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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 Crumby. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Matt Egan, co

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Speaker 1: head of the Full Discretion team at Loomis Sales. How

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Speaker 1: are you, Matt?

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Speaker 2: Very well, Thanks James, Thank you so.

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Speaker 1: Much for joining us today. We're very excited to dig

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Speaker 1: into your market views and the outlook. We're also delighted

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Speaker 1: to welcome back Bloomberg's Lisa Lee, covering credit markets from London.

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Speaker 1: Great to see you again, Lisa.

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Speaker 3: Happy to be here, James, I'm.

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Speaker 1: From Bloomberg Intelligence. Excellent to have back on the show.

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Speaker 1: Steve Flynn from Bloomberg Intelligence in New York. Welcome Steve.

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Speaker 4: Thanks, great to be back.

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Speaker 1: So let's start with you, Matt. It's great to have

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Speaker 1: you on the Credit Edge. But before I ask you

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Speaker 1: to explain to our listeners what full discretion actually means,

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Speaker 1: I wanted to just set the scene a little bit.

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Speaker 1: Credit market's a tree at very bullish levels, barn spreads

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Speaker 1: at the titus in two years, which means you're not

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Speaker 1: getting very compensated for the risk of borrowers not paying

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Speaker 1: you back. In addition, corporate bonds across the board are

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Speaker 1: very much in demand. There are even some signs of

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Speaker 1: froth in the marketplace, which I hope we'll get to

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Speaker 1: discuss a bit later. Meanwhile, there's this growing sense that

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Speaker 1: the US economy can avoid recession. Companies are just doing

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Speaker 1: fine with the much higher levels of borrowing cost and

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Speaker 1: that rate cuts just a matter of time, which will

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Speaker 1: juice the demand for yield. At the same time, we

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Speaker 1: see record levels of bond issuance. US companies have a

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Speaker 1: lot more refinancing to do this year, and they're taking

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Speaker 1: advantage of a window to sell a lot of bonds.

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Speaker 1: And there's a big boom going on in private debt

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Speaker 1: and asset based finance. So what's your take, Matt. There's

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Speaker 1: a long term participant in this market, credit markets offering

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Speaker 1: fair value relat to the risk. Is it all as

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Speaker 1: great as everyone's saying it is?

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Speaker 5: I think when you look at credit markets and judging

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Speaker 5: from the spread levels, I think they've gone a bit

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Speaker 5: too far. They've compressed too much. We're fading them on

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Speaker 5: the margin. On the other hand, I don't see anything

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Speaker 5: worrisome regarding credit losses, So you know, It's interesting of

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Speaker 5: the last couple of years, investors have been a bit

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Speaker 5: fluwnox by credit spreads and where they've lived. And you know,

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Speaker 5: as an investor over looking at these markets over long term,

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Speaker 5: you really put credit markets they tend to live in

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Speaker 5: two different regimes. One is a distressed regime where there's

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Speaker 5: a spike in losses, and of course high yield spreads

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Speaker 5: in that environment will go to something like six fifty

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Speaker 5: or high or eight hundred, or you could live in

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Speaker 5: this more benign, non stressed environment where losses tend to

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Speaker 5: be at relatively low levels. I think we're in that

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Speaker 5: kind of market right now, and it tends to live

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Speaker 5: in a trading range. And right now we're in a

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Speaker 5: seasonally tight period of that trading range, just from a

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Speaker 5: seasonal calendar perspective, and so you want to be sort

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Speaker 5: of fading the tight end of that range, but within

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Speaker 5: the range, I think you want to stay invested in spreads.

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Speaker 5: You know, history shows during these types of mars markets

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Speaker 5: you want to harvest that extra risk premium and compound

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Speaker 5: it and that that carry is going to win for

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Speaker 5: you as an investor.

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Speaker 1: So you mentioned high yield spreads are six fifty in

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Speaker 1: a typical most sort of recessionary environment. Now they're closer

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Speaker 1: to three hundred. What's the kind of fair value you're

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Speaker 1: looking at? I mean, you're fading it at the tights,

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Speaker 1: But what's the sort of fair value level do you think?

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Speaker 5: I think you know, in the near the very near term,

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Speaker 5: they could kind of crack through three hundred on the

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Speaker 5: high yield uh basis that that's not unheard of if

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Speaker 5: you look back in history. Uh you know, just as

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Speaker 5: you mentioned, sort of the push to invest in that space.

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Speaker 5: The technicals are strong on the upper bound. You could

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Speaker 5: see high yield easily in a normal trading rate, could

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Speaker 5: easily go out to four hundred, maybe even four hundred

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Speaker 5: and fifty basis points, and you want to be a

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Speaker 5: buyer on those on those weaker ends of those market.

