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Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at.

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Speaker 2: Bloomberg, and I'm Jody Luriy, a senior credit analyst covering

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Speaker 2: the leisure sector at Bloomberg Intelligence. This week, we're very

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Speaker 2: pleased to welcome Sinali Pierre, a portfolio manager at PIMCO,

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Speaker 2: the two trillion dollar asset manager.

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Speaker 3: How are you, Sonali doing great?

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Speaker 4: Thanks for having me, Jody and James.

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Speaker 2: Of course, of course, Sonali is focused on multi sector

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Speaker 2: credit opportunities. She's the lead portfolio manager for Diversified Income

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Speaker 2: and a senior member of the Leverage Finance team. Thank

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Speaker 2: you so much for joining us today, and we're very

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Speaker 2: excited to get your credit views.

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Speaker 1: And Sonati was actually named one of the one hundred

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Speaker 1: most influential women in Finance by Barons last year and

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Speaker 1: so recently made some big calls on the finance sector

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Speaker 1: and bonds in the leisure sector. So we're going to

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Speaker 1: dig into that today, but before we do, I just

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Speaker 1: want to set this scene a little bit here. Markets

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Speaker 1: have been whipsored by trade wars that will probably fuel

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Speaker 1: inflation and could also dent US growth. Both would be

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Speaker 1: very bad for credit. Yet corporate bonds and loans remain

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Speaker 1: priced for perfection. Debt spreads, which we use as a

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Speaker 1: proxy for risk, are pretty close to where they were

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Speaker 1: in two thousand and seven, just before the global financial crisis.

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Speaker 1: If you only looked at metal sorry market pricing, you

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Speaker 1: would think the world was a very peaceful, calm place

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Speaker 1: right now, nothing to worry about at all. But the

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Speaker 1: news headlines would suggest the exact opposite, from radical policy

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Speaker 1: shifts by the US government to wars in Ukraine and

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Speaker 1: the Middle East. And I think there's a lot of

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Speaker 1: complacency out there in markets, but we continue to see

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Speaker 1: very robust investor demand for corporate bonds and loans and

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Speaker 1: not a lot of net new supply. This, more than anything,

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Speaker 1: I think, seems to be keeping valuations quite high. So

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Speaker 1: let's start there, Sinali, what's your Should we worry more

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Speaker 1: about all these headlines or do credit markets rightly show

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Speaker 1: us now that the fundamental risks are actually pretty low.

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Speaker 4: You know, I echo some of the things you've said, certainly.

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Speaker 4: You know, we actually called our last cyclical piece uncertainty

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Speaker 4: is certain, And the reason we titled it that way

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Speaker 4: is because there are elevated geopolitical risks, growth is diverging

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Speaker 4: across markets, and you know what looks like we're a

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Speaker 4: little bit more in this higher for longer regime with

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Speaker 4: the FED being patient as they gather information and data

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Speaker 4: from whether it's the impact of deglobalization, deficit finance, tax cuts. Also,

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Speaker 4: you know, we're seeing the impact of the DOGE, the

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Speaker 4: Department of Government efficiency, deportations, deregulations. So there's a lot

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Speaker 4: out there that's uncertain even in today's policy outlook, and

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Speaker 4: you know, when you factor all that in, some of

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Speaker 4: it can lead to a little bit of inflation. Case

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Speaker 4: is that you know, we will get closer to FED target,

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Speaker 4: but not quite there. And so you know, when we

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Speaker 4: look across we do see a lot of uncertainty. But

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Speaker 4: we think fixed income is in a great position here

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Speaker 4: in large part because while spreads are tight, the yield

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Speaker 4: outlook is so strong in that you know, is it's

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Speaker 4: a good indicator for forward returns, and so even with

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Speaker 4: a FED that might be pausing in the near term,

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Speaker 4: the outlook for potential cuts in the back half of

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Speaker 4: the year could lead to additional capital appreciation for fixed income.

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Speaker 4: But also we're at a point where yields are higher

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Speaker 4: than cash, and cash is essentially renting the yield right

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Speaker 4: because it can change at any point. And when we

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Speaker 4: look at the equity market, it certainly has had a

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Speaker 4: very strong run. But at this point, with the starting

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Speaker 4: level of yield and fixed income, we think it looks

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Speaker 4: a lot more attractive to be in fixed income than

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Speaker 4: either the cash market or equities, although both have served

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Speaker 4: very well previously.

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Speaker 2: So, Siddali, I want to touch on the point that

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Speaker 2: you made about how spreads are tight but yields are attractive,

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Speaker 2: and we've actually we've heard that comment quite a bit recently. Now,

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Speaker 2: are you suggesting that all parts of fixed income look

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Speaker 2: attractive in that sense?

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Speaker 3: Are there certain areas in particular?

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Speaker 2: Is it okay to reach for yield or is it

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Speaker 2: okay to sort of go for more modest yield because

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Speaker 2: the absolute yield is so attractive everywhere.

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Speaker 4: That's a great question, you know. I mean, the income

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Speaker 4: that that starting yield can generate can cushion some spread widening,

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Speaker 4: and even in the event that we saw rates rise,

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Speaker 4: so you know, that's why we continue to see inflows

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Speaker 4: across asset classes. Ig H yield bank loans, et cetera.

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Speaker 4: But it doesn't mean that all these acid classes will

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Speaker 4: have similar return profiles, and of course we know their

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Speaker 4: risk profiles are quite different. From our perspective, we think

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Speaker 4: that high quality fixed income is attractive and at this point,

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Speaker 4: while there's opportunity selectively across each of these asset classes.

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Speaker 4: So in a multisector credit mandate here, you know, we

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Speaker 4: can look across and really dig into that relative value

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Speaker 4: not just by acid allocation, but also by regional selection,

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Speaker 4: industry selection, security selections. So there's a lot of ways

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Speaker 4: there we can extract those singles and doubles in alpha terms.

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Speaker 4: But you know, when we look across these acid classes,

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Speaker 4: you know, the ones that stand out tend to be

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Speaker 4: the ones that we think can you know, add diversification, resilience,

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Speaker 4: and yield to the portfolio across a wide number of

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Speaker 4: economic scenarios. We don't just build our portfolios for that

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Speaker 4: base case, right because obviously the base case many times

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Speaker 4: does not you know, transpire, because there's a lot going

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Speaker 4: on in the world, as we talked about earlier, right

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Speaker 4: with uncertainty being certain, you know, we need to make

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Speaker 4: sure that these portfolios can stand the test of time

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Speaker 4: and be robust.

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Speaker 1: On that note, a lot going on in the world tariffs.

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Speaker 1: You know, that's a lot of uncertainty. There, a lot

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Speaker 1: of announcements, a lot of you know, lack of real

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Speaker 1: clarity on what will actually go through. How do you

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Speaker 1: trade that on fixed income in a fixed incomefolio.

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Speaker 3: Yeah, certainly.

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Speaker 4: So. You know, the the tariffs can be looked at twofold, right,

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Speaker 4: they're somewhat leverage to make deals with other countries, so

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Speaker 4: it could be short lived, but there's also a potential

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Speaker 4: for you know, bringing jobs back to the US, and

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Speaker 4: that can lead to more uncertainty because it can take

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Speaker 4: that's a longer term theme, and so you know, not

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Speaker 4: only is it the impact of tariffs today, but it's

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Speaker 4: also the near term impacts versus the medium and longer

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Speaker 4: term impacts.

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Speaker 3: You know.

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Speaker 4: The way we look at it is making sure that

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Speaker 4: the industries we're in are strong and robust such that

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Speaker 4: they have either of the margin to be able to

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Speaker 4: pass on those tariffs to the consumer, or you know,

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Speaker 4: they have some barriers to entry as well such that

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Speaker 4: that you know, that replacement component is something they can

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Speaker 4: manage as well. And so we're looking at industries to

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Speaker 4: invest in. You know, even outside of this tariff situation

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Speaker 4: we're in today, you know, we are looking for strong

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Speaker 4: credit fundamentals, so meaning companies that have barriers to entry

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Speaker 4: pricing power. You know, if you focus on the fundamentals

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Speaker 4: from the beginning, it actually helps take care of these

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Speaker 4: types of situations when it becomes more acute, right where,

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Speaker 4: whether it's inflation or tariffs. And you know, for example,

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Speaker 4: some of the industries we are concerned about are ones

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Speaker 4: that we were you know, for example, retail, we were

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Speaker 4: concerned about it pre tariff situation, given you know, the

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Speaker 4: impact of online you know, with Amazon going into more

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Speaker 4: and more products, the you know, the traffic in brick

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Speaker 4: and mortar stores being not quite at its pre COVID peak,

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Speaker 4: and there was a lot of reasons to be concerned

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Speaker 4: about retail to begin with. But then you have, you know,

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Speaker 4: the add on of tariffs, and that certainly will squeeze margins,

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Speaker 4: especially for the lower margin, lower quality portions of retail

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Speaker 4: that are also beholden to consumer tastes and trends. So

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Speaker 4: you know, the way to navigate it is really to

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Speaker 4: make sure we're in those stronger companies that have more

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Speaker 4: consistent free cash flow and that we're avoiding some of

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Speaker 4: these sectors where there's just not the ability to flex

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Speaker 4: when things change. So another area we would have some

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Speaker 4: concern around is autos and a little bit more specifically

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Speaker 4: even European autos as we look at tarffs certainly causing

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Speaker 4: some pain there from a trade and tariff perspective.

