Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Camille McLeod Salmon
Speaker 1: at Fidelity International in London. How are you, Camille?
Speaker 2: Very well, Thank you.
Speaker 1: Thank you so much for joining us today. We're excited
Speaker 1: to dig into your market views and to get your outlook.
Speaker 1: We're also delighted to welcome back Bloomberg's very own Lisa Lee,
Speaker 1: who covers credit markets from London. Great to see you again, Lisa.
Speaker 3: Great to be here again, James.
Speaker 1: And from Bloomberg Intelligence. Excellent to see Aidan Cheslin. Welcome back, Aidans.
Speaker 4: Great.
Speaker 1: So let's start with you, Camille. It's great to see
Speaker 1: you on the Credit Edge. I know you want to
Speaker 1: talk about collateralized loan obligations. We'll get into that, but
Speaker 1: let's start with a big picture. When we talk to
Speaker 1: global portfolio managers at the moment, they do like the
Speaker 1: sound of Europe for the potential diversification and also because
Speaker 1: it looks relatively cheap. Of course, they skew to the
Speaker 1: bigger US market, and as we've discussed recently on this
Speaker 1: show it's getting expensive in the US. There's a lot
Speaker 1: of demand for not a lot of supply, so investors
Speaker 1: are definitely looking for options elsewhere, but maybe Europe's cheap
Speaker 1: for a reason. These economies seem more challenged in the US,
Speaker 1: where we may be headed for a soft landing rather
Speaker 1: than a recession, although a lot of the policy easing
Speaker 1: bets are being unwhelmed as we speak, because the data
Speaker 1: on the economy just keeps coming in strong. So you know,
Speaker 1: Europe in relative terms seem to have a lot of issues,
Speaker 1: including inflation, which is tying policy makers hands when it
Speaker 1: comes to stimulus. But what is the macro outlook from
Speaker 1: where you sit? Camille? Am I being too pessimistic?
Speaker 2: So I think let's start with kind of outlook for
Speaker 2: Europe and kind of what's been happening. So if you
Speaker 2: look at if you look at one of the big
Speaker 2: mowers in the market, it's the fact that we it's
Speaker 2: clear that we have reached kind of terminal rates and
Speaker 2: that we expect a decline this year. And we can
Speaker 2: talk about May versus March. I think there's probably people
Speaker 2: more eloquent and educated about that than I. And we
Speaker 2: can also talk about how many rate cuts four versus five,
Speaker 2: But it's clear that there there will be rate cuts,
Speaker 2: and that impacts our market in a number of ways.
Speaker 2: So firstly impacts the direct funding for our for our issuers.
Speaker 2: And then so as rates rise, that means that the
Speaker 2: cost of borrowing, sorry, as the rates decline, the cost
Speaker 2: of borrowing also declined. So that's a helpful tail wind.
Speaker 2: So what has been aheadwind now tearing into tailwind. We
Speaker 2: don't expect rates to reach zero percent, but clearly we've
Speaker 2: already seen since the end of last year that those
Speaker 2: interest costs have come down. And then leading on to that,
Speaker 2: it's if you look at you we have a maturity
Speaker 2: all that we're approaching. So if you look at maturities
Speaker 2: in twenty five, twenty six, and twenty seven in credit,
Speaker 2: we have two hundred and thirty six billion of maturities
Speaker 2: that we need to amend or deal with, and that
Speaker 2: as a curve is lower and those funding costs are cheaper.
Speaker 2: That actually means those A and e's are easier to
Speaker 2: get down and are more affordable, and that stretch that
Speaker 2: you have to make is less. And then it also
Speaker 2: impacts M and A. So when we look at the
Speaker 2: m and A environment. Actually, the bid off for spread
Speaker 2: that had existed is largely, in my opinion, a function
Speaker 2: of the rate problem. So if you're a seller and
Speaker 2: you expect rates to decline, then you're better off waiting
Speaker 2: and putting off that cell decision. And if you're a buyer,
Speaker 2: you can't really price in rate cuts. And I think
Speaker 2: that certainty that we're getting is allowing that bid ask
Speaker 2: spread hopefully to decline, plus some other factors that are
Speaker 2: happening in the sponsored space as well. And then also,
Speaker 2: like the US, lower rates has also meant that the
Speaker 2: search for meal means that we've seen tightening in the
Speaker 2: European market as well in terms of spread. So we've
Speaker 2: seen the wave of repricings that have come across the US,
Speaker 2: but we still think it looks relatively attractive. So I
Speaker 2: think for a number of reasons, Europe's an interesting diversification play,
Speaker 2: and that rate shift continues to make it an interesting
Speaker 2: diversit patient pay and relative it looks attractive. The US
Speaker 2: is large and liquid, but I think if you compare
Speaker 2: triple c's in each market, you've got nine percent triple
Speaker 2: c's in the US versus three percent in Europe, and
Speaker 2: also default rates are expected to be higher in the
Speaker 2: US than in U Europe. And I would also say
Speaker 2: that recovery rates give the creditor on creditor violence and
Speaker 2: the lost bitigation transactions that you're seeing in the US
Speaker 2: that haven't yet transported to Europe. And I think the
Speaker 2: clubbiness of the European market holds that by a little bit,
Speaker 2: although that's something that we continue to focus on. Makes
Speaker 2: europe An important diversification or important diversify if you're able
Speaker 2: to invest globally.