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Speaker 5: So it's almost like to me, it's a it's a

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Speaker 5: different kind of market than we've seen in a long time,

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Speaker 5: because you know, when you were in this sort of

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Speaker 5: this this you know, uh environment where you had the

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Speaker 5: GFC and an explosion and losses and then you had

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Speaker 5: the the worries regarding the pandemic or things like that,

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Speaker 5: you get some big volatility. This reminds me of more

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Speaker 5: of a pre GFC type of market, where you can

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Speaker 5: live in these uh modest ranges in your year, can

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Speaker 5: be made as a you know, as a professional investor

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Speaker 5: in short periods when you know you're at the trading

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Speaker 5: at the wider end of those markets.

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Speaker 1: But only about eighteen months ago, we were all really

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Speaker 1: worried about a ton of distress defaults, you know, some

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Speaker 1: real problems in the market, given how high rates had

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Speaker 1: suddenly gone, and how you know, some of the companies

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Speaker 1: teddy with weak runnings, we're going to be maybe struggling,

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Speaker 1: but that never happened. What do you make of that?

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Speaker 2: Right?

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Speaker 5: This has been a very interesting cycle, and I think

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Speaker 5: a cycle that we could potentially see going forward, which

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Speaker 5: is you're going to see the credit markets the credit cycle,

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Speaker 5: and we're cycle based investors. The credit cycle gets a

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Speaker 5: bit more volatile and shortened relative to the so called

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Speaker 5: great moderation that we used to see. And I don't

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Speaker 5: think we're gonna get the kind of fed put that

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Speaker 5: we've gotten in prior markets.

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Speaker 2: So you have to keep that in mind.

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Speaker 5: And this current cycle that we are in is a

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Speaker 5: good example of that, you know, So if you look

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Speaker 5: back at let's just take the downturn.

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Speaker 2: It was very quick and what it was.

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Speaker 5: Related to the pandemic obviously, and the FED did use

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Speaker 5: its put for good reason during that period, so it

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Speaker 5: didn't last long. And then as you move into the

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Speaker 5: next phase of the cycle, that tends to be what

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Speaker 5: we call credit repair, that lasted, you know, only a

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Speaker 5: few months, and then you're right into the recovery that

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Speaker 5: that lasted a matter of months, and you're back into

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Speaker 5: what we call the longer phase of the market, which

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Speaker 5: tends to be we call it the expansion late cycle

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Speaker 5: that tends to run very long. But this time it

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Speaker 5: was short circuited by inflation and the worries about it

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Speaker 5: and of course the hawkish pivot from the FED, and

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Speaker 5: along with that, investors started pricing in a very high

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Speaker 5: probability and rightly so, of a potential downturn. But the

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Speaker 5: reason there were flamox by this is they were expecting

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Speaker 5: spreads to widen much more than they did, you know,

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Speaker 5: and we did get out to five hundred or so

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Speaker 5: in the in the highyal markets. Is the canary in

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Speaker 5: the coal mine as an example. But people were saying,

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Speaker 5: as we were talking about before where are we going

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Speaker 5: to go into a distress market where loss is going

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Speaker 5: to be even higher that would push you into that.

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Speaker 2: More distress regime.

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Speaker 5: We think, actually, when we this is part of our

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Speaker 5: philosophy of looking at credit spreads themselves, it's not so

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Speaker 5: much the actual spread spreads are actually a very poor

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Speaker 5: predictor of ford performance in the credit markets. What's more

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Speaker 5: important is thinging about what are the losses going to

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Speaker 5: be as an investor want to be exposed to in

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Speaker 5: terms of downgrades and in the case of high yield,

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Speaker 5: potentially defaults. So what we do is look at what

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Speaker 5: is we call the risk premium, and that's simply the

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Speaker 5: spread that you observe in the marketplace minus the forward

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Speaker 5: looking losses. And the trick to investing really in the

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Speaker 5: middle of twenty twenty two on through twenty twenty three

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Speaker 5: was to recognize that even though there was a higher

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Speaker 5: probability of a downturn, that losses, even in the case

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Speaker 5: of a downturn, we're going to remain unusually low, and

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Speaker 5: therefore your risk premium was actually abnormally wide, you know,

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Speaker 5: at above medium levels. Now fast forward to today and

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Speaker 5: because people have now bought into the soft landing that's

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Speaker 5: taken off the table, you know, a recession and their

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Speaker 5: view of losses. They've actually come rest that risk premium

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Speaker 5: to below medium levels, which is not inconsistent for late expansion,

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Speaker 5: but you're definitely below You're in the sort of the

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Speaker 5: lower end of the range for what we would call

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Speaker 5: it's a more accurate predictor, which is risk premiums.