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Speaker 2: And which industries are the ones that you find more

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Speaker 2: attractive given you know, the margin profile, the cash flow profile,

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Speaker 2: the sort of areas that aren't of concern for you.

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Speaker 4: Yeah, so within investment grating and we do prefer financials,

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Speaker 4: especially the big six banks. They have gotten into a

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Speaker 4: position partly due to regulation, but where metrics are very strong.

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Speaker 4: You know, these are multi national in many cases, we're

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Speaker 4: looking at the global champions even across the globe, and

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Speaker 4: you know, because of the fact that they are serial

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Speaker 4: issuers at times they're trading wide and non financials, although

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Speaker 4: that spread difference has compressed more recently, but certainly that's

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Speaker 4: an area where we think is poised to benefit from

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Speaker 4: potentially being in higher for longer, from overall growth of

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Speaker 4: the market, so broader GDP growth as well, and potentially

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Speaker 4: even deregulation. As we look at this administration's policies other areas.

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Speaker 4: So within you know, high yield, i'd highlight, you know,

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Speaker 4: lodging and leisure demand has been pretty strong and the

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Speaker 4: consumer has been quite resilient. Now you know, it's not

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Speaker 4: the same across all the whole spectrum of consumers. Certainly

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Speaker 4: we've seen greater strength in the higher end consumer and

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Speaker 4: maybe even the medium areas, but where the low end

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Speaker 4: consumer does seem to be in a little bit of

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Speaker 4: a tighter spot. But that is certainly something that's helping.

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Speaker 4: You know, we're starting to see some you know, lodging

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Speaker 4: and leisure companies even or more recently have graduated from

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Speaker 4: high yield and gone into investment grade, and you know,

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Speaker 4: I would say there's some poise to continue to that

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Speaker 4: trend on rising stars, although I think we've seen the

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Speaker 4: bulk of it.

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Speaker 2: And I would say, Sinali that that is music to

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Speaker 2: my ears when you talk about lodging in leisure within

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Speaker 2: high yield, because that's certainly something we've been talking about

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Speaker 2: as well at nauseum, especially given our results to our

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Speaker 2: US travel survey and a lot of other reports that

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Speaker 2: we've done of late. So I think I think probably

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Speaker 2: thinking within that you know, something that was interesting to

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Speaker 2: me at least, and I don't know if this is

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Speaker 2: getting a little bit too detailed for you, is theme parks.

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Speaker 2: You know, they do fit that profile of high barriers

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Speaker 2: to entry, consistent ish cash flows, but they've definitely struggled,

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Speaker 2: and they're within leisure. But I mean that's been an

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Speaker 2: area that I've sort of looked at within my space

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Speaker 2: and said, you know what, as much as things are

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Speaker 2: going well for lodging, as much as things are going

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Speaker 2: well for other parts of leisure such as cruise lines,

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Speaker 2: theme parks still seem not on great footing.

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Speaker 3: What would you say to something like that.

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Speaker 2: I don't know if that's getting a little too specific

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Speaker 2: for you or if it's something that you're thinking about.

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Speaker 4: Absolutely, you know, normalization has been more variable with theme

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Speaker 4: parks and ski resorts and movie theaters too. Right relative

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Speaker 4: to the theme I'm talking about where we've seen more

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Speaker 4: robust demand, those are areas where it's been more variable,

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Speaker 4: and certainly in the movie theaters area lagging. So you know,

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Speaker 4: while we talk about lodging and leisure as an area

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Speaker 4: where overall we're constructive, there's always selection that's super important

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Speaker 4: here within the industry, than within the capital structure as well. Right,

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Speaker 4: So while we've seen the lodging industry actually evolve, right,

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Speaker 4: it's now characterized almost by act light fee based models,

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Speaker 4: where you know, we are seeing higher margins, less volatility,

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Speaker 4: and stronger free cash flow generation. As you highlight, that's

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Speaker 4: not what we're seeing everywhere. And so this is where

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Speaker 4: it becomes very important not just to be selective within

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Speaker 4: an industry by which company we're going to buy which

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Speaker 4: part of the capital structure, and then of course you

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Speaker 4: know what the covenants are as well, because what a

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Speaker 4: company looks like today it may very well not be

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Speaker 4: what it looks like when it's in a more difficult situation.

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Speaker 4: And so you know, we're looking with our analysts to

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Speaker 4: stress test many of these companies, look at the downside

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Speaker 4: protection but also the upside convexity, and when we build

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Speaker 4: a portfolio, we pull that all together to make sure

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Speaker 4: we're aware of, you know, what the correlations are, what

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Speaker 4: the downside risk is, and how we're going to actually

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Speaker 4: see catalyst to the upside and perform with spread tightening.

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Speaker 4: So I would agree with you that it's not uniform

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Speaker 4: across lodging and leisure but there are some really strong

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Speaker 4: spots within lodging, cruise lines and the like, but.

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Speaker 1: The sector as a whole, it must be getting squeezed

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Speaker 1: at some point. I mean, you know, we've had years

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Speaker 1: of this sort of excess spending from the post COVID

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Speaker 1: bending accumulation. We've had, you know, now a lot more

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Speaker 1: pressure on earnings inflation. You know, my eggs are costing

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Speaker 1: me ten dollars a dozen. And the first thing I'm

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Speaker 1: going to cut when I'm under pressure is all of

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Speaker 1: this sort of discretionary I mean, I'm not going on

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Speaker 1: a cruise, I'm not going to go to the theme

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Speaker 1: park because I'm just getting crushed on all sides.

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Speaker 3: So how come?

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Speaker 1: And also I'd add that the leisure sector, retail, you know,

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Speaker 1: these sorts of companies have had such a great run

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Speaker 1: in credit over the last few years. How can that

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Speaker 1: rally be sustained?

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Speaker 4: Yeah, I do think that. You know, as we said,

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Speaker 4: spreads have gotten tighter, so there's not a ton of

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Speaker 4: additional spread tightening. But there is also the potential to

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Speaker 4: either consolidate or to you know, we haven't talked about

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Speaker 4: the M and A theme yet, but there's also the

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Speaker 4: possibility of spread tightening by moving at a classes right

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Speaker 4: as we talked about earlier, with high high yield to

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Speaker 4: investment grade, and then of course creative financing as well,

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Speaker 4: which we haven't touched on just yet. But I think overall, yes,

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Speaker 4: you know, the consumer has performed better than expectations, and

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Speaker 4: that's been supported by low unemployment, positive real wage growth,

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Speaker 4: and in particular among middle income consumers. So yes, you know,

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Speaker 4: certainly the lower end consumer is more vulnerable, and these

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Speaker 4: are some discretionary areas where they can cut, but if

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Speaker 4: you look at forward bookings, it still looks strong. If

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Speaker 4: we look at you know, the delinquency rate, the rate

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Speaker 4: of delinquency increases, they have been accelerating, so you know,

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Speaker 4: this is certainly we're at a point where when spreads

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Speaker 4: are tight, where we really need to take out that

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Speaker 4: fine tooth comb and make sure that we're looking through

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Speaker 4: not just which companies will benefit if the trend continues,

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Speaker 4: but also you know, where is their resilience within their

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Speaker 4: profile to pivot if demand starts to come down, and

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Speaker 4: and also you know, so that pricing coming back, and

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Speaker 4: then also you know, being flexible and adjusting their their

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Speaker 4: capital structure, their pricing and the like.

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Speaker 2: So Sanala, you you did leave a breadcrumb there for

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Speaker 2: M and A as a discussion. And I think we've

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Speaker 2: seen across the board that everyone's expecting a quote unquote

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Speaker 2: dynamite ear for M and A, just given the administration,

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Speaker 2: given everything. But at the same time, we started off

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Speaker 2: this podcast talking about uncertainty with all the different policies,

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Speaker 2: and so M and A hasn't really bubbled up at

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Speaker 2: least yet as as we've expected. What are you thinking

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Speaker 2: when you when you think about uncertainty and when you

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Speaker 2: think about M and A and marrying the two together.

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Speaker 2: We I mean, we did see Hyatt with the playa deal, right,

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Speaker 2: but we're not seeing that giant deluge that that we've expected.

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Speaker 2: So what point does it sort of shift from uncertainty

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Speaker 2: and each day's a different story to yes, M and

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Speaker 2: A is back.