Speaker 1: So there's a lot to unpack there.
Speaker 4: Community.
Speaker 1: You've thrown us a lot of things. I just kind
Speaker 1: of wanted to back up a bit in terms of
Speaker 1: obviously the rates coming down are good for the borrowers
Speaker 1: who have been kind of struggling with with you know,
Speaker 1: the very big jump in rates, so their funding costs
Speaker 1: shot up at the same time the economy has kind
Speaker 1: of slowed down, their earnings suffered, and you know, fundamentally
Speaker 1: that's good. And as you say, for deal makers, it's good,
Speaker 1: But what about for the investors, because you know, they
Speaker 1: got into floating rate because there was a lot of
Speaker 1: side in that. Now that that whole tray is reversing,
Speaker 1: isn't it?
Speaker 2: So we still we still think that rates are not
Speaker 2: going to go back to zero, So in terms of
Speaker 2: current income in in European loans, it's still attractive. In loans.
Speaker 2: You also benefit from an inverted CUB. So if you
Speaker 2: look at the curve, European loans are generally based off
Speaker 2: three months of your arrival, so you're getting like one
Speaker 2: point three point three percent above where you are if
Speaker 2: you look at the five year point on the curve,
Speaker 2: so you're still getting a little bit of juice priced
Speaker 2: into the loan market. We are seeing repricing, so you're
Speaker 2: seeing loans that kind of were four seventy five come
Speaker 2: at kind of four hundred the spicey of those or
Speaker 2: a better quality of those pricing at three seventy five.
Speaker 2: But if you look at new issue in the loan space,
Speaker 2: you're still at kind of plus fourty five four fifty
Speaker 2: for B two, and I think you're shaking out four
Speaker 2: fifty four to seventy five plus your arrival for a
Speaker 2: B three, which I think for for clean new issue
Speaker 2: looks pretty interesting. So I still think from a carry perspective,
Speaker 2: loans continue to be offer interesting value Camille.
Speaker 3: From your seat, you see quite a huge array of borrowers.
Speaker 3: And when you look at them, are there margins still
Speaker 3: holding up or are you seeing a lag effect of
Speaker 3: central rate hikes and some margin compression and starting to
Speaker 3: see borrowers starting to wobble in terms of their earnings.
Speaker 2: It's a great question. So Fidelities just publish their global
Speaker 2: analyst survey and we have around twenty thousand meetings across equities,
Speaker 2: fixed income, and private credit each year with our companies,
Speaker 2: and we take time to aggregate and look at what
Speaker 2: our companies are telling us. So if you look at
Speaker 2: what our companies are telling us, they're saying that actually
Speaker 2: management teams are becoming more relaxed about inflation costs apart
Speaker 2: from labor. Labor continues to be the sticky element. Think
Speaker 2: in some sectors and some geographies that labour stickiness will continue,
Speaker 2: but actually labor costs outside of that actually starting to normalize.
Speaker 2: And for the first time since the pandemic, more of
Speaker 2: our analysts are saying, actually they think the costs for
Speaker 2: their borrowers or costs for issuers are declining more than increasing.
Speaker 3: And so when you look across all your borrowers One
Speaker 3: thing I learned about Europe is that the district and
Speaker 3: the countries really matter. Are you seeing any disparities and
Speaker 3: differences across borrowers from Germany versus Spain or in all
Speaker 3: the areas of Europe? Or is it sort of in
Speaker 3: March step as the economic forecast is changing.
