WEBVTT - Fidelity Fears Creditor Violence Spread; Altice Focus 0:00:18.160 --> 0:00:20.960 Hello, and welcome to the Credit Edge, a weekly markets podcast. 0:00:21.120 --> 0:00:23.760 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:24.360 --> 0:00:27.520 This week, we're very pleased to welcome Camille McLeod Salmon 0:00:27.560 --> 0:00:30.640 at Fidelity International in London. How are you, Camille? 0:00:31.040 --> 0:00:32.040 Very well, Thank you. 0:00:32.760 --> 0:00:34.600 Thank you so much for joining us today. We're excited 0:00:34.640 --> 0:00:37.040 to dig into your market views and to get your outlook. 0:00:37.360 --> 0:00:40.479 We're also delighted to welcome back Bloomberg's very own Lisa Lee, 0:00:40.479 --> 0:00:43.080 who covers credit markets from London. Great to see you again, Lisa. 0:00:43.400 --> 0:00:45.199 Great to be here again, James. 0:00:45.159 --> 0:00:49.919 And from Bloomberg Intelligence. Excellent to see Aidan Cheslin. Welcome back, Aidans. 0:00:50.560 --> 0:00:50.840 Great. 0:00:50.880 --> 0:00:52.800 So let's start with you, Camille. It's great to see 0:00:52.840 --> 0:00:54.960 you on the Credit Edge. I know you want to 0:00:55.000 --> 0:00:58.280 talk about collateralized loan obligations. We'll get into that, but 0:00:58.480 --> 0:01:01.080 let's start with a big picture. When we talk to 0:01:01.200 --> 0:01:04.360 global portfolio managers at the moment, they do like the 0:01:04.360 --> 0:01:07.640 sound of Europe for the potential diversification and also because 0:01:07.680 --> 0:01:11.080 it looks relatively cheap. Of course, they skew to the 0:01:11.120 --> 0:01:13.760 bigger US market, and as we've discussed recently on this 0:01:13.800 --> 0:01:16.840 show it's getting expensive in the US. There's a lot 0:01:16.840 --> 0:01:19.760 of demand for not a lot of supply, so investors 0:01:19.800 --> 0:01:23.720 are definitely looking for options elsewhere, but maybe Europe's cheap 0:01:23.760 --> 0:01:27.399 for a reason. These economies seem more challenged in the US, 0:01:28.160 --> 0:01:30.160 where we may be headed for a soft landing rather 0:01:30.160 --> 0:01:32.160 than a recession, although a lot of the policy easing 0:01:32.160 --> 0:01:35.119 bets are being unwhelmed as we speak, because the data 0:01:35.360 --> 0:01:38.880 on the economy just keeps coming in strong. So you know, 0:01:38.959 --> 0:01:41.080 Europe in relative terms seem to have a lot of issues, 0:01:41.120 --> 0:01:44.040 including inflation, which is tying policy makers hands when it 0:01:44.120 --> 0:01:47.440 comes to stimulus. But what is the macro outlook from 0:01:47.440 --> 0:01:49.720 where you sit? Camille? Am I being too pessimistic? 0:01:50.120 --> 0:01:53.440 So I think let's start with kind of outlook for 0:01:53.840 --> 0:01:56.920 Europe and kind of what's been happening. So if you 0:01:57.000 --> 0:01:59.480 look at if you look at one of the big 0:01:59.760 --> 0:02:03.080 mowers in the market, it's the fact that we it's 0:02:03.200 --> 0:02:07.960 clear that we have reached kind of terminal rates and 0:02:08.040 --> 0:02:10.480 that we expect a decline this year. And we can 0:02:10.520 --> 0:02:14.560 talk about May versus March. I think there's probably people 0:02:14.639 --> 0:02:19.640 more eloquent and educated about that than I. And we 0:02:19.639 --> 0:02:22.080 can also talk about how many rate cuts four versus five, 0:02:22.400 --> 0:02:25.000 But it's clear that there there will be rate cuts, 0:02:25.040 --> 0:02:29.120 and that impacts our market in a number of ways. 0:02:29.520 --> 0:02:35.040 So firstly impacts the direct funding for our for our issuers. 