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Speaker 4: Yeah. I think part of the reason it's been a

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Speaker 4: little bit slower than initially maybe forecasted for twenty twenty

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Speaker 4: five is because we're in what looks like higher for

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Speaker 4: longer than initially forecasted going into twenty twenty five, right,

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Speaker 4: and certainly depth financing is not going to come down

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Speaker 4: maybe in the cost quite as quickly. But I still

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Speaker 4: think that there's room for more additional MNA here and

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Speaker 4: that has to do with whether it's you know, it's

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Speaker 4: supported by the needs in also some of these sectors.

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Speaker 4: So you know, the expectation of M and A being

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Speaker 4: high in consumer and TMT, you know, as we look

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Speaker 4: at the build out for you know, the technology AI,

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Speaker 4: if we think about the US exceptionalism point as well,

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Speaker 4: and then also of course with an administration where de

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Speaker 4: regulation seems to be a theme. So I think, you know,

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Speaker 4: also sponsors are at a point where they need to

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Speaker 4: increasingly look for ways to monetize their positions as well.

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Speaker 4: So whether that's you know, bolt on acquisitions perhaps you know,

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Speaker 4: in an early stage rather than a large scale M

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Speaker 4: and A. But I still think this theme is here

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Speaker 4: with US for twenty twenty five, and it's now going

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Speaker 4: to be maybe more of a question of you know,

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Speaker 4: the portion that maybe was considered for debt financing, maybe

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Speaker 4: there's a component that's also equity financed. But you know, overall,

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Speaker 4: I think credit markets are certainly looking for additional new

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Speaker 4: supply and with M and A to be one of

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Speaker 4: those drivers to bring that.

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Speaker 1: So is that the opportunity then in terms of deal making,

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Speaker 1: is it more like it rebalances the market because it

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Speaker 1: seems very out of balance in terms of supply versus demand,

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Speaker 1: or is there an opportunity to play the you know

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Speaker 1: that the the acquisition targets and try and get the

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Speaker 1: change of control prem from that.

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Speaker 4: I think that those are good. Those are two good points, right.

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Speaker 4: One is that the demand for credit generally is very strong,

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Speaker 4: and you know, in another area, you can see that

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Speaker 4: the demand is very strong, not just from the you know,

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Speaker 4: weekly inflows in public markets, but also there's you know,

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Speaker 4: in excess of four hundred billion of capital that's been

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Speaker 4: raised in private credit markets that has not yet been deployed,

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Speaker 4: and given its in locked up vehicles, you need to

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Speaker 4: earn the fee, you need to deploy the capital, right,

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Speaker 4: So that that's one thing that's definitely helping buoy markets

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Speaker 4: overall in terms of tight spreads. But in terms of

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Speaker 4: you know, the way we look at these things is

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Speaker 4: certainly we want to be able to identify the catalyst,

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Speaker 4: meaning the companies that are likely to be bought, you know,

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Speaker 4: and that's what you know, our investors are certainly counting

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Speaker 4: on us, not just from a you know, building portfolios

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Speaker 4: that are robust, as we mentioned that across a wide

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Speaker 4: number of scenarios, but also selecting those that companies that

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Speaker 4: will be beneficiaries of themes and and this cat list

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Speaker 4: so certainly in high yield. Given the average dollar price

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Speaker 4: and given the step rate increase that we saw over

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Speaker 4: twenty twenty two in parts of twenty twenty three, the

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Speaker 4: you know, one to one change of control can be

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Speaker 4: really meaningful today, and so we're certainly looking at, you know,

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Speaker 4: which are the acquisition targets potentially, you know, where what's

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Speaker 4: the dollar price that that curve trades and is there

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Speaker 4: a bond in particular that we think we can get

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Speaker 4: the biggest bang for our buck by being long and

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Speaker 4: then potential acquisition happens and you get that one on

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Speaker 4: one change of control.

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Speaker 1: Which sector is you mostly looking at in that context?

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Speaker 3: Yeah?

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Speaker 4: I think in that context, you know, we will see

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Speaker 4: some M and A in consumer and TMT and building materials,

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Speaker 4: and so those are some areas in particular where we

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Speaker 4: think are poised for M and A.

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Speaker 2: And then I think, you know, thinking along those lines,

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Speaker 2: and only when we think about something like retail, where

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Speaker 2: we did see quite a bit of M and A

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Speaker 2: that sort of fell flat, right, that was significant credit

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Speaker 2: risks and then ended.

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Speaker 3: Up just dwindling.

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Speaker 2: How are you managing through those risks and how are

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Speaker 2: you kind of thinking I mean, obviously, retail is one

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Speaker 2: of the ones you don't like. Financials obviously is one

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Speaker 2: that you do, and that could actually benefit a lot

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Speaker 2: of financial institutions, right in terms of fees and what

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Speaker 2: have you. But where are you sort of thinking that, Okay,

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Speaker 2: this is a good area to look at, or are

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Speaker 2: you just being very credit by credit specific and very

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Speaker 2: picking picky and choosy in terms of what you're thinking

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Speaker 2: about in the context of M A.

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Speaker 4: Yeah, certainly all M and A is not good for

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Speaker 4: all credits, right, so you know we are being selective

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Speaker 4: by you know, by industry, by region, by the specific company,

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Speaker 4: et cetera. But you know, so we're still deploying. You know,

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Speaker 4: we're not going to deploy just because we think something

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Speaker 4: is an M and A target if it's not a

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Speaker 4: sound credit on its own as well, right, because there's

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Speaker 4: always a scenario to let a company go into bankruptcy

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Speaker 4: and then buy assets or buy the company then, right,

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Speaker 4: So you know, first and foremost credit selection is based

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Speaker 4: on you know the strength of credit and where it's going.

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Speaker 4: But you know, we also are looking at many times

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Speaker 4: the standalone first and then deciding, you know, what are

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Speaker 4: the possible outcomes. So that's just one probable outcome when

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Speaker 4: we look at it. You know, we're not banking on

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Speaker 4: and then announced Emina necessarily actually closing, right, So all

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Speaker 4: of this has to kind of be brought to bear

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Speaker 4: in a scenario analysis.

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Speaker 2: So thinking more broadly, when when we're thinking globally, I

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Speaker 2: mean where geographically are you looking both for credit as

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Speaker 2: well as other asset classes and are there certain asset

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Speaker 2: classes that you find interesting? I know you said that

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Speaker 2: European autos are a no go for you guys at

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Speaker 2: the moment or not something that you like retail as well,

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Speaker 2: what are you what are you leaning towards, What regions

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Speaker 2: are you leaning towards? And what asset classes are you

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Speaker 2: leaning towards?

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Speaker 4: Yes, so you know, we still do prefer developed markets

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Speaker 4: over emerging markets overall, you know, and even honing into

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Speaker 4: developed markets while most are heading towards you know, there

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Speaker 4: are central bank targets for inflation.

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Speaker 3: Obviously we may.

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Speaker 4: Still see a rate hike from the Bank of Japan.

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Speaker 4: So you know, within developed markets, we do think the

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Speaker 4: US exceptionalism still has some time and that theme meaning

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Speaker 4: we do prefer the US over Europe, not just due

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Speaker 4: to that, but also around the impact of tariffs. You know,

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Speaker 4: many of these tariffs, while we don't know how long

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Speaker 4: they will last, can certainly hinder growth in many of

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Speaker 4: these areas, including the US potentially but more likely to

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Speaker 4: be more painful for whether it's Canada, Mexico, Europe. And

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Speaker 4: so you know, we've been really looking at the credit,

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Speaker 4: its quality, the relative value. You know, when we look

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Speaker 4: at relative value, we get really granular, making sure we're

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Speaker 4: leaving no stone unturned.

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Speaker 1: On the covenant side, there have been a lot more

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Speaker 1: aggressive credits are on credits to situations, perhaps arising from

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Speaker 1: people not looking at the covenants close enough. But how

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Speaker 1: much of that is becoming part of your investment decision?

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Speaker 1: I mean, do you have to get a lawyer into

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Speaker 1: every every time you make a decision nowadays?

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Speaker 4: You know, I mean, covenants have been loose for quite

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Speaker 4: a long time. So you know, creditor is basically with

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Speaker 4: this amount of demand. You know, many bondholders have whether

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Speaker 4: they did it explicitly or implicitly have agreed to loose docs.

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Speaker 3: You know.