Speaker 2: I mentioned labour costs being tighter in some areas, and
Speaker 2: that's one case that you can see if you go
Speaker 2: from geography to geophy. So if you look at healthcare,
Speaker 2: for example, that's one thing that's particularly sticky across across
Speaker 2: your So some of the sectors are still dealing with
Speaker 2: those higher wage costs. It's quite positive in terms of
Speaker 2: what I've been saying, And you mentioned the lagged impact
Speaker 2: on rates. One thing I would caveat is that even
Speaker 2: though the market's feeling quite buoyant at the moment and
Speaker 2: it's pising through two expected cuts, if you look at
Speaker 2: what our analysts are saying right now in terms of
Speaker 2: what we're experienced on the ground, the mood a little
Speaker 2: bit more somber. So forty eight percent of our analysts
Speaker 2: and the Global survey have said actually they feel like
Speaker 2: their industries are in a slowdown and for a very
Speaker 2: slim number actually in recession, and we've seen that for
Speaker 2: the chemicals industry, where we've had well over a year
Speaker 2: and a half of the stocking. You started to see
Speaker 2: it in building materials as well. And so each geography
Speaker 2: deals with different challenges. And I'm sure we're talking about later,
Speaker 2: but in your really idiosyncratic res is a key driver,
Speaker 2: and understanding different patterns and trends is really important too.
Speaker 1: What about the default rate, Camille, I mean, everyone was
Speaker 1: very fearful last year about a big spike in defaults
Speaker 1: in leverage finance, but particularly on the loan side, because
Speaker 1: the floating rate nature and because those brewers seem to
Speaker 1: be under more pressure. But it never happened, and if
Speaker 1: you bet against it you would have made a lot
Speaker 1: of money. Were we just kicking the can? Is it
Speaker 1: all going to show up this year? And you mentioned
Speaker 1: that massive maturity war? Is that the trigger for it?
Speaker 1: I mean, are you worried now about defaults?
Speaker 2: It speaks in part to your first question. So last
Speaker 2: year we were we were having questions about the transmission
Speaker 2: and mechanism in Europe clearly being more effective than in
Speaker 2: the US, and concerns about the European economy and what
Speaker 2: that means for loans, and loans returned thirteen and a
Speaker 2: half percent last year, So clearly I think the important
Speaker 2: economy is quite important. But on the loan side, what
Speaker 2: you really need to focus on is borrower's ability to
Speaker 2: repay or to service debt. And so when we looked
Speaker 2: at across our book, actually interest coverage ratios across our book,
Speaker 2: and I think that's probably quite reflective for the market
Speaker 2: as well. Eighty five percent of our issuers have greater
Speaker 2: than two times interest coverage, and that's because going into
Speaker 2: twenty two, actually cushions interest coverage ratio cushions were quite high.
Speaker 2: So we've seen them declining from twenty two to twenty
Speaker 2: three and our forecasts into twenty four, and actually our
Speaker 2: forecast was done at the back end of last year,
Speaker 2: so the alleviation and rates gives us a bit more
Speaker 2: cushion over our forecasts than we had anticipated. So actually,
Speaker 2: in terms of affordability, our issuers are able to afford
Speaker 2: higher rates, and even if you look at the fifteen percent,
Speaker 2: there are sub two times. Some of those deals were
Speaker 2: the hung LBO deals that were coming into twenty two,
Speaker 2: where we know that they have higher interest costs such
Speaker 2: as six tricks, but we think the company's defensive enough
Speaker 2: that that could service a higher level of interest. So
Speaker 2: in terms of in terms of internal liquidity, that looks good. Also,
Speaker 2: we looked at OURCF draw downs across our book and
Speaker 2: if you look at RCF draw downs, fifty six percent
Speaker 2: of our issues haven't even drawn down on their RCF facilities.
Speaker 2: And ourcfs in this latest vintage tend to be larger,
Speaker 2: and they were larger, so private equity could shoe buy
Speaker 2: and build strategies without having to come back to the syndicate.
Speaker 2: So actually available liquidity to our borrowers is also good,
Speaker 2: So internal cash generation good. Available liquidity is good, which
Speaker 2: means they can tread water. And last year, interestingly enough,
Speaker 2: even though we sort volumes under pressure, our issuers were
Speaker 2: able to push through price increases more than kind of
Speaker 2: the price increases they were saying they were seeing. So
Speaker 2: the EBITDA for most of our companies either stayed the
Speaker 2: same or increased, and that was because they had that
Speaker 2: pricing power. I think to the question Lisa asked earlier,
Speaker 2: are we worried about that pricing power going into next year? Definitely,
Speaker 2: I mentioned earlier that our analysts were saying that they
Speaker 2: think more are saying that they think costs will decrease
Speaker 2: versus cost increasing. But that also means that their ability
Speaker 2: to pass on a cross we would question and it
Speaker 2: totally we We've spoken to issues at the start of
Speaker 2: the year and they say they think they can preserve
Speaker 2: margins through productivity gains, and I think that's yet to
Speaker 2: be seen.