0:02:36.160 --> 0:02:39.799 And then so as rates rise, that means that the 0:02:39.800 --> 0:02:42.959 cost of borrowing, sorry, as the rates decline, the cost 0:02:43.000 --> 0:02:46.639 of borrowing also declined. So that's a helpful tail wind. 0:02:46.680 --> 0:02:49.800 So what has been aheadwind now tearing into tailwind. We 0:02:49.880 --> 0:02:54.480 don't expect rates to reach zero percent, but clearly we've 0:02:54.520 --> 0:02:57.720 already seen since the end of last year that those 0:02:57.760 --> 0:03:01.040 interest costs have come down. And then leading on to that, 0:03:01.240 --> 0:03:05.760 it's if you look at you we have a maturity 0:03:05.840 --> 0:03:10.000 all that we're approaching. So if you look at maturities 0:03:10.040 --> 0:03:13.760 in twenty five, twenty six, and twenty seven in credit, 0:03:13.800 --> 0:03:16.440 we have two hundred and thirty six billion of maturities 0:03:16.480 --> 0:03:21.160 that we need to amend or deal with, and that 0:03:21.840 --> 0:03:24.280 as a curve is lower and those funding costs are cheaper. 0:03:24.320 --> 0:03:26.960 That actually means those A and e's are easier to 0:03:26.960 --> 0:03:29.640 get down and are more affordable, and that stretch that 0:03:29.680 --> 0:03:34.000 you have to make is less. And then it also 0:03:34.080 --> 0:03:37.720 impacts M and A. So when we look at the 0:03:37.880 --> 0:03:41.880 m and A environment. Actually, the bid off for spread 0:03:42.000 --> 0:03:45.840 that had existed is largely, in my opinion, a function 0:03:45.960 --> 0:03:49.120 of the rate problem. So if you're a seller and 0:03:49.160 --> 0:03:51.920 you expect rates to decline, then you're better off waiting 0:03:51.960 --> 0:03:54.560 and putting off that cell decision. And if you're a buyer, 0:03:54.640 --> 0:03:57.280 you can't really price in rate cuts. And I think 0:03:57.440 --> 0:04:02.360 that certainty that we're getting is allowing that bid ask 0:04:03.200 --> 0:04:06.640 spread hopefully to decline, plus some other factors that are 0:04:06.640 --> 0:04:12.520 happening in the sponsored space as well. And then also, 0:04:12.960 --> 0:04:15.880 like the US, lower rates has also meant that the 0:04:15.880 --> 0:04:19.160 search for meal means that we've seen tightening in the 0:04:19.680 --> 0:04:23.880 European market as well in terms of spread. So we've 0:04:23.920 --> 0:04:27.599 seen the wave of repricings that have come across the US, 0:04:27.600 --> 0:04:32.240 but we still think it looks relatively attractive. So I 0:04:32.279 --> 0:04:37.000 think for a number of reasons, Europe's an interesting diversification play, 0:04:37.040 --> 0:04:40.120 and that rate shift continues to make it an interesting 0:04:40.120 --> 0:04:43.919 diversit patient pay and relative it looks attractive. The US 0:04:44.080 --> 0:04:46.800 is large and liquid, but I think if you compare 0:04:47.120 --> 0:04:49.880 triple c's in each market, you've got nine percent triple 0:04:49.920 --> 0:04:55.000 c's in the US versus three percent in Europe, and 0:04:55.040 --> 0:04:58.919 also default rates are expected to be higher in the 0:04:59.040 --> 0:05:02.560 US than in U Europe. And I would also say 0:05:04.920 --> 0:05:10.279 that recovery rates give the creditor on creditor violence and 0:05:10.279 --> 0:05:12.880 the lost bitigation transactions that you're seeing in the US 0:05:13.200 --> 0:05:17.240 that haven't yet transported to Europe. And I think the 0:05:17.240 --> 0:05:20.280 clubbiness of the European market holds that by a little bit, 0:05:20.320 --> 0:05:23.800 although that's something that we continue to focus on. Makes 0:05:23.880 --> 0:05:29.000 europe An important diversification or important diversify if you're able 0:05:29.080 --> 0:05:30.920 to invest globally. 0:05:31.360 --> 0:05:32.440 So there's a lot to unpack there. 0:05:32.480 --> 0:05:32.800 Community. 0:05:32.800 --> 0:05:34.840 You've thrown us a lot of things. I just kind 0:05:34.839 --> 0:05:36.400 of wanted to back up a bit in terms of 0:05:36.760 --> 0:05:39.480 obviously the rates coming down are good for the borrowers 0:05:40.560 --> 0:05:42.760 who have been kind of struggling with with you know, 0:05:43.040 --> 0:05:46.080 the very big jump in rates, so their funding costs 0:05:46.080 --> 0:05:48.200 shot up at the same time the economy has kind 0:05:48.200 --> 0:05:53.240 of slowed down, their earnings suffered, and you know, fundamentally 0:05:53.279 --> 0:05:55.760 that's good. And as you say, for deal makers, it's good, 0:05:55.760 --> 0:05:57.880 But what about for the investors, because you know, they 0:05:58.160 --> 0:05:59.840 got into floating rate because there was a lot of 0:06:00.160 --> 0:06:02.359 side in that. Now that that whole tray is reversing, 0:06:02.400 --> 0:06:02.760 isn't it? 0:06:03.080 --> 0:06:06.360 So we still we still think that rates are not 0:06:06.400 --> 0:06:08.240 going to go back to zero, So in terms of 0:06:08.400 --> 0:06:12.400 current income in in European loans, it's still attractive. In loans. 