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Speaker 4: Certainly our analysts are looking through these docks with the

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Speaker 4: PM team as well and making sure we're aware of

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Speaker 4: where there's downside potential or where you know, you may

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Speaker 4: need to see amendment activity for example. You know, but

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Speaker 4: certainly this live mobility management exercise being called an exercise

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Speaker 4: is a euphemism of its own right. This is essentially

436
00:23:51,320 --> 00:23:54,200
Speaker 4: creditor on creditor of violence taking out like a knife fight,

437
00:23:54,280 --> 00:23:56,960
Speaker 4: you know. But it's really important to us and to

438
00:23:56,960 --> 00:23:59,600
Speaker 4: make sure that we are well resources to protect our

439
00:23:59,640 --> 00:24:02,800
Speaker 4: clients interests. So you know, we've added a lot of

440
00:24:02,840 --> 00:24:08,160
Speaker 4: resourcing in our alts areas, in our opportunistic credit areas,

441
00:24:08,200 --> 00:24:11,040
Speaker 4: in our distressed areas, really just to make sure that

442
00:24:11,119 --> 00:24:14,919
Speaker 4: we can advocate very effectively on behalf of our clients,

443
00:24:14,960 --> 00:24:17,760
Speaker 4: whether we're going into an lem's type situation, a co

444
00:24:17,800 --> 00:24:22,320
Speaker 4: op agreement, you know. And importantly, what might seem like

445
00:24:22,400 --> 00:24:25,160
Speaker 4: a short term solution is often still not a long

446
00:24:25,280 --> 00:24:28,159
Speaker 4: term solution. So meaning seventy five percent of the default

447
00:24:28,200 --> 00:24:30,400
Speaker 4: in the bank loan market in twenty twenty four were

448
00:24:30,400 --> 00:24:34,280
Speaker 4: from lems, and historically forty percent of them Lems end

449
00:24:34,359 --> 00:24:37,800
Speaker 4: up still defaulting within three years. Right, So while it's

450
00:24:37,800 --> 00:24:41,880
Speaker 4: important to advocate and ensure outcomes here, we're also looking

451
00:24:41,920 --> 00:24:45,840
Speaker 4: to ensure long term outcomes are robust as well.

452
00:24:45,920 --> 00:24:46,080
Speaker 3: Right.

453
00:24:46,440 --> 00:24:48,560
Speaker 4: You don't want to put good money after bad money

454
00:24:49,040 --> 00:24:51,000
Speaker 4: just to say, you know, you were in the in

455
00:24:51,119 --> 00:24:54,040
Speaker 4: group right on a co op, So you know, this

456
00:24:54,160 --> 00:24:57,240
Speaker 4: is certainly something we're looking at and have added a

457
00:24:57,240 --> 00:24:59,840
Speaker 4: lot of resources and have had a lot of resources too,

458
00:25:00,280 --> 00:25:04,400
Speaker 4: but it's certainly something where being at a larger, well

459
00:25:04,440 --> 00:25:08,040
Speaker 4: resourced firm is helpful, and you know, making sure that

460
00:25:08,160 --> 00:25:10,720
Speaker 4: we are reading the docks as we do in advance

461
00:25:10,760 --> 00:25:13,639
Speaker 4: of any of these situations. It really makes sure that

462
00:25:13,720 --> 00:25:18,000
Speaker 4: we are in a better situation before the rubber heads

463
00:25:18,040 --> 00:25:18,360
Speaker 4: the road.

464
00:25:18,840 --> 00:25:20,520
Speaker 1: But surely it only gets worse from here. I mean,

465
00:25:20,520 --> 00:25:22,600
Speaker 1: we've had one guest described it as just capitalism at

466
00:25:22,600 --> 00:25:25,439
Speaker 1: work and it's a natural, you know, just what's going

467
00:25:25,480 --> 00:25:27,399
Speaker 1: to happen, and so I'm kind of you know what

468
00:25:27,760 --> 00:25:29,879
Speaker 1: stops it, and really it's just spreading and it seems

469
00:25:29,880 --> 00:25:31,760
Speaker 1: to be going into all markets at this point.

470
00:25:32,200 --> 00:25:35,080
Speaker 4: Well, I think that's an important part, right to keep perspective,

471
00:25:35,200 --> 00:25:38,359
Speaker 4: which is, you know, less than five percent of the

472
00:25:38,400 --> 00:25:41,760
Speaker 4: high yield and banklal markets are quote unquote distressed, right

473
00:25:41,760 --> 00:25:46,080
Speaker 4: if you use the typical one thousand plus spread, and

474
00:25:46,440 --> 00:25:49,680
Speaker 4: with that, you know about if you look at that portion,

475
00:25:49,800 --> 00:25:52,080
Speaker 4: about a third tends to defall on a given year.

476
00:25:52,119 --> 00:25:54,880
Speaker 4: So we're talking about a very small portion of the market,

477
00:25:55,240 --> 00:25:58,639
Speaker 4: but certainly yes this you know, if we allowed loose docks,

478
00:25:59,800 --> 00:26:02,439
Speaker 4: you know, these are all possibilities. This is why it

479
00:26:02,440 --> 00:26:07,200
Speaker 4: becomes really important to pick. You know, when we're selecting companies,

480
00:26:07,560 --> 00:26:10,120
Speaker 4: we're not looking at you know, we're making sure we're

481
00:26:10,119 --> 00:26:14,160
Speaker 4: picking the right industry and the right company with its

482
00:26:14,200 --> 00:26:18,560
Speaker 4: flexibility meaning having that how it's so important to make

483
00:26:18,600 --> 00:26:21,359
Speaker 4: sure that the company is sound rather than you know,

484
00:26:21,400 --> 00:26:23,560
Speaker 4: the covenants are a sound you don't need to test

485
00:26:23,600 --> 00:26:26,760
Speaker 4: those covenants if you're in a strong company to begin with, right,

486
00:26:27,240 --> 00:26:29,199
Speaker 4: And so that's where it becomes the trade off of

487
00:26:29,280 --> 00:26:33,720
Speaker 4: really trying to forecast ahead what's likely to be the

488
00:26:33,760 --> 00:26:37,280
Speaker 4: possibilities when you look at that sensitivity analysis, because you

489
00:26:37,320 --> 00:26:39,600
Speaker 4: know today it's often when you get the new issue,

490
00:26:40,119 --> 00:26:43,320
Speaker 4: you know, you're not looking at a company that's going

491
00:26:43,400 --> 00:26:47,159
Speaker 4: to struggle, But when you start to map out possible outcomes,

492
00:26:47,920 --> 00:26:50,640
Speaker 4: that's when it gets difficult, and so it's important that

493
00:26:50,720 --> 00:26:53,040
Speaker 4: you know the company being in a better company with

494
00:26:53,160 --> 00:26:57,320
Speaker 4: tight covenants than being in a poor company with loose covenants.

495
00:26:57,320 --> 00:26:58,800
Speaker 4: That's where it's going to get difficult.

496
00:26:59,200 --> 00:27:03,880
Speaker 2: Keeping along that line of distressed and defaults, default rates

497
00:27:03,880 --> 00:27:07,480
Speaker 2: are on historic level, relatively low at the moment, but

498
00:27:07,560 --> 00:27:11,720
Speaker 2: we are starting to see signs of some companies potentially

499
00:27:12,000 --> 00:27:14,840
Speaker 2: going into what you would call Chapter twenty two, meaning

500
00:27:15,320 --> 00:27:20,240
Speaker 2: their second round of Chapter eleven, or possibly some sort

501
00:27:20,240 --> 00:27:22,119
Speaker 2: of restructuring type situation.

502
00:27:22,920 --> 00:27:24,200
Speaker 3: Given where we are.

503
00:27:24,119 --> 00:27:26,320
Speaker 2: With the credit markets, with the credit cycle, I mean,

504
00:27:26,359 --> 00:27:29,760
Speaker 2: do you expect default rates still still stay low or

505
00:27:30,000 --> 00:27:32,000
Speaker 2: or is that sort of the other end of the

506
00:27:32,080 --> 00:27:36,399
Speaker 2: coin when you're talking about what's going on from an

507
00:27:36,520 --> 00:27:38,320
Speaker 2: uncertain global economic environment.

508
00:27:38,720 --> 00:27:41,280
Speaker 4: Yeah, you know, when we look out, the default rate

509
00:27:41,560 --> 00:27:44,280
Speaker 4: is still forecasted to be relatively low. Right, if you

510
00:27:44,320 --> 00:27:47,280
Speaker 4: look at the twelve month trailing par weighted high yield

511
00:27:47,280 --> 00:27:50,639
Speaker 4: default rate has been just one point thirty nine percent,

512
00:27:51,200 --> 00:27:54,080
Speaker 4: so we're below even the long term average. So certainly

513
00:27:54,080 --> 00:27:56,600
Speaker 4: it can tick up from this low level. But when

514
00:27:56,640 --> 00:27:59,439
Speaker 4: you look out, one of the triggers often for default

515
00:27:59,480 --> 00:28:02,520
Speaker 4: is in near term maturity. These companies have been really

516
00:28:02,880 --> 00:28:06,600
Speaker 4: quick to refinance. In fact, eighty percent of the bank

517
00:28:06,600 --> 00:28:10,240
Speaker 4: loan market last year was eighty percent that supply was refinancings.