Speaker 1: I think how much of the trouble though, Camille, do
Speaker 1: you think was pushed into private credit or amended and
Speaker 1: extended and pretended a way that you know that will
Speaker 1: eventually crop up again that we you know, we haven't
Speaker 1: quite seen the end of these problems.
Speaker 2: Yeah, I think it's really interesting. So if you look
Speaker 2: at the amend and extends that were done post two
Speaker 2: thousand an eight to pass to find out for crisis,
Speaker 2: you will then helped buy a zero rate environment. So
Speaker 2: the question is what will that look like now? And certainly,
Speaker 2: as we discussed that the start lower funding costs are
Speaker 2: helping that situation, and so will a resumption of M
Speaker 2: and A. That will also help that situation because you
Speaker 2: can sell the company and put a new a new
Speaker 2: cap structure on it. I look at private credit really
Speaker 2: and high yield and leverage loans, and often people try
Speaker 2: to segregate them, but I think we should look at
Speaker 2: credit as solution providers. And actually, as we go into
Speaker 2: A and E's where maybe it's a good company, but
Speaker 2: the capital stack was put in a place where rates
Speaker 2: with zero, well, actually you might need those private credits
Speaker 2: to provide part cash, part pick or even all part
Speaker 2: pick financing. And I think that gives a chance for again,
Speaker 2: the sponsors take a long time if they think actually,
Speaker 2: technically there should be an increased in valuation. I think
Speaker 2: what's clear though, is private credit will not finance companies
Speaker 2: outside sectors or companies that are not good, and so
Speaker 2: it's important to understand enterprise valuations. And also it's quite
Speaker 2: healthy that there are some companies that you know, have
Speaker 2: been able to survive in a zero rate environment, and
Speaker 2: it will become difficult for them to continue on without
Speaker 2: a restructuring of the balance sheet. If you look, we're
Speaker 2: largely through twenty five refinance in terms of A and E's,
Speaker 2: and the twenty fives that are left are either deals
Speaker 2: that are up for sales, or they're on the block,
Speaker 2: or they're about to IPO or they are companies that
Speaker 2: actually you need to think about a wholesale restructuring.
Speaker 3: So moving on to Clos Camille definitely feels like twenty
Speaker 3: twenty four a different mood in the market. Yes, people
Speaker 3: are getting deals done last year, but this year has
Speaker 3: been a big shift in like triplea tightening and you
Speaker 3: guys got a deal that sort of reset helped reset
Speaker 3: the market for where it will price. And already some
Speaker 3: analysts are predicting up increasing the prediction for COLO issues.
Speaker 3: So can you speak a little bit to what's made
Speaker 3: the market feel so much better in twenty twenty four
Speaker 3: and how much can how much? How long can this last?
Speaker 2: I think that in that search field, COLO liabilities, as
Speaker 2: other asset classes, have rallied in So at the end
Speaker 2: of last year we were kind of at one seventy
Speaker 2: and now we're testing in Europe inside one point fifty
Speaker 2: and I think that is just part of the market tightening.
Speaker 2: So even though it has tightened again, I would look
Speaker 2: at it on a relative basis. On a relative basis,
Speaker 2: we still think that CLO's liabilities look attractive. Also, if
Speaker 2: you are taking the view that actually we tighten in
Speaker 2: from here actually, what you're doing is buying assets at
Speaker 2: kind of one fifty and you're locking that in for
Speaker 2: one and a half two years for that spread level.
Speaker 3: So how low can triple as go? Come? We all right, now,
Speaker 3: can you one forty even lower?
Speaker 2: What's the expectation you mentioned the potential supply. I think
Speaker 2: one thing that's kind of putting a stopper on that
Speaker 2: is that asset the ability to source assets. But we
Speaker 2: know that there are a number of clos waiting to
Speaker 2: come to market, so that that puts an upper pressure
Speaker 2: on on triple A spreads and liability spreads. And then
Speaker 2: also I would say that we've got the reset wave
Speaker 2: coming which will also again put new issuanto market, so
Speaker 2: that will help keep it a tightening on triple A
Speaker 2: spreads and liability spreads in general.
Speaker 5: I maybe I can jump in there, what kind of
Speaker 5: I'm interested, what kind of sectors you've got your eye
Speaker 5: on at the moment, What are your kind of likes
Speaker 5: and dislikes.