0:06:12.400 --> 0:06:15.560 You also benefit from an inverted CUB. So if you 0:06:15.600 --> 0:06:18.880 look at the curve, European loans are generally based off 0:06:18.880 --> 0:06:21.719 three months of your arrival, so you're getting like one 0:06:21.760 --> 0:06:24.760 point three point three percent above where you are if 0:06:24.839 --> 0:06:26.960 you look at the five year point on the curve, 0:06:27.440 --> 0:06:30.760 so you're still getting a little bit of juice priced 0:06:30.800 --> 0:06:35.120 into the loan market. We are seeing repricing, so you're 0:06:35.120 --> 0:06:38.280 seeing loans that kind of were four seventy five come 0:06:38.360 --> 0:06:41.039 at kind of four hundred the spicey of those or 0:06:41.320 --> 0:06:44.919 a better quality of those pricing at three seventy five. 0:06:45.240 --> 0:06:47.320 But if you look at new issue in the loan space, 0:06:47.360 --> 0:06:50.800 you're still at kind of plus fourty five four fifty 0:06:50.839 --> 0:06:52.960 for B two, and I think you're shaking out four 0:06:53.080 --> 0:06:56.320 fifty four to seventy five plus your arrival for a 0:06:56.320 --> 0:06:58.559 B three, which I think for for clean new issue 0:06:58.680 --> 0:07:03.640 looks pretty interesting. So I still think from a carry perspective, 0:07:03.760 --> 0:07:08.360 loans continue to be offer interesting value Camille. 0:07:08.400 --> 0:07:11.760 From your seat, you see quite a huge array of borrowers. 0:07:12.040 --> 0:07:14.640 And when you look at them, are there margins still 0:07:14.640 --> 0:07:17.800 holding up or are you seeing a lag effect of 0:07:17.960 --> 0:07:21.520 central rate hikes and some margin compression and starting to 0:07:21.560 --> 0:07:25.360 see borrowers starting to wobble in terms of their earnings. 0:07:26.320 --> 0:07:31.320 It's a great question. So Fidelities just publish their global 0:07:31.360 --> 0:07:36.480 analyst survey and we have around twenty thousand meetings across equities, 0:07:36.520 --> 0:07:41.000 fixed income, and private credit each year with our companies, 0:07:41.080 --> 0:07:44.480 and we take time to aggregate and look at what 0:07:44.520 --> 0:07:47.720 our companies are telling us. So if you look at 0:07:47.760 --> 0:07:51.720 what our companies are telling us, they're saying that actually 0:07:52.080 --> 0:07:56.160 management teams are becoming more relaxed about inflation costs apart 0:07:56.160 --> 0:08:00.280 from labor. Labor continues to be the sticky element. Think 0:08:00.280 --> 0:08:04.720 in some sectors and some geographies that labour stickiness will continue, 0:08:05.840 --> 0:08:10.400 but actually labor costs outside of that actually starting to normalize. 0:08:10.560 --> 0:08:14.840 And for the first time since the pandemic, more of 0:08:14.880 --> 0:08:18.880 our analysts are saying, actually they think the costs for 0:08:19.040 --> 0:08:24.680 their borrowers or costs for issuers are declining more than increasing. 0:08:25.320 --> 0:08:27.800 And so when you look across all your borrowers One 0:08:27.800 --> 0:08:31.000 thing I learned about Europe is that the district and 0:08:31.120 --> 0:08:34.800 the countries really matter. Are you seeing any disparities and 0:08:34.880 --> 0:08:40.040 differences across borrowers from Germany versus Spain or in all 0:08:40.040 --> 0:08:42.120 the areas of Europe? Or is it sort of in 0:08:42.520 --> 0:08:46.160 March step as the economic forecast is changing. 