at the moment as well. 593 00:31:25,640 --> 00:31:28,520 Speaker 2: So I think at the moment, we really see this 594 00:31:28,600 --> 00:31:32,200 Speaker 2: a game or a question of really just making the 595 00:31:32,280 --> 00:31:35,760 Speaker 2: right credit selection. I don't think there's a clear advantage 596 00:31:35,760 --> 00:31:38,480 Speaker 2: of one market over the other at the moment. I 597 00:31:38,480 --> 00:31:43,600 Speaker 2: think what we we see if you but having said that, 598 00:31:43,800 --> 00:31:46,040 Speaker 2: you were to look at the technicals, I think they 599 00:31:46,200 --> 00:31:49,640 Speaker 2: slightly favor at the moment the European markets. And there's 600 00:31:50,560 --> 00:31:53,360 Speaker 2: a reason why I say that is actually, although I 601 00:31:53,360 --> 00:31:57,880 Speaker 2: don't think we've seen anywhere near this whole scale reallocation 602 00:31:58,000 --> 00:32:00,480 Speaker 2: away from the US market that perhaps people we're talking 603 00:32:00,560 --> 00:32:03,000 Speaker 2: about in April or May, I think, on the margins, 604 00:32:03,040 --> 00:32:06,600 Speaker 2: we have seen people quite keen to diversify a little 605 00:32:06,600 --> 00:32:10,600 Speaker 2: bit and I think Europe has been a beneficiary of that, 606 00:32:12,040 --> 00:32:14,520 Speaker 2: and I think other markets, such as say emerging market 607 00:32:14,560 --> 00:32:17,080 Speaker 2: debt or something like that, has also been a beneficiary 608 00:32:17,120 --> 00:32:19,720 Speaker 2: of that as well, as people just look to diversify 609 00:32:19,800 --> 00:32:22,720 Speaker 2: risk a little bit away from the US. But again, 610 00:32:23,720 --> 00:32:26,000 Speaker 2: the majority of assets will still be in the US. 611 00:32:26,840 --> 00:32:29,760 Speaker 2: It's on the margin. And we've not only seen that, 612 00:32:29,880 --> 00:32:34,360 Speaker 2: I think from European investors going back to home, I guess, 613 00:32:34,800 --> 00:32:37,160 Speaker 2: but also I think we've seen it from investors who 614 00:32:37,200 --> 00:32:40,320 Speaker 2: are traditionally very US centric investors, say for example in 615 00:32:40,360 --> 00:32:42,960 Speaker 2: the Middle East or perhaps in Asia. They've also, on 616 00:32:43,000 --> 00:32:46,760 Speaker 2: the margin, have slightly reduced their exposure to the US 617 00:32:46,800 --> 00:32:49,160 Speaker 2: and that's really been to the benefit of Europe. And 618 00:32:49,160 --> 00:32:52,000 Speaker 2: when you've seen even a small allocation away from the US, 619 00:32:52,440 --> 00:32:54,680 Speaker 2: because the European markets are that much smaller. It actually 620 00:32:54,680 --> 00:32:56,880 Speaker 2: makes quite a lot of difference to the European market. 621 00:32:57,520 --> 00:32:59,880 Speaker 1: That the spread's going further lower. And also, you know 622 00:33:00,080 --> 00:33:02,680 Speaker 1: there is easing going on around the world. You mentioned 623 00:33:02,720 --> 00:33:05,239 Speaker 1: earlier a nice yield when if you've got to put 624 00:33:05,240 --> 00:33:07,240 Speaker 1: a number on that, but also, I mean, how much 625 00:33:07,320 --> 00:33:14,120 Speaker 1: of that nice yield remains in those tightening and easing dynamics. 