Speaker 2: So in terms of sectors called to our portfolios will
Speaker 2: typically always have those defensive businesses, so for example, tech, healthcare,
Speaker 2: business services, those businesses where you've got good visibility over revenues,
Speaker 2: strongly bit dar margins, good cash flow generation, and I
Speaker 2: think that that leaning is probably increased. So if you
Speaker 2: look at those sectors relative to their ten year historic
Speaker 2: average and you're just for kind of triple season those
Speaker 2: sectors and distress names in that sectors, actually you're still
Speaker 2: getting some of the highest spreads that you've got relative
Speaker 2: tenure averages. And we think that as you enter into
Speaker 2: period where rates are declining, that will be obviously not
Speaker 2: going to zero, but that pressure that they faced into
Speaker 2: a three will be diminishing. So we continue to like
Speaker 2: those sectors. And if we're wrong and actually in the
Speaker 2: next twelve months are not the uptick that our analysts
Speaker 2: are expecting or not the improvement in earnings that are expecting.
Speaker 2: If we're wrong about that, then you're in these defensive sectors.
Speaker 2: I would say that our sector leaning changes. It's amount.
Speaker 2: There's a sector influence to portfolio constructions changes over time.
Speaker 2: So if you look at the end of twenty twenty two,
Speaker 2: we were looking at kind of the gas situation, and
Speaker 2: that had an impact on kind of what sectors we
Speaker 2: didn't did and didn't like. We'll also move sectors according
Speaker 2: to who can pass through inflation and who can take interest,
Speaker 2: who can take a higher level of interest costs. But
Speaker 2: if you look at it now, I think we're more
Speaker 2: positioning towards less it's less of a sector focus in
Speaker 2: our for a little more about idiosyncratic risks. The operating
Speaker 2: environment for our borrows is becoming more complex. If you
Speaker 2: look at it, They've over the last five years, they've
Speaker 2: had to deal with COVID, they've had to deal with war,
Speaker 2: they had to deal with supply chain issues, rising rates.
Speaker 2: So and if we look forward, there's AI, there's a
Speaker 2: number of elections going on this year and the implications
Speaker 2: of that, working it through changing supply chains again, ESG regulations.
Speaker 2: There are a lot that our borrows need to deal with.
Speaker 2: And making sure that each company understanding what that impact
Speaker 2: is on each of our companies as we look forward
Speaker 2: is quite important.
Speaker 3: To go back to something we talked about earlier, which
Speaker 3: is default rates. They have remained so much lower than
Speaker 3: many were afraid of, but recoveries have not been very great.
Speaker 3: I think Europe's recovery has been better than the US
Speaker 3: because the US has what's called London and lender violence,
Speaker 3: where existing lenders do not treat each other very well
Speaker 3: and prime each other, and Europe doesn't quite have that.
Speaker 3: But can you speak to how you look at recoveries
Speaker 3: and whether maybe whether you think that might come to
Speaker 3: wash upon these shores and what impact that might have.
Speaker 2: Yeah, I think you'll definitely see a dispersion in recovery
Speaker 2: recovery rates, and you've already seen that. You've seen that
Speaker 2: in some of the cross border transactions. A couple that
Speaker 2: have happened in Europe, the creditor and creditor. That kind
Speaker 2: of flavor was tested in Europe and got a lot
Speaker 2: of pushback. I think no one wants to be the
Speaker 2: first one to put that across. As I mentioned, it's
Speaker 2: a more clubby market. So probably think about the US
Speaker 2: as it was call it ten years ago. And so
Speaker 2: there's an impact to treating inland as badly as you
Speaker 2: continue to raise capital. But at the same time, we
Speaker 2: don't all it out. I think one of the things
Speaker 2: that is most distinct about the US is just these
Speaker 2: funds that are actively looking. So in a default situation,
Speaker 2: you'll be thinking about, okay, recoveries, how how we make
Speaker 2: the best of it, But there are actually funds that
Speaker 2: are seeking out default situations and trying to prime lenders,
Speaker 2: and that asset priming and that need to create those
Speaker 2: transactions I think is quite disturbing, but it'd be naive
Speaker 2: to say that it would never come to Europe.
Speaker 1: What about the innovation in clos, Camilla, I want to
Speaker 1: ask you about that. We're seeing more interests in private
Speaker 1: debt clos for example, not just middle market, but you know,
Speaker 1: the larger private debt deals. How do you feel about
Speaker 1: that and what other innovations do you expect this year?
Speaker 2: Yeah, so the COLO market has been fairly innovative, I
Speaker 2: would say since twenty twenty two. So the fact is
Speaker 2: that we've had limited issuance over twenty two and twenty
Speaker 2: two three, and so the way you extract value from
Speaker 2: or the way leverage loans deliver total returns is different.