0:08:46.960 --> 0:08:49.920 I mentioned labour costs being tighter in some areas, and 0:08:49.960 --> 0:08:52.560 that's one case that you can see if you go 0:08:52.640 --> 0:08:54.880 from geography to geophy. So if you look at healthcare, 0:08:54.920 --> 0:08:59.760 for example, that's one thing that's particularly sticky across across 0:08:59.840 --> 0:09:02.160 your So some of the sectors are still dealing with 0:09:02.240 --> 0:09:07.560 those higher wage costs. It's quite positive in terms of 0:09:07.559 --> 0:09:10.360 what I've been saying, And you mentioned the lagged impact 0:09:10.400 --> 0:09:15.000 on rates. One thing I would caveat is that even 0:09:15.000 --> 0:09:17.440 though the market's feeling quite buoyant at the moment and 0:09:17.440 --> 0:09:21.559 it's pising through two expected cuts, if you look at 0:09:21.559 --> 0:09:24.640 what our analysts are saying right now in terms of 0:09:24.679 --> 0:09:26.960 what we're experienced on the ground, the mood a little 0:09:27.000 --> 0:09:31.000 bit more somber. So forty eight percent of our analysts 0:09:31.200 --> 0:09:35.480 and the Global survey have said actually they feel like 0:09:35.520 --> 0:09:37.880 their industries are in a slowdown and for a very 0:09:37.920 --> 0:09:41.080 slim number actually in recession, and we've seen that for 0:09:41.160 --> 0:09:44.520 the chemicals industry, where we've had well over a year 0:09:44.520 --> 0:09:46.640 and a half of the stocking. You started to see 0:09:46.640 --> 0:09:52.520 it in building materials as well. And so each geography 0:09:52.640 --> 0:09:56.960 deals with different challenges. And I'm sure we're talking about later, 0:09:57.080 --> 0:10:02.079 but in your really idiosyncratic res is a key driver, 0:10:02.200 --> 0:10:07.240 and understanding different patterns and trends is really important too. 0:10:07.760 --> 0:10:10.480 What about the default rate, Camille, I mean, everyone was 0:10:10.600 --> 0:10:13.440 very fearful last year about a big spike in defaults 0:10:13.440 --> 0:10:16.240 in leverage finance, but particularly on the loan side, because 0:10:16.280 --> 0:10:19.240 the floating rate nature and because those brewers seem to 0:10:19.280 --> 0:10:21.240 be under more pressure. But it never happened, and if 0:10:21.280 --> 0:10:22.560 you bet against it you would have made a lot 0:10:22.600 --> 0:10:25.040 of money. Were we just kicking the can? Is it 0:10:25.040 --> 0:10:26.439 all going to show up this year? And you mentioned 0:10:26.440 --> 0:10:29.520 that massive maturity war? Is that the trigger for it? 0:10:29.559 --> 0:10:31.400 I mean, are you worried now about defaults? 0:10:31.679 --> 0:10:35.199 It speaks in part to your first question. So last 0:10:35.280 --> 0:10:40.679 year we were we were having questions about the transmission 0:10:40.679 --> 0:10:43.800 and mechanism in Europe clearly being more effective than in 0:10:43.840 --> 0:10:47.120 the US, and concerns about the European economy and what 0:10:47.160 --> 0:10:50.839 that means for loans, and loans returned thirteen and a 0:10:50.880 --> 0:10:54.360 half percent last year, So clearly I think the important 0:10:54.400 --> 0:10:57.160 economy is quite important. But on the loan side, what 0:10:57.200 --> 0:11:00.200 you really need to focus on is borrower's ability to 0:11:00.360 --> 0:11:04.839 repay or to service debt. And so when we looked 0:11:04.840 --> 0:11:11.200 at across our book, actually interest coverage ratios across our book, 0:11:11.240 --> 0:11:13.680 and I think that's probably quite reflective for the market 0:11:13.679 --> 0:11:16.600 as well. Eighty five percent of our issuers have greater 0:11:16.640 --> 0:11:20.280 than two times interest coverage, and that's because going into 0:11:20.480 --> 0:11:25.040 twenty two, actually cushions interest coverage ratio cushions were quite high. 0:11:25.040 --> 0:11:27.560 So we've seen them declining from twenty two to twenty 0:11:27.640 --> 0:11:31.480 three and our forecasts into twenty four, and actually our 0:11:31.520 --> 0:11:33.560 forecast was done at the back end of last year, 0:11:33.679 --> 0:11:36.880 so the alleviation and rates gives us a bit more 0:11:37.400 --> 0:11:41.600 cushion over our forecasts than we had anticipated. So actually, 0:11:42.120 --> 0:11:46.440 in terms of affordability, our issuers