626 00:33:14,320 --> 00:33:17,120 Speaker 2: People have been quite happy to have they've been sitting 627 00:33:17,120 --> 00:33:20,360 Speaker 2: in cash and cash reserves or cash accounts, and cash 628 00:33:20,360 --> 00:33:23,040 Speaker 2: deposits have really been quite high across Europe, and I 629 00:33:23,040 --> 00:33:27,840 Speaker 2: think what we're increasingly seeing is people looking at alternative 630 00:33:28,400 --> 00:33:30,960 Speaker 2: ways to get income, and I think that's going to 631 00:33:30,960 --> 00:33:34,479 Speaker 2: continue driving the markets. And nowhere is that more evident 632 00:33:34,680 --> 00:33:41,360 Speaker 2: than we've seen in things like fixed maturity products, where 633 00:33:41,520 --> 00:33:47,760 Speaker 2: people have been transferring from their cash deposits into either 634 00:33:47,760 --> 00:33:53,000 Speaker 2: investment grade corporate bonds or high year corporate bonds to 635 00:33:53,040 --> 00:33:55,920 Speaker 2: supplement that income. That has been reducing this interest rates. 636 00:33:55,920 --> 00:33:59,200 Speaker 2: So the answer is, I think yield from that point 637 00:33:59,240 --> 00:34:03,120 Speaker 2: of view, is still attractive to people because it's where 638 00:34:03,400 --> 00:34:06,600 Speaker 2: and it's still very attractive compared to history as well. 639 00:34:06,960 --> 00:34:08,480 Speaker 2: I mean, if you look over the last ten or 640 00:34:08,480 --> 00:34:10,759 Speaker 2: fifteen years, really we haven't seen these yields at all 641 00:34:11,080 --> 00:34:14,920 Speaker 2: during this period. So and I think memories, you know, 642 00:34:15,239 --> 00:34:17,600 Speaker 2: going back to when interest rates were much higher, you know, 643 00:34:17,640 --> 00:34:20,960 Speaker 2: many decades ago, have faded and actually people still regard 644 00:34:20,960 --> 00:34:23,200 Speaker 2: these yields as attractive and places they want to put 645 00:34:23,239 --> 00:34:27,400 Speaker 2: their cash. And also it goes I mean, just as 646 00:34:27,440 --> 00:34:31,000 Speaker 2: another I think that the FMP market is really also 647 00:34:32,000 --> 00:34:35,839 Speaker 2: helping in some ways to stabilize and you know, people 648 00:34:35,920 --> 00:34:37,839 Speaker 2: in regard it as a good thing or a bad thing, 649 00:34:37,880 --> 00:34:41,400 Speaker 2: but actually once the money goes into these F and 650 00:34:41,440 --> 00:34:44,120 Speaker 2: P funds that have maturities of say three or four years, 651 00:34:44,480 --> 00:34:48,400 Speaker 2: it's almost locked up, and it's providing to some extensibility 652 00:34:48,480 --> 00:34:50,840 Speaker 2: to both the investment rate and the high yield markets, 653 00:34:51,160 --> 00:34:54,840 Speaker 2: especially in these shorter data points. And again it was 654 00:34:54,960 --> 00:34:59,520 Speaker 2: very evident during April selloff, when we had Liberation Day, 655 00:35:00,040 --> 00:35:02,359 Speaker 2: that we saw that there was very very impact. There 656 00:35:02,360 --> 00:35:05,680 Speaker 2: were still buyers of all of these short dated bonds, 657 00:35:05,719 --> 00:35:08,480 Speaker 2: and we believe that a lot of that demand is 658 00:35:08,480 --> 00:35:11,560 Speaker 2: from fixed maturity products and we've seen that demand continue 659 00:35:11,840 --> 00:35:14,239 Speaker 2: and it provides a real stability and anchoring to that 660 00:35:14,760 --> 00:35:15,880 Speaker 2: short end of the market. 661 00:35:17,040 --> 00:35:20,680 Speaker 1: Sorry, fixed maturity products the FMP you were talking about. 