Speaker 2: So if you look at in twenty twenty two and
Speaker 2: the arbitrage and colos or the value for the equity
Speaker 2: and clos really comes from the fact that prices in
Speaker 2: the leverage loan market were so low versus in a
Speaker 2: more normalized market where if you look at your liabilities,
Speaker 2: so you're financing a portfolio of assets with bonds, then
Speaker 2: your assets spreads also have to rise, but because we
Speaker 2: didn't have any nuissians in terms of assets to reset higher.
Speaker 2: Actually it was the porter part and that led to
Speaker 2: colo structure changing, so not selling single B static issuance,
Speaker 2: changing of non calls. In terms of private deals, I
Speaker 2: think there's a real push to get private credit deals done.
Speaker 2: One of the big challenges apart from the rating agencies
Speaker 2: is getting the diversity of assets in Europe for that
Speaker 2: to happen. So I think the first ones to do
Speaker 2: it will be one of the established direct lenders with
Speaker 2: a large portfolio.
Speaker 1: Can you expect that to happen this year?
Speaker 2: I hear people who are pushing for it.
Speaker 1: Okay, we'll watch out. In terms of what you see
Speaker 1: as opportunities can be in terms of relative value, what
Speaker 1: do you think is the best relative value right now
Speaker 1: across all the things you look at.
Speaker 2: It's a pretty painful question given the repricings there were seeing.
Speaker 2: So if you've seen our analysts, it's hard. It's hard
Speaker 2: to reset sometimes. I think where there's value is as
Speaker 2: I say, current income in loans is really good. I
Speaker 2: think we're thinking high single digits total return if you
Speaker 2: you even take account for the lower default rates that
Speaker 2: you see in the market, and I think if you
Speaker 2: then look at the fact that active managers can one
Speaker 2: avoid those defaults and should outperform the market, and then
Speaker 2: also trading should generate relative value. So our approach is
Speaker 2: really when we manage is rather than picking assets that
Speaker 2: we think are maybe more distressed and making call about
Speaker 2: whether there's a port pa, we think that you can
Speaker 2: make small gains over time that actually build and are
Speaker 2: accretive to the portfolio. So that's how our investment style
Speaker 2: is set up. So we're always looking at where we
Speaker 2: think leverage is going over the next four quarters. So
Speaker 2: there's always small trades to be done in terms of
Speaker 2: names that we think maybe the market hasn't priced in
Speaker 2: that the next set of earnings might be a little
Speaker 2: bit weaker, or there's a rating trigger. It's a little
Speaker 2: bit hard in the market now because you can see
Speaker 2: names that probably will get a downgrade but are supported
Speaker 2: by a strong technical But I think as we move
Speaker 2: through the year there will be windows and you can
Speaker 2: be nimble nimble about it.
Speaker 1: Are there any particular sectors or countries that are ripe
Speaker 1: for those opportunities right now?
Speaker 2: So when we when we look at the tech sector.
Speaker 2: That is, if you look at the ten year historic average,
Speaker 2: they are trading at the upper end of the range.
Speaker 2: And has discussed before, once you get those card in
Speaker 2: interest rates, we think there's some tightness there. We also
Speaker 2: think in the chemical sector we are starting to see
Speaker 2: some green shoots. I don't think we're at a point
Speaker 2: where we would going to the most challenged yet, but
Speaker 2: I do think definitely in the double B space as
Speaker 2: part of the tech stack that we've already been investing
Speaker 2: in because they can take a longer period of destocking.
Speaker 2: But I think there are more names now that could
Speaker 2: benefit from those early green shoots within the chemical sector.
Speaker 1: When you mentioned double digit returns, you're talking about European
Speaker 1: loans specifically for this year.
Speaker 2: European loans had thirteen and a half percent total return
Speaker 2: last year. We think it'd be more like high single
Speaker 2: digit this year, even when you take into account the
Speaker 2: defaults that we expect, so we expect defaults to remain contained.
Speaker 1: Okay, what sort of rate on the defaults?
Speaker 2: I think the raining agencies have said kind of three
Speaker 2: to four percent, and that includes director of stressed exchanges.
Speaker 2: It feels like that's probably a fair a fair assumption.
Speaker 2: But again I think the movement in rates, maybe at
Speaker 2: the margin we do a little bit better.
Speaker 1: So over all, you sound quite upbeat, Camille, And you know,
Speaker 1: obviously we're a credit show. We tend to look we
Speaker 1: tend to be fairly pessimistic, and we're journalists too, so
Speaker 1: we're even more pessimistic. But what do you think are
Speaker 1: the biggest risks out there? What are the things that
Speaker 1: keep you up at night worrying? Is it defaults and
Speaker 1: bankruptcies or rates or is it something you know, geopolitical
Speaker 1: or something else that we haven't discussed. It's more troubling.