are able to afford 0:11:47.040 --> 0:11:49.880 higher rates, and even if you look at the fifteen percent, 0:11:50.600 --> 0:11:53.439 there are sub two times. Some of those deals were 0:11:54.240 --> 0:11:56.960 the hung LBO deals that were coming into twenty two, 0:11:57.040 --> 0:11:59.640 where we know that they have higher interest costs such 0:11:59.679 --> 0:12:02.440 as six tricks, but we think the company's defensive enough 0:12:02.440 --> 0:12:06.160 that that could service a higher level of interest. So 0:12:06.960 --> 0:12:12.400 in terms of in terms of internal liquidity, that looks good. Also, 0:12:12.440 --> 0:12:16.199 we looked at OURCF draw downs across our book and 0:12:16.280 --> 0:12:20.200 if you look at RCF draw downs, fifty six percent 0:12:20.240 --> 0:12:24.000 of our issues haven't even drawn down on their RCF facilities. 0:12:24.520 --> 0:12:27.760 And ourcfs in this latest vintage tend to be larger, 0:12:28.120 --> 0:12:31.240 and they were larger, so private equity could shoe buy 0:12:31.240 --> 0:12:34.040 and build strategies without having to come back to the syndicate. 0:12:34.320 --> 0:12:37.960 So actually available liquidity to our borrowers is also good, 0:12:38.160 --> 0:12:42.120 So internal cash generation good. Available liquidity is good, which 0:12:42.120 --> 0:12:45.880 means they can tread water. And last year, interestingly enough, 0:12:46.679 --> 0:12:49.920 even though we sort volumes under pressure, our issuers were 0:12:49.920 --> 0:12:54.360 able to push through price increases more than kind of 0:12:54.360 --> 0:12:57.040 the price increases they were saying they were seeing. So 0:12:57.800 --> 0:13:00.840 the EBITDA for most of our companies either stayed the 0:13:00.880 --> 0:13:04.079 same or increased, and that was because they had that 0:13:04.559 --> 0:13:08.800 pricing power. I think to the question Lisa asked earlier, 0:13:09.040 --> 0:13:13.080 are we worried about that pricing power going into next year? Definitely, 0:13:13.720 --> 0:13:16.240 I mentioned earlier that our analysts were saying that they 0:13:16.280 --> 0:13:19.720 think more are saying that they think costs will decrease 0:13:19.840 --> 0:13:23.280 versus cost increasing. But that also means that their ability 0:13:23.360 --> 0:13:26.439 to pass on a cross we would question and it 0:13:26.559 --> 0:13:31.400 totally we We've spoken to issues at the start of 0:13:31.440 --> 0:13:33.400 the year and they say they think they can preserve 0:13:33.520 --> 0:13:38.120 margins through productivity gains, and I think that's yet to 0:13:38.160 --> 0:13:38.480 be seen. 0:13:38.520 --> 0:13:40.439 I think how much of the trouble though, Camille, do 0:13:40.440 --> 0:13:43.600 you think was pushed into private credit or amended and 0:13:43.679 --> 0:13:46.160 extended and pretended a way that you know that will 0:13:46.480 --> 0:13:48.720 eventually crop up again that we you know, we haven't 0:13:48.840 --> 0:13:50.319 quite seen the end of these problems. 0:13:50.760 --> 0:13:52.800 Yeah, I think it's really interesting. So if you look 0:13:52.840 --> 0:13:57.240 at the amend and extends that were done post two 0:13:57.240 --> 0:14:00.640 thousand an eight to pass to find out for crisis, 0:14:00.720 --> 0:14:05.200 you will then helped buy a zero rate environment. So 0:14:06.600 --> 0:14:09.600 the question is what will that look like now? And certainly, 0:14:09.679 --> 0:14:13.680 as we discussed that the start lower funding costs are 0:14:13.720 --> 0:14:17.400 helping that situation, and so will a resumption of M 0:14:17.480 --> 0:14:19.480 and A. That will also help that situation because you 0:14:19.520 --> 0:14:21.800 can sell the company and put a new a new 0:14:21.840 --> 0:14:26.040 cap structure on it. I look at private credit really 0:14:26.480 --> 0:14:29.720 and high yield and leverage loans, and often people try 0:14:29.720 --> 0:14:32.000 to segregate them, but I think we should look at 0:14:32.000 --> 0:14:35.800 credit as solution providers. And actually, as we go into 0:14:36.000 --> 0:14:39.400 A and E's where maybe it's a good