662 00:35:20,680 --> 00:35:22,600 Speaker 1: That's something you you have in Europe that we don't 663 00:35:22,600 --> 00:35:24,360 Speaker 1: have here. So I'm just wondering could you just expand 664 00:35:24,360 --> 00:35:25,400 Speaker 1: a little bit on what they are. 665 00:35:26,120 --> 00:35:31,440 Speaker 2: Yeah, sure, it's they have a maturity data effectively, so 666 00:35:31,920 --> 00:35:35,160 Speaker 2: it's usually between three and four years, and so people 667 00:35:35,200 --> 00:35:39,279 Speaker 2: will transfer there into one of these funds and it 668 00:35:39,320 --> 00:35:41,719 Speaker 2: will have a yield headline yield that you get at 669 00:35:41,719 --> 00:35:45,160 Speaker 2: the beginning of when you invest in the money, and 670 00:35:45,200 --> 00:35:48,319 Speaker 2: then in three or four years that year should have 671 00:35:48,560 --> 00:35:52,080 Speaker 2: materialized and you can get your money back and you 672 00:35:52,120 --> 00:35:55,480 Speaker 2: will have got whether it's four or five six percent yield, 673 00:35:55,480 --> 00:35:57,640 Speaker 2: whatever your risk tolerance was when you went into there. 674 00:35:58,080 --> 00:36:01,560 Speaker 2: And these are very attractive products to much of the 675 00:36:01,600 --> 00:36:03,600 Speaker 2: retail market across Europe. 676 00:36:05,400 --> 00:36:08,920 Speaker 1: And they are significantly active in the corporate debt market 677 00:36:08,960 --> 00:36:12,799 Speaker 1: to the extent that they're actually affecting risk pricing or 678 00:36:12,800 --> 00:36:15,719 Speaker 1: demand or how what's the bigger impact. 679 00:36:16,120 --> 00:36:19,919 Speaker 2: I would say both. I mean anything that you can 680 00:36:20,200 --> 00:36:23,919 Speaker 2: you can often even see that where a bond has 681 00:36:24,880 --> 00:36:27,440 Speaker 2: a three and a half or four year maturity, as 682 00:36:27,480 --> 00:36:29,680 Speaker 2: soon as it falls into the range of the majority 683 00:36:29,680 --> 00:36:32,640 Speaker 2: of fmps, it's spread my attactically tighten. It's your go 684 00:36:32,719 --> 00:36:36,200 Speaker 2: down because the demand for the is so significant. I 685 00:36:36,239 --> 00:36:39,040 Speaker 2: mean there are billions, there is billions of euros that 686 00:36:39,080 --> 00:36:42,360 Speaker 2: has flowed into these products over the last six months. 687 00:36:43,040 --> 00:36:45,320 Speaker 1: I want to ask you, James about ESG because you 688 00:36:45,440 --> 00:36:47,520 Speaker 1: brought it up earlier and it is something that is 689 00:36:47,560 --> 00:36:49,719 Speaker 1: on our mind. This week Climate Week in New York, 690 00:36:50,840 --> 00:36:53,400 Speaker 1: Black Rot was though among a group of money managers 691 00:36:53,400 --> 00:36:56,160 Speaker 1: to have lost credit mandates from one of Europe's largest 692 00:36:56,160 --> 00:36:59,000 Speaker 1: pension funds, and there was a, you know, an e 693 00:36:59,160 --> 00:37:02,919 Speaker 1: SG element to that. I know it's it's a quite 694 00:37:02,920 --> 00:37:05,719 Speaker 1: a controversial matter in the US and it's more embraced 695 00:37:05,920 --> 00:37:08,720 Speaker 1: in Europe. But what's your view generally on ESG investing 696 00:37:08,760 --> 00:37:09,640 Speaker 1: when it comes to credit. 