Speaker 2: I think it's hard to h it's hard to know
Speaker 2: exactly what's going to happen in a year. If you
Speaker 2: look at typically in market dislocations, we think they are
Speaker 2: for interesting opportunities. So if you look at COVID, for example,
Speaker 2: there was no respect of ratings. Names would just shut down,
Speaker 2: so you could be in a travel company that was very,
Speaker 2: very low levered and suddenly their earnings got shut down
Speaker 2: and they were and those spreads blew up. So in
Speaker 2: market dislocation, we always think that there's opportunity to trade,
Speaker 2: and we've actually been able to build value in periods
Speaker 2: of market dislocations. So what I would be worried about,
Speaker 2: or what we are focused on is and we've touched
Speaker 2: on it, this move that's it's in the US towards
Speaker 2: creditor on creditor of violence and the shift that you've
Speaker 2: had there that translating into Europe. And also we're worried
Speaker 2: about jump to default risk. So most of the names
Speaker 2: in the leverage known market trade around part. So if
Speaker 2: you do get a company that's misses on earnings or
Speaker 2: get things wrong, once you lose a colo Bidge, you're
Speaker 2: pretty punished for that. So we're really focused on our
Speaker 2: analysts are really focused on understanding where our companies are going,
Speaker 2: being close to our sponsors and our borrowers to understand,
Speaker 2: you know, things that are not going to plan. Is
Speaker 2: that a quick blip or is that something more more
Speaker 2: serious where we need to trade out great stuff.
Speaker 1: Camille McLeod Salmon at Fidelity International, thank you so much
Speaker 1: for being on the credit edge.
Speaker 2: Thank you so much, Thank you for having me.
Speaker 1: Also want to say a big thanks to Lisa Lee
Speaker 1: with Bloomberg News in London. Brilliant to see you again.
Speaker 1: Cheers and before we talk to Aidan Cheslin at Bloomberg
Speaker 1: Intalience is a bit more detailed about the telecoms. I'd
Speaker 1: just like to say read all of Lisa's great scoops
Speaker 1: on the Bloomberg terminal and of course at Bloomberg dot Com.
Speaker 1: So Aidan Chanslin at Bloomberg Intelligence, you cover telecoms based
Speaker 1: in London. I wanted to get an update on Altice,
Speaker 1: which is a huge global telecom's name with a lot
Speaker 1: of debt. They've been through a lot of drama over
Speaker 1: the last few years. Some people said that they wouldn't
Speaker 1: make it, but we have seen some a movement in
Speaker 1: the bonds recently and are they mounting a big comeback here?
Speaker 1: What's the outlook.
Speaker 5: I think what's happened is you've seen some movement at
Speaker 5: the shorter end of the curve where they've started to
Speaker 5: try and push them of their twenty twenty.
Speaker 4: Five maturities out.
Speaker 5: They've had more success on that at Altis International, where
Speaker 5: there's money sitting in escrow ready to repay the twenty
Speaker 5: twenty five bonds. Artists France, they've partially partially done that.
Speaker 5: They had a small loan that got done, but there's
Speaker 5: still a bit more work to do. I think the
Speaker 5: market is also speculating that they might get some disposals
Speaker 5: done which will again help the twenty twenty five maturities.
Speaker 5: You still have a huge dislocation obviously into the subordinated ponds,
Speaker 5: particularly about East France, and I think that's that's very
Speaker 5: much justified. They're very much a recovery pain.
Speaker 1: So as we just talked about with Fidelity, I mean,
Speaker 1: there seems to be the sense of relief that you know,
Speaker 1: rates will come down and some of these struggling borrowers
Speaker 1: will end up, you know, getting access to cheaper finance
Speaker 1: that could even get them out of the hole. Is
Speaker 1: that the situation with our teas are they kind of
Speaker 1: seeing a pathway out here, and it is it helped
Speaker 1: by the macro and the rates outlook.
Speaker 5: Well, the loan stuff they did last year before, some
Speaker 5: of it before the big rally we had in the
Speaker 5: end of the year was well into double digits yield wise,
Speaker 5: so they're certainly paying through the teeth to be able
Speaker 5: to extend. And you know, there's some medioscreted issues around
Speaker 5: the ongoing police and restigations that are still going on
Speaker 5: into alleged corruption there which I think are made probably
Speaker 5: with them specifically.
Speaker 4: In the market's just a little bit more jittery.