company, but 0:14:39.520 --> 0:14:43.160 the capital stack was put in a place where rates 0:14:43.160 --> 0:14:47.120 with zero, well, actually you might need those private credits 0:14:47.160 --> 0:14:51.600 to provide part cash, part pick or even all part 0:14:51.680 --> 0:14:55.800 pick financing. And I think that gives a chance for again, 0:14:55.880 --> 0:14:58.280 the sponsors take a long time if they think actually, 0:14:58.520 --> 0:15:02.800 technically there should be an increased in valuation. I think 0:15:02.840 --> 0:15:06.640 what's clear though, is private credit will not finance companies 0:15:07.040 --> 0:15:11.360 outside sectors or companies that are not good, and so 0:15:11.400 --> 0:15:16.720 it's important to understand enterprise valuations. And also it's quite 0:15:16.720 --> 0:15:19.520 healthy that there are some companies that you know, have 0:15:19.640 --> 0:15:22.920 been able to survive in a zero rate environment, and 0:15:22.960 --> 0:15:27.200 it will become difficult for them to continue on without 0:15:27.280 --> 0:15:30.120 a restructuring of the balance sheet. If you look, we're 0:15:30.200 --> 0:15:33.840 largely through twenty five refinance in terms of A and E's, 0:15:33.960 --> 0:15:36.880 and the twenty fives that are left are either deals 0:15:36.880 --> 0:15:38.880 that are up for sales, or they're on the block, 0:15:39.000 --> 0:15:42.840 or they're about to IPO or they are companies that 0:15:42.920 --> 0:15:47.240 actually you need to think about a wholesale restructuring. 0:15:48.000 --> 0:15:52.160 So moving on to Clos Camille definitely feels like twenty 0:15:52.200 --> 0:15:55.800 twenty four a different mood in the market. Yes, people 0:15:55.840 --> 0:15:58.600 are getting deals done last year, but this year has 0:15:58.680 --> 0:16:03.080 been a big shift in like triplea tightening and you 0:16:03.120 --> 0:16:05.560 guys got a deal that sort of reset helped reset 0:16:05.600 --> 0:16:10.200 the market for where it will price. And already some 0:16:10.280 --> 0:16:14.320 analysts are predicting up increasing the prediction for COLO issues. 0:16:14.440 --> 0:16:16.800 So can you speak a little bit to what's made 0:16:17.080 --> 0:16:20.000 the market feel so much better in twenty twenty four 0:16:20.040 --> 0:16:23.080 and how much can how much? How long can this last? 0:16:23.360 --> 0:16:29.240 I think that in that search field, COLO liabilities, as 0:16:29.280 --> 0:16:32.080 other asset classes, have rallied in So at the end 0:16:32.120 --> 0:16:34.200 of last year we were kind of at one seventy 0:16:34.680 --> 0:16:38.200 and now we're testing in Europe inside one point fifty 0:16:38.760 --> 0:16:42.560 and I think that is just part of the market tightening. 0:16:42.920 --> 0:16:44.880 So even though it has tightened again, I would look 0:16:44.920 --> 0:16:47.240 at it on a relative basis. On a relative basis, 0:16:47.240 --> 0:16:53.800 we still think that CLO's liabilities look attractive. Also, if 0:16:53.840 --> 0:16:56.760 you are taking the view that actually we tighten in 0:16:56.800 --> 0:17:00.640 from here actually, what you're doing is buying assets at 0:17:00.720 --> 0:17:03.360 kind of one fifty and you're locking that in for 0:17:03.560 --> 0:17:06.080 one and a half two years for that spread level. 0:17:06.880 --> 0:17:10.240 So how low can triple as go? Come? We all right, now, 0:17:10.240 --> 0:17:12.240 can you one forty even lower? 0:17:12.680 --> 0:17:17.840 What's the expectation you mentioned the potential supply. I think 0:17:17.880 --> 0:17:21.679 one thing that's kind of putting a stopper on that 0:17:21.880 --> 0:17:25.480 is that asset the ability to source assets. But we 0:17:25.520 --> 0:17:29.240 know that there are a number of clos waiting to 0:17:29.760 --> 0:17:33.040 come to market, so that that puts an upper pressure 0:17:33.119 --> 0:17:37.800 on on triple A spreads and liability spreads. And then 0:17:38.080 --> 0:17:44.560 also I would say that we've got the reset wave 0:17:44.640 --> 0:17:50.320 coming which will also again put new issuanto market, so 0:17:50.359 --> 0:17:52.800 that will help keep it a tightening on triple A 0:17:52.960 --> 0:17:55.800 spreads and liability spreads in general. 