518
00:28:10,640 --> 00:28:13,120
Speaker 4: So you know, when you look out at the near

519
00:28:13,200 --> 00:28:16,639
Speaker 4: term twenty twenty five, twenty twenty six maturities, it's not

520
00:28:16,720 --> 00:28:19,720
Speaker 4: a wall, and certainly it's manageable, and you know, we

521
00:28:19,760 --> 00:28:22,639
Speaker 4: may even see more repricings this year for what's left

522
00:28:23,080 --> 00:28:26,560
Speaker 4: that you know, there's between that, and it comes back

523
00:28:26,600 --> 00:28:29,360
Speaker 4: to the actual credits and the quality of the credits

524
00:28:29,440 --> 00:28:33,600
Speaker 4: because the portion that's distressed, the fact that there's not

525
00:28:33,640 --> 00:28:35,879
Speaker 4: a lot of near term maturities, you know, that paints

526
00:28:35,920 --> 00:28:39,959
Speaker 4: a pretty strong outlook for credit from a fundamental perspective.

527
00:28:40,880 --> 00:28:43,200
Speaker 4: And then you know, when we look at without that

528
00:28:43,280 --> 00:28:46,320
Speaker 4: near term maturity and there's still a robust open capital

529
00:28:46,360 --> 00:28:51,960
Speaker 4: markets outlook, it certainly is something that can be managed.

530
00:28:52,400 --> 00:28:54,480
Speaker 4: Now that you know, if we're talking about triple cs

531
00:28:54,560 --> 00:28:57,360
Speaker 4: and sort of the wrong industries right where there's been

532
00:28:57,400 --> 00:29:01,080
Speaker 4: some pain, whether it's cable media, retail, you know, there

533
00:29:01,160 --> 00:29:04,239
Speaker 4: certainly will still be defaults. It's just that you know,

534
00:29:04,280 --> 00:29:07,000
Speaker 4: we're also seeing many companies go down the LME route,

535
00:29:07,040 --> 00:29:09,880
Speaker 4: which you know is effectively still taking a haircut on

536
00:29:09,920 --> 00:29:13,800
Speaker 4: your capital, but you know, not an official call it

537
00:29:13,880 --> 00:29:14,600
Speaker 4: Chapter eleven.

538
00:29:15,360 --> 00:29:19,320
Speaker 2: Do you also think that perhaps given the robustness of

539
00:29:19,400 --> 00:29:23,680
Speaker 2: the private credit market, that that's providing an alternative avenue

540
00:29:23,720 --> 00:29:27,280
Speaker 2: for some of these companies to go in terms of financing,

541
00:29:27,360 --> 00:29:30,920
Speaker 2: but also just needing additional sources of capital or is

542
00:29:30,960 --> 00:29:33,960
Speaker 2: that just a separate, complete issue.

543
00:29:34,480 --> 00:29:38,520
Speaker 4: Definitely, you know, the fact that there's capital that's eager

544
00:29:38,560 --> 00:29:43,240
Speaker 4: to be deployed certainly means that they're looking for deals

545
00:29:43,320 --> 00:29:45,640
Speaker 4: right and of the things that are not getting done

546
00:29:45,680 --> 00:29:47,360
Speaker 4: in the highal market. And part of the reason the

547
00:29:47,400 --> 00:29:50,640
Speaker 4: hile market is actually improved in quality over the last decade,

548
00:29:50,880 --> 00:29:54,280
Speaker 4: meaning there's more double B than there has been i

549
00:29:54,360 --> 00:29:56,600
Speaker 4: call it ten years ago in HYLD and that's even

550
00:29:56,680 --> 00:29:59,400
Speaker 4: after two hundred and fifty billion of rising stars across

551
00:29:59,480 --> 00:30:02,320
Speaker 4: twenty twenty in twenty twenty three. Has a lot to

552
00:30:02,360 --> 00:30:05,480
Speaker 4: do with It's not just organic growth that's improved these companies,

553
00:30:05,520 --> 00:30:09,040
Speaker 4: it's also that you know, essentially private credit has helped

554
00:30:09,120 --> 00:30:12,120
Speaker 4: do the laundry of high yield right where if we

555
00:30:12,160 --> 00:30:14,080
Speaker 4: look at the for example, even the bank loan market,

556
00:30:14,120 --> 00:30:17,200
Speaker 4: which has deteriorated in quality over the last decade, as

557
00:30:17,280 --> 00:30:21,440
Speaker 4: companies saw the flexibility to refinance at any time at

558
00:30:21,520 --> 00:30:25,480
Speaker 4: par is quite attractive right when when rates are high

559
00:30:25,480 --> 00:30:28,040
Speaker 4: and at the time earlier spreads were high, that ability

560
00:30:28,080 --> 00:30:31,480
Speaker 4: to just reprice is really helpful versus you know, in

561
00:30:31,480 --> 00:30:33,720
Speaker 4: the high yeal market having a non call three period

562
00:30:33,840 --> 00:30:37,480
Speaker 4: a par plus half the coupon as the first call price,

563
00:30:38,320 --> 00:30:40,840
Speaker 4: you know, where so it's time prohibitive and cost prohibitive

564
00:30:40,840 --> 00:30:43,720
Speaker 4: and high yield. So certainly, you know, having this dry

565
00:30:43,760 --> 00:30:46,320
Speaker 4: capital in private markets has helped. In fact, if you

566
00:30:46,400 --> 00:30:48,960
Speaker 4: look at the just you know, over twenty twenty four

567
00:30:49,680 --> 00:30:53,440
Speaker 4: of the deals that went from the broadly syndicated loan

568
00:30:53,520 --> 00:30:57,280
Speaker 4: market to private credit, you know, fifty six percent of

569
00:30:57,320 --> 00:31:00,320
Speaker 4: those were single B minus, twenty seven percent were triple

570
00:31:00,360 --> 00:31:03,560
Speaker 4: C plus. So yes, in twenty twenty three we did

571
00:31:03,600 --> 00:31:07,120
Speaker 4: see we are seeing this fungibility across high yield bank

572
00:31:07,160 --> 00:31:11,600
Speaker 4: loans and private credit where you know, essentially many times

573
00:31:11,640 --> 00:31:15,000
Speaker 4: we're providing dual track financing to an issuer where wherever

574
00:31:15,040 --> 00:31:17,400
Speaker 4: they want, you know, we'll show them terms of this

575
00:31:17,560 --> 00:31:19,440
Speaker 4: is the price and the covees and the structure. We

576
00:31:19,480 --> 00:31:21,760
Speaker 4: want to see if it's a public deal and this

577
00:31:21,800 --> 00:31:23,320
Speaker 4: is what it looks like if it's a private deal,

578
00:31:23,720 --> 00:31:27,760
Speaker 4: because we do have many strategies that can go across

579
00:31:27,800 --> 00:31:30,480
Speaker 4: these areas, and we want to make sure just we're

580
00:31:30,480 --> 00:31:34,320
Speaker 4: getting compensated for giving up that liquidity and we're getting

581
00:31:34,360 --> 00:31:37,680
Speaker 4: compensated for the different structure if we are. We're pretty

582
00:31:37,720 --> 00:31:40,360
Speaker 4: agnostic which way the company wants to go, but it's

583
00:31:40,400 --> 00:31:43,280
Speaker 4: really important that you know, we realize that what it

584
00:31:43,320 --> 00:31:44,960
Speaker 4: means when you have a lot of capital that's in

585
00:31:44,960 --> 00:31:47,120
Speaker 4: a locked up vehicle that can't go away tomorrow, right

586
00:31:47,160 --> 00:31:49,640
Speaker 4: like the technicals in the public markets, those could go

587
00:31:49,720 --> 00:31:53,920
Speaker 4: way tomorrow, that's not an investing strategy. Whereas here, you know,

588
00:31:53,960 --> 00:31:57,040
Speaker 4: that can certainly lead to sort of the stage we're

589
00:31:57,080 --> 00:31:58,840
Speaker 4: in right now, where spreads are tight and it can

590
00:31:58,920 --> 00:32:01,680
Speaker 4: last a bit longer than me be initially anticipated by

591
00:32:01,920 --> 00:32:04,200
Speaker 4: public markets private markets.

592
00:32:04,200 --> 00:32:06,600
Speaker 1: There that's all people want to talk about right right now,

593
00:32:06,600 --> 00:32:08,960
Speaker 1: and about the massive growth and about the potential for

594
00:32:08,960 --> 00:32:13,240
Speaker 1: forty trillion dollars of investible assets out there. But when

595
00:32:13,240 --> 00:32:15,760
Speaker 1: you look at it across you know, public and private,

596
00:32:16,600 --> 00:32:18,400
Speaker 1: and I know it's hard to compare apples to apples

597
00:32:18,400 --> 00:32:21,120
Speaker 1: because they really, you know, they're very different. But what

598
00:32:21,200 --> 00:32:23,200
Speaker 1: kind of relative value, are you saying, and are you

599
00:32:23,240 --> 00:32:25,400
Speaker 1: able to sort of quantify it maybe by IG and

600
00:32:25,440 --> 00:32:25,880
Speaker 1: high yield.