697 00:37:12,120 --> 00:37:14,479 Speaker 2: I think the thing about ESG is it's actually part 698 00:37:14,560 --> 00:37:18,279 Speaker 2: of our risk control anyway, It's always been part of 699 00:37:18,320 --> 00:37:23,919 Speaker 2: our process if you think about the elements that lead 700 00:37:24,280 --> 00:37:29,279 Speaker 2: to a good credit selection. And this is before this 701 00:37:29,320 --> 00:37:33,799 Speaker 2: is not specific ESG funds. This is just consideration of 702 00:37:33,840 --> 00:37:36,920 Speaker 2: the risk factors that affect a company. And if you 703 00:37:37,000 --> 00:37:44,440 Speaker 2: consider there that you know, the the environmental impact that 704 00:37:44,520 --> 00:37:48,440 Speaker 2: a company has in terms of it's if it gets 705 00:37:48,440 --> 00:37:55,480 Speaker 2: into issues, for example, it's pollution or something like that. 706 00:37:55,480 --> 00:37:59,080 Speaker 2: Then actually you always need to consider that because it's 707 00:37:59,160 --> 00:38:02,640 Speaker 2: part of the investment that a company needs to make 708 00:38:02,840 --> 00:38:05,359 Speaker 2: to make sure that it's actually complying with rules. So 709 00:38:05,360 --> 00:38:06,920 Speaker 2: I think from that point of view we've always looked 710 00:38:06,920 --> 00:38:09,200 Speaker 2: at it. You don't want companies to end up with 711 00:38:10,040 --> 00:38:13,319 Speaker 2: liabilities because they're obviously going to be credit negative, So 712 00:38:13,400 --> 00:38:15,399 Speaker 2: from that point of view, we've always looked at it. 713 00:38:15,840 --> 00:38:19,440 Speaker 2: I think in terms of social branding and how important 714 00:38:19,560 --> 00:38:21,920 Speaker 2: it is to make sure that you're best in class 715 00:38:21,960 --> 00:38:23,960 Speaker 2: from that point of view, in terms of how you 716 00:38:23,960 --> 00:38:27,160 Speaker 2: treat your employees or anything like that. Then actually, I 717 00:38:27,200 --> 00:38:30,279 Speaker 2: think we have always looked into that as well, because 718 00:38:30,280 --> 00:38:32,960 Speaker 2: it can again affect the value and the risk of 719 00:38:33,000 --> 00:38:35,680 Speaker 2: a company from that point of view. And again governance, 720 00:38:36,560 --> 00:38:38,920 Speaker 2: I mean goes without saying. You really want strong governance 721 00:38:38,920 --> 00:38:41,880 Speaker 2: within a company to make sure it's well run, well controlled. 722 00:38:42,320 --> 00:38:44,799 Speaker 2: One of the biggest reasons for loss, I would say 723 00:38:44,800 --> 00:38:48,480 Speaker 2: amongst companies over the history that I've been looking at 724 00:38:48,480 --> 00:38:52,000 Speaker 2: these credit markets is often because of poor governance, because 725 00:38:52,000 --> 00:38:56,239 Speaker 2: of irregularities that occur. So any company that has good 726 00:38:56,320 --> 00:38:58,719 Speaker 2: governance is obviously going to or not obviously, but is 727 00:38:58,800 --> 00:39:02,840 Speaker 2: usually a good credit its investment as well. So I 728 00:39:02,880 --> 00:39:05,560 Speaker 2: don't think it's a new thing that we've looked at 729 00:39:05,960 --> 00:39:08,520 Speaker 2: from that point of view. It's always something that goes 730 00:39:08,560 --> 00:39:11,560 Speaker 2: to the risk of a company, something that has always 731 00:39:11,560 --> 00:39:13,320 Speaker 2: been part of our credit process. 732 00:39:14,000 --> 00:39:15,960 Speaker 1: So in terms of everything you're looking at right now, Jane, 733 00:39:16,040 --> 00:39:18,520 Speaker 1: what's the what's the big opportunity, where's the best relative 734 00:39:18,600 --> 00:39:21,400 Speaker 1: value let's say for the next six to twelve months 735 00:39:21,480 --> 00:39:23,239 Speaker 1: in your you know, in your view. 736 00:39:25,000 --> 00:39:26,520 Speaker 2: So I think when you look at relative value, as 737 00:39:26,560 --> 00:39:30,600 Speaker 2: long as I think I mentioned them earlier, actually, I 738 00:39:30,640 --> 00:39:33,239 Speaker 2: think the probably COLO tranchers are probably one of the 739 00:39:33,239 --> 00:39:37,240 Speaker 2: best relative value picked within the credit markets at the moment. 