0:17:56.680 --> 0:17:59.240 I maybe I can jump in there, what kind of 0:17:59.240 --> 0:18:02.240 I'm interested, what kind of sectors you've got your eye 0:18:02.240 --> 0:18:04.440 on at the moment, What are your kind of likes 0:18:04.440 --> 0:18:05.159 and dislikes. 0:18:05.800 --> 0:18:09.160 So in terms of sectors called to our portfolios will 0:18:09.200 --> 0:18:16.920 typically always have those defensive businesses, so for example, tech, healthcare, 0:18:18.200 --> 0:18:23.200 business services, those businesses where you've got good visibility over revenues, 0:18:23.720 --> 0:18:29.960 strongly bit dar margins, good cash flow generation, and I 0:18:30.000 --> 0:18:32.800 think that that leaning is probably increased. So if you 0:18:32.840 --> 0:18:37.760 look at those sectors relative to their ten year historic 0:18:37.840 --> 0:18:41.120 average and you're just for kind of triple season those 0:18:41.320 --> 0:18:43.880 sectors and distress names in that sectors, actually you're still 0:18:43.920 --> 0:18:48.520 getting some of the highest spreads that you've got relative 0:18:48.560 --> 0:18:52.280 tenure averages. And we think that as you enter into 0:18:52.359 --> 0:18:56.680 period where rates are declining, that will be obviously not 0:18:56.720 --> 0:18:59.840 going to zero, but that pressure that they faced into 0:18:59.880 --> 0:19:03.720 a three will be diminishing. So we continue to like 0:19:03.760 --> 0:19:07.800 those sectors. And if we're wrong and actually in the 0:19:07.880 --> 0:19:11.520 next twelve months are not the uptick that our analysts 0:19:11.560 --> 0:19:15.760 are expecting or not the improvement in earnings that are expecting. 0:19:15.800 --> 0:19:18.800 If we're wrong about that, then you're in these defensive sectors. 0:19:19.880 --> 0:19:23.760 I would say that our sector leaning changes. It's amount. 0:19:24.280 --> 0:19:28.000 There's a sector influence to portfolio constructions changes over time. 0:19:28.119 --> 0:19:30.960 So if you look at the end of twenty twenty two, 0:19:31.440 --> 0:19:34.080 we were looking at kind of the gas situation, and 0:19:34.119 --> 0:19:37.280 that had an impact on kind of what sectors we 0:19:37.320 --> 0:19:41.840 didn't did and didn't like. We'll also move sectors according 0:19:41.880 --> 0:19:46.320 to who can pass through inflation and who can take interest, 0:19:46.840 --> 0:19:54.080 who can take a higher level of interest costs. But 0:19:54.160 --> 0:19:55.960 if you look at it now, I think we're more 0:19:56.000 --> 0:19:59.760 positioning towards less it's less of a sector focus in 0:19:59.800 --> 0:20:03.600 our for a little more about idiosyncratic risks. The operating 0:20:04.000 --> 0:20:08.359 environment for our borrows is becoming more complex. If you 0:20:08.440 --> 0:20:10.920 look at it, They've over the last five years, they've 0:20:10.920 --> 0:20:15.000 had to deal with COVID, they've had to deal with war, 0:20:16.119 --> 0:20:19.080 they had to deal with supply chain issues, rising rates. 0:20:20.560 --> 0:20:24.679 So and if we look forward, there's AI, there's a 0:20:24.760 --> 0:20:27.760 number of elections going on this year and the implications 0:20:27.800 --> 0:20:33.600 of that, working it through changing supply chains again, ESG regulations. 0:20:34.160 --> 0:20:35.800 There are a lot that our borrows need to deal with. 0:20:35.840 --> 0:20:39.960 And making sure that each company understanding what that impact 0:20:40.080 --> 0:20:43.520 is on each of our companies as we look forward 0:20:44.119 --> 0:20:45.560 is quite important. 0:20:46.160 --> 0:20:48.320 To go back to something we talked about earlier, which 0:20:48.400 --> 0:20:51.120 is default rates. They have remained so much lower than 0:20:51.160 --> 0:20:56.880 many were afraid of, but recoveries have not been very great. 