601
00:32:26,520 --> 00:32:28,480
Speaker 4: Yeah, certainly so, I mean in IG you know, maney

602
00:32:28,480 --> 00:32:31,160
Speaker 4: of these private credit deals, whether you want to call

603
00:32:31,240 --> 00:32:34,400
Speaker 4: them reverse inquiries in the old school way or private placements,

604
00:32:34,800 --> 00:32:37,960
Speaker 4: but you know, many of them are due to companies

605
00:32:38,000 --> 00:32:42,080
Speaker 4: looking for a more unique structure, having some complexity involved

606
00:32:42,120 --> 00:32:46,760
Speaker 4: as well. And you know there are certainly market participants

607
00:32:46,800 --> 00:32:49,200
Speaker 4: that can give afford to give up that liquidity and

608
00:32:49,720 --> 00:32:53,360
Speaker 4: look for that additional spread. You know, this isn't something

609
00:32:53,360 --> 00:32:56,040
Speaker 4: new to him. Go We've been doing reverse inquiry type deals,

610
00:32:56,160 --> 00:32:59,440
Speaker 4: working with issuers, with our eighty plus research analysts, really

611
00:32:59,480 --> 00:33:02,200
Speaker 4: looking to essentially craft the bonds we want to buy

612
00:33:03,080 --> 00:33:05,280
Speaker 4: on behalf of our clients. When we look at it

613
00:33:05,400 --> 00:33:09,920
Speaker 4: versus say the leve fin area, you know, here it's

614
00:33:09,960 --> 00:33:13,400
Speaker 4: a bit more nuanced, certainly because you are you know,

615
00:33:13,440 --> 00:33:16,880
Speaker 4: adding leverage in many of these cases, or you know,

616
00:33:17,280 --> 00:33:20,760
Speaker 4: have seeking control and the like. So it becomes even

617
00:33:20,840 --> 00:33:23,360
Speaker 4: less apples to apples, you know when we talk about it.

618
00:33:23,400 --> 00:33:26,960
Speaker 4: But nonetheless, you know, I think the important part is

619
00:33:26,960 --> 00:33:30,120
Speaker 4: that we're when we make that trade off between public

620
00:33:30,160 --> 00:33:33,120
Speaker 4: to private market that we're getting compensated for the liquidity,

621
00:33:33,360 --> 00:33:37,040
Speaker 4: the opportunity cost, the alpha that we can generate. You know,

622
00:33:37,120 --> 00:33:41,320
Speaker 4: seventy percent of fixing come managers can generate positive alpha,

623
00:33:41,320 --> 00:33:43,440
Speaker 4: and I'd hope to say that it's even better at PIMCO.

624
00:33:44,120 --> 00:33:46,680
Speaker 4: But also the credit quality difference. Right, So if we're

625
00:33:46,680 --> 00:33:50,040
Speaker 4: getting compensated for all of those things, we're pretty agnostic

626
00:33:50,280 --> 00:33:53,680
Speaker 4: between which market a issuer wants to come in, as

627
00:33:53,680 --> 00:33:56,240
Speaker 4: we do have strategies that can do either. But if

628
00:33:56,240 --> 00:33:58,480
Speaker 4: we're not getting compensated, then we say to right now.

629
00:33:58,520 --> 00:34:02,240
Speaker 4: In particular, public fixed income is attractive because it also

630
00:34:02,360 --> 00:34:06,640
Speaker 4: leads you the flexibility to later go into a more

631
00:34:07,000 --> 00:34:10,200
Speaker 4: leverage heavy whether that's you know, the lower quality parts

632
00:34:10,200 --> 00:34:13,239
Speaker 4: of bank loans, high yield or private credit when we

633
00:34:13,320 --> 00:34:16,040
Speaker 4: think the compensation is more considerable.

634
00:34:16,520 --> 00:34:18,520
Speaker 1: But right now, how much more compensation are you getting

635
00:34:18,520 --> 00:34:20,920
Speaker 1: on a let's say an IG private versus a public,

636
00:34:21,280 --> 00:34:23,040
Speaker 1: say high yield And is it enough?

637
00:34:23,800 --> 00:34:24,040
Speaker 3: Yeah?

638
00:34:24,080 --> 00:34:26,640
Speaker 4: So for IG deals, you know, we're seeing anywhere between

639
00:34:26,640 --> 00:34:28,799
Speaker 4: thirty to fifty bases point pickup, and I would say

640
00:34:28,800 --> 00:34:32,800
Speaker 4: it's case by case the is ited enough? Right, because

641
00:34:33,040 --> 00:34:35,840
Speaker 4: it's a question of the complexity and structure as well,

642
00:34:36,239 --> 00:34:38,080
Speaker 4: and so similarly, you know, when we look even in

643
00:34:38,120 --> 00:34:40,239
Speaker 4: lower quality, you know, we that's why I say it's

644
00:34:40,239 --> 00:34:42,640
Speaker 4: like it becomes less of an apples to apples. You know,

645
00:34:42,719 --> 00:34:45,200
Speaker 4: certainly there are heuristics of how much may be more

646
00:34:45,200 --> 00:34:48,240
Speaker 4: spread you'd want to get, but it's really a question

647
00:34:48,360 --> 00:34:51,040
Speaker 4: of you know, also, is this in an industry that

648
00:34:51,080 --> 00:34:53,400
Speaker 4: you may want need to exit or want to exit

649
00:34:53,480 --> 00:34:57,520
Speaker 4: over a secular period, right because you know, again, if

650
00:34:57,520 --> 00:35:01,920
Speaker 4: you're underwriting in with strong standards, good docs, and in

651
00:35:01,920 --> 00:35:04,640
Speaker 4: industries where you know we would want to be in

652
00:35:04,719 --> 00:35:06,960
Speaker 4: for the long term, that's a very different story than

653
00:35:07,040 --> 00:35:10,120
Speaker 4: if you need to change your mind and you know

654
00:35:10,160 --> 00:35:13,160
Speaker 4: where where you kind of can't in those in that

655
00:35:13,239 --> 00:35:16,000
Speaker 4: asset class. You know, I would actually also turn us

656
00:35:16,040 --> 00:35:18,160
Speaker 4: to asset based finance, which you know we think is

657
00:35:18,200 --> 00:35:21,440
Speaker 4: quite attractive. You know, you're getting that investment grade type

658
00:35:21,920 --> 00:35:26,880
Speaker 4: credit quality and you're getting more compensation for you know,

659
00:35:26,960 --> 00:35:30,440
Speaker 4: the complexity and and it's an area where we think

660
00:35:30,480 --> 00:35:35,520
Speaker 4: a PIMPCO we've got some edge given our significant footprint

661
00:35:35,640 --> 00:35:40,400
Speaker 4: in securitized credit and you know also relationships as well.

662
00:35:41,160 --> 00:35:44,239
Speaker 2: So you talked about acid beefs financing as an area

663
00:35:44,280 --> 00:35:46,320
Speaker 2: to go into. Are there certain sectors, Are there certain

664
00:35:46,360 --> 00:35:47,960
Speaker 2: areas that you find most attractive.

665
00:35:48,680 --> 00:35:51,080
Speaker 4: Yeah, well, you know, we do find acid based lending

666
00:35:51,280 --> 00:35:54,160
Speaker 4: quite attractive, you know for us, I would say it's

667
00:35:54,160 --> 00:35:56,840
Speaker 4: also not something new given you know, over the last

668
00:35:56,880 --> 00:35:59,239
Speaker 4: fifteen years we've deployed close to two hundred billion in

669
00:35:59,520 --> 00:36:03,960
Speaker 4: private ass based credit. What we're looking to do here is,

670
00:36:04,080 --> 00:36:09,400
Speaker 4: you know, we're seeing quite attractive investment grade opportunities with

671
00:36:10,160 --> 00:36:15,040
Speaker 4: a bigger spread pickup than say direct lending in IG

672
00:36:15,320 --> 00:36:18,360
Speaker 4: so the four A two market and so you know,

673
00:36:18,440 --> 00:36:23,840
Speaker 4: with that you're getting the better documentation and you know,

674
00:36:24,080 --> 00:36:27,560
Speaker 4: essentially a bigger spread pickup, and it's an area where

675
00:36:27,600 --> 00:36:29,640
Speaker 4: we know quite well. So this is something we've found

676
00:36:29,719 --> 00:36:33,160
Speaker 4: quite attractive and have also deployed additional resourcing here as well.

677
00:36:33,360 --> 00:36:36,200
Speaker 4: In terms of, you know, what we're looking at, I

678
00:36:36,200 --> 00:36:40,120
Speaker 4: would say the opportunity set is pretty broad, but fun financings,

679
00:36:40,160 --> 00:36:42,320
Speaker 4: consumer and non consumer related credit.