Speaker 5: So I think for them it's it's more about self
Speaker 5: help rather than the market bailing them out, if I'm
Speaker 5: completely honest. But you know, if the market does generally
Speaker 5: become a little bit easier to access, it can't do
Speaker 5: them any harm, and it can't do at their disposal
Speaker 5: prospects any harm. I think disposals potentially at how Tis
Speaker 5: International are probably one source of cash for them in
Speaker 5: the mid term. There's limits to how much cash outis
Speaker 5: Internationals can out stream to help silos like out East France,
Speaker 5: but I think that's probably where you could more likely
Speaker 5: to see disposals, and there seems to be a bit
Speaker 5: more interest from potential buyers.
Speaker 1: So they can actually reduce leverage and there's a path
Speaker 1: to that slightly.
Speaker 5: Yeah, I say Artists International is a less levered part
Speaker 5: of present four and a half times around that we
Speaker 5: think it's going to be when they report you for results.
Speaker 5: You know, there's a talk of them selling most parts
Speaker 5: of that business, with the exception of Israel. I think
Speaker 5: probably the Portuguese part of the business that's been showing
Speaker 5: some nicely. Big dark growth seems one possible avenue to
Speaker 5: raise some disposal proceeds.
Speaker 4: They probably need to repay quite a lot of debt
Speaker 4: within the.
Speaker 5: International box before they could upstream material proceeds to help
Speaker 5: other parts of the structure. But everything is for sale
Speaker 5: in that business. And the more confidence that potential buyers
Speaker 5: have around the credit markets, improving macro conditions not being
Speaker 5: as bad as feared, I think brings that disposal that
Speaker 5: a little bit closer.
Speaker 1: Is there selling off the Crown jewels because they need
Speaker 1: to get cash?
Speaker 5: Yeah, that is a risk, but you know, Portugal is
Speaker 5: an asset that's been handed around quite a lot. It's
Speaker 5: a larger part of the business, is part of the
Speaker 5: business that's done well relatively speaking recently. I'm not sure
Speaker 5: whether mister Dragees sees it necessarily as a Crown joint
Speaker 5: compared to France.
Speaker 4: I think saving France is probably top of the list.
Speaker 1: And just to be clearfulur listeners that he is the
Speaker 1: billionaire owner of the company, right, yeah, okay? And are
Speaker 1: there any kind of read throughs for the sector. Is
Speaker 1: it very specific to this one company?
Speaker 4: I think very.
Speaker 5: Specific to this this particular company. As I say, I
Speaker 5: think amongst the tm T names I cover, I think
Speaker 5: probably they have the most acute short term refinancing requirements.
Speaker 4: The support nature bonds are definitely going. The widest bonds.
Speaker 5: Are high look at in my coverage genius, and I
Speaker 5: think you know the nature of telecoms is that you
Speaker 5: have an area like Portugal for example, dominated by by
Speaker 5: one big, big player, and you know, if you get
Speaker 5: a change in ownership of that one player and of
Speaker 5: redefines that market. One issue they do have though that
Speaker 5: I think is common to a lot of companies that
Speaker 5: have allowed leverage to go up to this kind of
Speaker 5: five to six times area that you see. How to
Speaker 5: use France though, is the depressed equity valuations, particularly telecom space,
Speaker 5: have made it much more difficult for businesses to delever
Speaker 5: through disposals.
Speaker 4: You know, most of the deals.
Speaker 5: We've seen telecoms companies being sold, whether it's radophone selling
Speaker 5: in Spain or have you the kind of multiples we've
Speaker 5: seen around five five and a quarter times eve eve
Speaker 5: itde selling a business at five times ev ef it
Speaker 5: does doesn't really help you if your leverage or six times.
Speaker 5: So that's something you you know, when people start talking
Speaker 5: about disposals as a potential savior to highly indbted how
Speaker 5: your companies.
Speaker 4: I think that's something you actually have to look out for,
Speaker 4: whether that's.
Speaker 5: Realistic or whether it's just something that helps with liquidity
Speaker 5: and kicks the can further down just to end up
Speaker 5: having your business.
Speaker 1: Aidan Chanslin at Bloomberg Intelligence, thank you so much for
Speaker 1: joining us.
Speaker 4: My pleasure, James.
Speaker 1: Check out all of Aiden's great research on the Bloomberg
Speaker 1: Terminal or contact him directly if you need more information.
Speaker 1: Thanks again to Camille mcleoud Salmon at Fidelity International and
Speaker 1: Lisa Lee from Bloomberg News. Read all of Lisa's great
Speaker 1: scoops on the Terminal and at Bloomberg dot com. And
Speaker 1: please do subscribe wherever you get your podcasts. We're on Apple,
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Speaker 1: tell your friends, or email me directly at jcromb eight
Speaker 1: at Bloomberg dot net. I'm James Crombie. It's been a
Speaker 1: pleasure having you. See you next week on the Credit Edge.