0:20:56.920 --> 0:20:59.840 I think Europe's recovery has been better than the US 0:21:00.240 --> 0:21:03.000 because the US has what's called London and lender violence, 0:21:03.040 --> 0:21:07.560 where existing lenders do not treat each other very well 0:21:07.600 --> 0:21:09.800 and prime each other, and Europe doesn't quite have that. 0:21:10.119 --> 0:21:12.960 But can you speak to how you look at recoveries 0:21:13.000 --> 0:21:15.879 and whether maybe whether you think that might come to 0:21:16.080 --> 0:21:18.720 wash upon these shores and what impact that might have. 0:21:19.840 --> 0:21:22.600 Yeah, I think you'll definitely see a dispersion in recovery 0:21:23.200 --> 0:21:25.760 recovery rates, and you've already seen that. You've seen that 0:21:25.840 --> 0:21:29.199 in some of the cross border transactions. A couple that 0:21:29.200 --> 0:21:37.120 have happened in Europe, the creditor and creditor. That kind 0:21:37.160 --> 0:21:40.680 of flavor was tested in Europe and got a lot 0:21:40.720 --> 0:21:42.720 of pushback. I think no one wants to be the 0:21:42.840 --> 0:21:46.240 first one to put that across. As I mentioned, it's 0:21:46.240 --> 0:21:50.160 a more clubby market. So probably think about the US 0:21:50.320 --> 0:21:53.800 as it was call it ten years ago. And so 0:21:55.040 --> 0:21:57.679 there's an impact to treating inland as badly as you 0:21:57.720 --> 0:22:02.000 continue to raise capital. But at the same time, we 0:22:02.280 --> 0:22:05.200 don't all it out. I think one of the things 0:22:05.200 --> 0:22:08.880 that is most distinct about the US is just these 0:22:08.920 --> 0:22:12.320 funds that are actively looking. So in a default situation, 0:22:12.400 --> 0:22:16.439 you'll be thinking about, okay, recoveries, how how we make 0:22:16.480 --> 0:22:18.159 the best of it, But there are actually funds that 0:22:18.520 --> 0:22:22.160 are seeking out default situations and trying to prime lenders, 0:22:22.480 --> 0:22:26.440 and that asset priming and that need to create those 0:22:26.480 --> 0:22:30.479 transactions I think is quite disturbing, but it'd be naive 0:22:30.560 --> 0:22:32.879 to say that it would never come to Europe. 0:22:33.119 --> 0:22:37.000 What about the innovation in clos, Camilla, I want to 0:22:37.000 --> 0:22:40.280 ask you about that. We're seeing more interests in private 0:22:40.280 --> 0:22:43.359 debt clos for example, not just middle market, but you know, 0:22:43.400 --> 0:22:46.440 the larger private debt deals. How do you feel about 0:22:46.440 --> 0:22:48.560 that and what other innovations do you expect this year? 0:22:49.000 --> 0:22:52.080 Yeah, so the COLO market has been fairly innovative, I 0:22:52.119 --> 0:22:56.320 would say since twenty twenty two. So the fact is 0:22:56.400 --> 0:22:59.760 that we've had limited issuance over twenty two and twenty 0:22:59.800 --> 0:23:05.240 two three, and so the way you extract value from 0:23:06.320 --> 0:23:10.640 or the way leverage loans deliver total returns is different. 0:23:11.040 --> 0:23:19.040 So if you look at in twenty twenty two and 0:23:19.080 --> 0:23:23.320 the arbitrage and colos or the value for the equity 0:23:23.320 --> 0:23:26.840 and clos really comes from the fact that prices in 0:23:26.880 --> 0:23:31.119 the leverage loan market were so low versus in a 0:23:31.160 --> 0:23:34.960 more normalized market where if you look at your liabilities, 0:23:35.080 --> 0:23:40.040 so you're financing a portfolio of assets with bonds, then 0:23:40.119 --> 0:23:42.840 your assets spreads also have to rise, but because we 0:23:42.880 --> 0:23:47.159 didn't have any nuissians in terms of assets to reset higher. 0:23:47.240 --> 0:23:51.040 Actually it was the porter part and that led to 0:23:51.320 --> 0:23:58.280 colo structure changing, so not selling single B static issuance, 0:23:58.440 --> 0:24:05.560 changing of non calls. In terms of private deals, I 0:24:05.600 --> 0:24:08.639 think there's a real push to get private credit deals done. 0:24:09.720 --> 0:24:12.720 One of the big challenges apart from the rating agencies 0:24:12.800 --> 0:24:16.000 is getting the diversity of assets in Europe for that 0:24:16.040 --> 0:24:18.720 to happen. So I think the first ones to do 0:24:18.760 --> 0:24:21.440