680
00:36:43,040 --> 00:36:44,759
Speaker 1: Given the tight spreads that we've talked about, I mean,

681
00:36:44,800 --> 00:36:47,240
Speaker 1: there's very little room for error. There's very little potential

682
00:36:47,239 --> 00:36:50,080
Speaker 1: compensation for credit risk as it is, and there are

683
00:36:50,080 --> 00:36:52,000
Speaker 1: so many things that could potentially go wrong. You know

684
00:36:52,040 --> 00:36:54,480
Speaker 1: that the trade wars we started talking about at the beginning,

685
00:36:54,480 --> 00:36:55,759
Speaker 1: and all the other stuff that's going on in the

686
00:36:55,760 --> 00:36:59,840
Speaker 1: policy side could end up hitting growth. It could hit earnings.

687
00:37:00,239 --> 00:37:03,880
Speaker 1: You know, we might get declining earnings and declining growth

688
00:37:03,920 --> 00:37:07,799
Speaker 1: and still very high inflation, you know, taculation potentially, which

689
00:37:07,840 --> 00:37:09,840
Speaker 1: would be pretty bad for credit. And yet none of

690
00:37:09,840 --> 00:37:11,680
Speaker 1: this seems to be priced in. So is there a

691
00:37:11,680 --> 00:37:14,000
Speaker 1: way to hedge any of those views if you take

692
00:37:14,040 --> 00:37:15,920
Speaker 1: a take a I mean other than the CDX, which

693
00:37:15,920 --> 00:37:17,840
Speaker 1: I guess everyone is saying is very very cheap at

694
00:37:17,880 --> 00:37:19,120
Speaker 1: the moment, Is there is there something you can do

695
00:37:19,200 --> 00:37:19,760
Speaker 1: to hedge?

696
00:37:20,120 --> 00:37:22,120
Speaker 4: So actually, you know, this is where I think our

697
00:37:22,239 --> 00:37:25,799
Speaker 4: portfolio construction is so important, right, which is rather than

698
00:37:26,120 --> 00:37:30,040
Speaker 4: looking for those hedges and looking for ways to reduce risk,

699
00:37:30,920 --> 00:37:33,600
Speaker 4: you know, we'd rather reduce the risk that we're concerned about,

700
00:37:33,640 --> 00:37:35,800
Speaker 4: and so when in doing so, you know, many times

701
00:37:35,800 --> 00:37:39,200
Speaker 4: we're actually have sold protection to those who are looking

702
00:37:39,239 --> 00:37:42,080
Speaker 4: for the quick way out of the risk and looking

703
00:37:42,120 --> 00:37:44,640
Speaker 4: at the relative value between cash and derivative markets and

704
00:37:44,640 --> 00:37:47,839
Speaker 4: making that decision based on the relative value. But in

705
00:37:47,920 --> 00:37:50,080
Speaker 4: terms of you know, how do we shore up the portfolio?

706
00:37:50,520 --> 00:37:53,239
Speaker 4: You know, we're looking for ways to build resilience and

707
00:37:53,280 --> 00:37:55,840
Speaker 4: that downside protection. And so one thing, for example, is

708
00:37:55,840 --> 00:38:00,799
Speaker 4: adding some securitized credit to our multi sector mandates. It's

709
00:38:00,840 --> 00:38:03,520
Speaker 4: also looking at, you know, within high yield for example,

710
00:38:03,560 --> 00:38:06,600
Speaker 4: thirty five percent of that market is now secured, so

711
00:38:06,640 --> 00:38:09,520
Speaker 4: maybe looking up at a secured bond versus an unsecured holding,

712
00:38:10,080 --> 00:38:13,840
Speaker 4: depending on the relative value. It's also looking at, you know,

713
00:38:14,000 --> 00:38:16,800
Speaker 4: certainly the credit selection. But when we even go into

714
00:38:17,280 --> 00:38:21,960
Speaker 4: other ways of building that resilience, you know, is you know,

715
00:38:22,200 --> 00:38:24,840
Speaker 4: really being aware of correlated risks and the like. And

716
00:38:24,880 --> 00:38:28,040
Speaker 4: so while spreads are tight, it's super important to be

717
00:38:28,239 --> 00:38:30,680
Speaker 4: invested right now because of how high the yields are,

718
00:38:30,760 --> 00:38:34,040
Speaker 4: and in order to wait for that quote unquote backup

719
00:38:34,080 --> 00:38:39,520
Speaker 4: that may come in credit markets, the not being invested

720
00:38:39,560 --> 00:38:42,080
Speaker 4: at that time unless you can say precisely when that

721
00:38:42,160 --> 00:38:46,800
Speaker 4: backup will be, it's very difficult to forego the income

722
00:38:46,840 --> 00:38:50,640
Speaker 4: that that fixed income can produce. So I would say,

723
00:38:50,680 --> 00:38:53,759
Speaker 4: you know, instead, it's important to look at the portfolio

724
00:38:53,880 --> 00:38:57,280
Speaker 4: very granularly and maybe reduce some of the cyclicals versus

725
00:38:57,320 --> 00:39:00,520
Speaker 4: non cyclicals and kind of be invested and be ready

726
00:39:00,560 --> 00:39:04,360
Speaker 4: and poised with that flexibility and liquidity to go further

727
00:39:04,440 --> 00:39:08,440
Speaker 4: on offense. If we were to see a backup when you.

728
00:39:08,360 --> 00:39:11,480
Speaker 1: Look around everything that you get to see, Sonali, what

729
00:39:11,520 --> 00:39:12,880
Speaker 1: would you put your finger on in terms of the

730
00:39:12,880 --> 00:39:15,560
Speaker 1: best relative value for let's say the next twelve to

731
00:39:15,560 --> 00:39:16,360
Speaker 1: eighteen months.

732
00:39:16,560 --> 00:39:18,560
Speaker 4: Yeah, I think you know at this point, because there

733
00:39:18,600 --> 00:39:23,680
Speaker 4: isn't a singular beta that's miss priced or attractive within

734
00:39:23,800 --> 00:39:27,719
Speaker 4: corporate credit markets. It's really building that resilience in right.

735
00:39:27,760 --> 00:39:31,600
Speaker 4: So if I think about, you know, where the portfolio

736
00:39:32,080 --> 00:39:35,279
Speaker 4: has alpha potential over the next year, you know it's

737
00:39:35,360 --> 00:39:38,680
Speaker 4: in that. It's in the fact that, yes, the selection

738
00:39:38,760 --> 00:39:40,600
Speaker 4: is part of it, but the dispersion is also a

739
00:39:40,640 --> 00:39:44,480
Speaker 4: part of it. And then being in areas where we

740
00:39:44,520 --> 00:39:47,920
Speaker 4: can benefit from, you know, the flexibility. So for example,

741
00:39:48,520 --> 00:39:51,799
Speaker 4: having a derivative position for us means that we have

742
00:39:51,920 --> 00:39:56,680
Speaker 4: cash backing that. So when others say there's outflows broadly

743
00:39:56,719 --> 00:39:58,480
Speaker 4: in the market and people need to sell to be

744
00:39:58,520 --> 00:40:01,960
Speaker 4: able to return cash to their investors, that's a time

745
00:40:02,000 --> 00:40:04,640
Speaker 4: where we're sitting on cash, we can quickly unwind the

746
00:40:04,640 --> 00:40:09,000
Speaker 4: derivatives and actually step in and be a buyer of bonds,

747
00:40:09,080 --> 00:40:12,080
Speaker 4: essentially becoming the price maker, right. And so that's why

748
00:40:12,160 --> 00:40:17,080
Speaker 4: that portfolio construction becomes really important, and you know, it

749
00:40:17,120 --> 00:40:19,759
Speaker 4: is so important because we don't know when we may

750
00:40:19,840 --> 00:40:22,759
Speaker 4: see a backup in spreads. But what we do know

751
00:40:23,040 --> 00:40:25,200
Speaker 4: is that for now, it looks like the market's in

752
00:40:25,239 --> 00:40:30,200
Speaker 4: a pretty strong place from a broad macro picture growth picture,

753
00:40:31,200 --> 00:40:35,360
Speaker 4: and you know, there's always that potential for us to

754
00:40:35,400 --> 00:40:38,520
Speaker 4: see a hiccup given how tight spreads are. So if

755
00:40:38,520 --> 00:40:41,600
Speaker 4: we built that flexibility into the construction, we can kind

756
00:40:41,640 --> 00:40:43,879
Speaker 4: of perform across both scenarios.

757
00:40:44,239 --> 00:40:47,640
Speaker 1: So there's nothing that really looks cheap right now, corporate bonds, loans,

758
00:40:47,960 --> 00:40:50,160
Speaker 1: structure of finance, mortgages, anything like that.