740 00:39:37,239 --> 00:39:38,960 Speaker 2: And the beauty of them as well as that you 741 00:39:39,000 --> 00:39:41,319 Speaker 2: can pick your risk tolerance as well. You can go 742 00:39:41,360 --> 00:39:44,080 Speaker 2: from Triple A all the way down potentially to Colo 743 00:39:44,080 --> 00:39:45,759 Speaker 2: equity as well if you want, and you can get 744 00:39:46,600 --> 00:39:49,919 Speaker 2: the potential return that you want. And on almost every 745 00:39:50,000 --> 00:39:53,920 Speaker 2: chrance you look at in terms of it spread, it 746 00:39:54,000 --> 00:39:56,880 Speaker 2: looked well remunerated. So particularly you know, you look at 747 00:39:56,880 --> 00:39:59,759 Speaker 2: Triple A's you're coming at one twenty five, one thirty, 748 00:40:01,680 --> 00:40:05,400 Speaker 2: they look extremely attractive. From that point of view similarly 749 00:40:05,400 --> 00:40:08,000 Speaker 2: to the investment grade tranches as well, and if your 750 00:40:08,000 --> 00:40:12,000 Speaker 2: tolerance is higher than you know, equity in the low 751 00:40:12,080 --> 00:40:15,760 Speaker 2: to mid teams is also a pretty attractive investment as well. 752 00:40:15,920 --> 00:40:19,600 Speaker 2: And I think that much of the would i say, 753 00:40:19,640 --> 00:40:23,040 Speaker 2: sort of stigma of clos that perhaps existed post financial 754 00:40:23,080 --> 00:40:26,000 Speaker 2: crisises or less past now and we've seen that CLO 755 00:40:26,120 --> 00:40:29,320 Speaker 2: two point nor it is really a very good structure 756 00:40:29,680 --> 00:40:32,440 Speaker 2: and something where really the chance of credit loss, especially 757 00:40:32,480 --> 00:40:35,680 Speaker 2: in these higher rated transes, is very very low. 758 00:40:36,760 --> 00:40:39,799 Speaker 1: But given all that we're discussing about the stresses in 759 00:40:39,840 --> 00:40:42,799 Speaker 1: the leverage finance market, you know there's there's loans. You 760 00:40:42,840 --> 00:40:44,239 Speaker 1: know that there aren't that many of them, there's a 761 00:40:44,280 --> 00:40:46,480 Speaker 1: lot of demand for them that the pricing just gets squeezed, 762 00:40:46,480 --> 00:40:49,600 Speaker 1: they get refinanced all the time that the arbitrage for 763 00:40:49,680 --> 00:40:52,920 Speaker 1: clos is being diminished. You're not worry generally about sort 764 00:40:52,920 --> 00:40:56,600 Speaker 1: of risk brewing technical risk in the clos given how 765 00:40:56,760 --> 00:40:58,720 Speaker 1: tight the market is for leverage loans. 766 00:41:00,160 --> 00:41:02,520 Speaker 2: I mean, clearly there's a there's an element as well 767 00:41:02,520 --> 00:41:06,440 Speaker 2: which you need to pick the right managers because the 768 00:41:06,840 --> 00:41:09,719 Speaker 2: loans that get selected to be in the closlore on 769 00:41:09,719 --> 00:41:12,480 Speaker 2: the credit skill of those managers, and the managers that 770 00:41:12,560 --> 00:41:15,560 Speaker 2: avoid the problems and the more avoid the defaults will 771 00:41:15,760 --> 00:41:20,000 Speaker 2: I think will have very good performing clos and we're 772 00:41:20,080 --> 00:41:22,240 Speaker 