759
00:40:50,400 --> 00:40:51,839
Speaker 4: Yeah, So I would say the things that we think

760
00:40:51,880 --> 00:40:54,879
Speaker 4: are attractive outright right now is certainly the asset based

761
00:40:54,920 --> 00:40:59,840
Speaker 4: lending looks attractive for the quality of the risk versus

762
00:41:00,080 --> 00:41:03,799
Speaker 4: the spreads we can get, so that looks attractive. Other

763
00:41:03,880 --> 00:41:06,799
Speaker 4: areas that look attractive agency mortgages. You know, if we

764
00:41:06,840 --> 00:41:09,120
Speaker 4: look at the spread there, it's almost similar to like

765
00:41:09,160 --> 00:41:11,720
Speaker 4: single a corporate and you're picking up an implicit government

766
00:41:11,760 --> 00:41:16,400
Speaker 4: guarantee as well as liquidity, So that looks attractive. Parts

767
00:41:16,480 --> 00:41:20,120
Speaker 4: of the non agency market certainly look attractive versus some

768
00:41:20,280 --> 00:41:23,560
Speaker 4: areas of corporate credit and then within corporate credit, I

769
00:41:23,560 --> 00:41:27,640
Speaker 4: think it's more nuanced at this point, given how much

770
00:41:27,640 --> 00:41:30,040
Speaker 4: spreads have compressed, and so there I would say it's

771
00:41:30,080 --> 00:41:34,880
Speaker 4: more about the right industry, the right covenant package, et cetera,

772
00:41:35,360 --> 00:41:37,640
Speaker 4: in terms of the selection, and so that that becomes

773
00:41:37,719 --> 00:41:39,040
Speaker 4: very human capital intensive.

774
00:41:39,480 --> 00:41:42,480
Speaker 1: So you sound quite positive, You sound quite optimistic, although

775
00:41:42,560 --> 00:41:45,040
Speaker 1: whenever I look at the news, I struggle to feel

776
00:41:45,200 --> 00:41:47,920
Speaker 1: the same way. Why should I be optimistic?

777
00:41:47,920 --> 00:41:48,439
Speaker 4: Why? Why?

778
00:41:48,640 --> 00:41:52,839
Speaker 1: You know, what's the opportunity to the optimistic take? And

779
00:41:52,920 --> 00:41:54,400
Speaker 1: is there anything at all you worry about?

780
00:41:54,719 --> 00:41:56,399
Speaker 4: So certainly we worry about a lot of things as

781
00:41:56,400 --> 00:42:01,120
Speaker 4: fixed income investors, whether it's geopolitics, whether it's you know,

782
00:42:01,200 --> 00:42:04,359
Speaker 4: the path for monetary policy, or the lot you know,

783
00:42:04,440 --> 00:42:07,200
Speaker 4: how difficult it maybe to get additional fiscal policy, that

784
00:42:07,360 --> 00:42:10,520
Speaker 4: change in administration's policies and their impacts. So there's a

785
00:42:10,560 --> 00:42:14,240
Speaker 4: lot to worry about. That said, today's outlook for fixed

786
00:42:14,239 --> 00:42:17,000
Speaker 4: income in particular is very strong.

787
00:42:17,400 --> 00:42:17,600
Speaker 3: Right.

788
00:42:18,000 --> 00:42:21,520
Speaker 4: We haven't seen this rate reset up to this type

789
00:42:21,520 --> 00:42:23,640
Speaker 4: of level in a long time, and so it's really

790
00:42:23,719 --> 00:42:27,320
Speaker 4: providing a real opportunity from a historical perspective as well.

791
00:42:28,040 --> 00:42:30,960
Speaker 4: And then while spreads are tight, admittedly you know, when

792
00:42:30,960 --> 00:42:33,000
Speaker 4: we look at the fundamentals of these companies, we look

793
00:42:33,000 --> 00:42:36,440
Speaker 4: at the macro outlook for growth. You know, there's a

794
00:42:36,440 --> 00:42:38,920
Speaker 4: scenario where we can stay in this type of environment

795
00:42:39,040 --> 00:42:42,319
Speaker 4: for longer than say, the historical spread would suggest. Right,

796
00:42:42,800 --> 00:42:44,520
Speaker 4: And so as a result, we need to be invested,

797
00:42:44,520 --> 00:42:46,520
Speaker 4: and we need to look for ways in which we

798
00:42:46,600 --> 00:42:51,279
Speaker 4: can make sure our portfolios are flexible and liquid and

799
00:42:51,360 --> 00:42:55,520
Speaker 4: able to move where when the time comes. But for now,

800
00:42:55,560 --> 00:42:59,120
Speaker 4: we want to make sure that we are outperforming by

801
00:42:59,200 --> 00:43:02,360
Speaker 4: ways of you know, with discipline such that you know,

802
00:43:02,400 --> 00:43:05,360
Speaker 4: when those days come that you're worried about, you know,

803
00:43:05,400 --> 00:43:08,879
Speaker 4: we can move on offense and really you know, move

804
00:43:08,920 --> 00:43:12,399
Speaker 4: into some of these more economically sensitive areas that will

805
00:43:12,400 --> 00:43:13,200
Speaker 4: have repriced.

806
00:43:13,480 --> 00:43:15,760
Speaker 1: But you already do expect spreads to say this type

807
00:43:16,000 --> 00:43:17,480
Speaker 1: for let's say the rest of the year.

808
00:43:18,280 --> 00:43:21,560
Speaker 4: We will certainly see volatility as headlines move, as rates move,

809
00:43:21,800 --> 00:43:26,440
Speaker 4: as you know, policy implication implications are digested. It's just that,

810
00:43:27,000 --> 00:43:29,520
Speaker 4: as I mentioned earlier, you know, at this level of yield,

811
00:43:29,600 --> 00:43:32,840
Speaker 4: if you get a twenty five bit spread widening, you

812
00:43:32,840 --> 00:43:35,960
Speaker 4: can absorb that and still see positive potential returns on

813
00:43:36,000 --> 00:43:39,200
Speaker 4: an absolute basis. Right, So it's much more a question

814
00:43:39,239 --> 00:43:44,240
Speaker 4: of timing magnitude, and from here the forecast doesn't appear

815
00:43:44,320 --> 00:43:48,120
Speaker 4: to be for a significant correction, although that's always possible,

816
00:43:48,120 --> 00:43:50,719
Speaker 4: and so we'll make sure that we can still weather

817
00:43:50,800 --> 00:43:51,440
Speaker 4: that as well.

818
00:43:51,760 --> 00:43:53,719
Speaker 1: Do you see anything that might shake the demand for

819
00:43:53,760 --> 00:43:57,160
Speaker 1: credit though it it just seems relentless and constantly.

820
00:43:56,760 --> 00:43:57,920
Speaker 3: Growing, you know.

821
00:43:58,000 --> 00:44:01,600
Speaker 4: I I think if I guess areas where you know

822
00:44:01,640 --> 00:44:04,879
Speaker 4: we could come up short, would be whether it's geopolitical

823
00:44:04,960 --> 00:44:07,880
Speaker 4: risk out there, whether it's you know, M and A

824
00:44:08,000 --> 00:44:11,879
Speaker 4: not materializing and therefore it's you know, you're chasing into

825
00:44:11,960 --> 00:44:15,920
Speaker 4: newer tights you know, in the market, or just an

826
00:44:16,000 --> 00:44:20,399
Speaker 4: upset in the overall macro outlook. Certainly, if growth were

827
00:44:20,400 --> 00:44:23,759
Speaker 4: in question, that would certainly lead to some discomfort in

828
00:44:23,840 --> 00:44:28,399
Speaker 4: the economically sensitive areas that are very levered. So there's

829
00:44:28,480 --> 00:44:32,360
Speaker 4: certainly a scenario for spread widening and or a big

830
00:44:32,880 --> 00:44:35,680
Speaker 4: potential for spread widening. It's just a question of the

831
00:44:35,680 --> 00:44:37,959
Speaker 4: probabilities we assigned to each of these scenarios.

832
00:44:38,120 --> 00:44:40,799
Speaker 1: Great stuff, Sinili Pierre, portfolio manager at PIMCO. It's been

833
00:44:40,800 --> 00:44:42,640
Speaker 1: a pleasure having you on the credit edge many thanks,

834
00:44:42,920 --> 00:44:44,960
Speaker 1: thanks so much, and of course we're very grateful to

835
00:44:45,040 --> 00:44:47,720
Speaker 1: Jody Lewi from Bloomberg Intelligence. Thanks for joining us today, Jody,

836
00:44:48,000 --> 00:44:48,719
Speaker 1: of course James.

837
00:44:48,760 --> 00:44:49,640
Speaker 3: As always, for.

838
00:44:49,640 --> 00:44:52,160
Speaker 1: More Credit Analysis, read all of Jody Lewie's great work

839
00:44:52,160 --> 00:44:54,920
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844
00:45:07,719 --> 00:45:10,640
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847
00:45:17,680 --> 00:45:21,000
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848
00:45:21,000 --> 00:45:23,120
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849
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