2: very comfortable with that from that point of view. But clearly, 773 00:41:22,600 --> 00:41:24,680 Speaker 2: when we're buying clo trans is one of the things 774 00:41:24,719 --> 00:41:27,600 Speaker 2: that we are looking at is the style and quality 775 00:41:27,600 --> 00:41:31,279 Speaker 2: of the manager and their history of credit selections, their team, 776 00:41:31,320 --> 00:41:33,040 Speaker 2: all the things that you look at to make sure 777 00:41:33,040 --> 00:41:36,360 Speaker 2: that you're selecting managers where you think that their chances 778 00:41:36,360 --> 00:41:40,000 Speaker 2: of credit loss within their portfolios are minimal. And of 779 00:41:40,000 --> 00:41:42,840 Speaker 2: course there's you know that these clos are based on 780 00:41:43,320 --> 00:41:45,640 Speaker 2: really a very diverse portfolio, and you know it's one 781 00:41:45,680 --> 00:41:49,200 Speaker 2: of the criteria that clos are judged on is the 782 00:41:49,200 --> 00:41:50,840 Speaker 2: diversity of the underlying holders. 783 00:41:51,280 --> 00:41:54,279 Speaker 1: And you're buying European clos from Triple aid all the 784 00:41:54,320 --> 00:41:55,799 Speaker 1: way down to the extity trund. 785 00:41:56,560 --> 00:41:59,440 Speaker 2: Yes, yes, or we have the we have funds and 786 00:41:59,480 --> 00:42:00,319 Speaker 2: ability to do that. 787 00:42:01,160 --> 00:42:04,440 Speaker 1: Would they also buy private credit helos. 788 00:42:05,640 --> 00:42:08,439 Speaker 2: That's not something that fits within the mandates of those 789 00:42:08,520 --> 00:42:10,480 Speaker 2: But if we had a mandate that was able to 790 00:42:10,520 --> 00:42:12,480 Speaker 2: put these end then I'm sure we'd look at those 791 00:42:12,520 --> 00:42:12,839 Speaker 2: as well. 792 00:42:13,960 --> 00:42:15,880 Speaker 1: Great stuff. James Turner from black Rock. It's been a 793 00:42:15,880 --> 00:42:18,200 Speaker 1: pleasure having you on the Credit Edge. Many thanks, no, 794 00:42:18,320 --> 00:42:21,680 Speaker 1: thank you very much. And to Tim Riminton with Bloomberg Intelligence, 795 00:42:21,719 --> 00:42:23,000 Speaker 1: thank you so much for joining us today. 796 00:42:23,520 --> 00:42:24,720 Speaker 3: Thank you for having me James. 797 00:42:25,440 --> 00:42:27,440 Speaker 1: Even more analysis read all of Tim's great work on 798 00:42:27,440 --> 00:42:30,400 Speaker 1: the Bloomberg Terminal. Bloomberg Intelligence as part of our Search 799 00:42:30,400 --> 00:42:33,640 Speaker 1: department with five hundred analysts and strategists working across all markets. 800 00:42:34,080 --> 00:42:36,600 Speaker 1: Coverage includes over two thousand equities and credits and outlooks 801 00:42:36,600 --> 00:42:39,160 Speaker 1: on more than ninety industries and one hundred market industries, 802 00:42:39,239 --> 00:42:43,040 Speaker 1: currencies and commodities. Please do subscribe to the Credit Edge 803 00:42:43,080 --> 00:42:46,160 Speaker 1: wherever you get your podcasts. We're on Apple, Spotify, and 804 00:42:46,200 --> 00:42:49,040 Speaker 1: all other good podcast providers, including the Bloomberg Terminal at 805 00:42:49,120 --> 00:42:52,360 Speaker 1: b pod Go. Give us a review, Tell your friends. 806 00:42:52,560 --> 00:42:56,640 Speaker 1: We'll email me directly at Jcromby eight at Bloomberg dot net. 807 00:42:57,239 --> 00:42:59,359 Speaker 1: I'm James Cromby. It's been a pleasure having you join 808 00:42:59,440 --> 00:43:05,960 Speaker 1: us again this week on the Credit Edge.