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Speaker 3: So when you look at the default expectations, do you

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Speaker 3: think the market has a correct or maybe it's a

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Speaker 3: little bit under waiting how much default there might be.

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Speaker 3: And also, can you speak about recoveries because it's not

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Speaker 3: just defaults. Recoveries have been really low in both high

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Speaker 3: yould bonds, but especially in leverage loans right.

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Speaker 5: Well, leverage loans have been higher than high yield, and

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Speaker 5: I think there's an interesting sub theme going on there,

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Speaker 5: which is the convergence between bank loans and high yield.

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Speaker 2: I think the market is correct to assume.

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Speaker 5: That there won't be a lot of losses coming out

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Speaker 5: of the high yeal market. And for that matter, investment

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Speaker 5: grade now investment grade really talking about downgrades, but more

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Speaker 5: importantly sort of those fallen angel that the build up

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Speaker 5: of fallen angels there are not a lot of those

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Speaker 5: in the investment grade market, So I think investment grade

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Speaker 5: actually from a risk adjusted perspective, probably looks the most attractive.

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Speaker 2: Then comes high yield. With bank loans.

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Speaker 5: I'm a little bit more worried about excesses that had

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Speaker 5: been built up during you know, just prior to the

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Speaker 5: pandemic and during you know, the easy money of the

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Speaker 5: pandemic era. And what's interesting about bank loans and why

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Speaker 5: we think they're converging here, is that bank loans used

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Speaker 5: to be a double B average quality. High yield used

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Speaker 5: to be a single B average quality, So as a

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Speaker 5: higher level of market was secured, you tended to get

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Speaker 5: losses that were less than the high heal market and

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Speaker 5: recovery so much higher. That's shifted over the past several years.

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Speaker 5: Bank loan quality has dropped in average to from a

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Speaker 5: double B to a single B. More LBOs were financed there,

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Speaker 5: So the bank loan market today looks a lot like

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Speaker 5: the old high yal market, And in fact, the high

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Speaker 5: market actually went up in quality, and you just don't

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Speaker 5: see the amount of LBOs that you normally would get there.

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Speaker 2: So the excess in my excesses in.

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Speaker 5: My mind have been underwritten in that space based on

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Speaker 5: the demand created by the colos. That's been a key

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Speaker 5: part of that, and the fact that the underwriters, particularly

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Speaker 5: the private side, like to bring their debt into the

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Speaker 5: bank loan market. So that's an area we're watching out

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Speaker 5: for for excesses and losses.

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Speaker 3: And do you worry about some of these lender and

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Speaker 3: lender of violence that has become sort of we haven't

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Speaker 3: seen it a little bit less lately, but I think

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Speaker 3: people are getting gearing up to do those things, and

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Speaker 3: based a lot on the lack of covenance and weaker documents.

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Speaker 5: Yeah, covenant, The value of covenants in our markets, both

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Speaker 5: in Highland bank loans have really diminished over my career,

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Speaker 5: and there's a lot of reasons for that. I think

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Speaker 5: passive plays a role in that nobody cares about you know,

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Speaker 5: where they're doing the underwriting initially, but that's really dropped

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Speaker 5: a way, and I think you've got to be very

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Speaker 5: particularly as a bond picker like we are, you have

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Speaker 5: to really understand what your protections are and over even

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Speaker 5: when covenants were better, I always found that you could

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Speaker 5: always find a good lawyer out there that would find

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Speaker 5: a way to kind of side steps of these these

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Speaker 5: restrictions and now they're even less so so yes, creditor

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Speaker 5: and credit credit or violence is alive, and well, uh

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Speaker 5: so we're seeing a lot of course of exchanges and

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Speaker 5: things like that. So you need to really understand that.

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Speaker 5: And I think what it means, like back to your point,

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Speaker 5: is that there's a possibility that that recoveries are going

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Speaker 5: to be lower than they otherwise would be. Now, recoveries

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Speaker 5: themselves tend to be cyclical, right when there's a lot

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Speaker 5: of distressed, recoveries are lower and vice versa. Uh, but

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Speaker 5: that creditor and creditor violence, you think you could have

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Speaker 5: a good, say second lean position or a good claim

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Speaker 5: even as an unsecured position, and then all of these

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Speaker 5: a sudden you find yourself being coerced out of that.

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Speaker 1: On the investment grade side, Matt, on the bonds, you

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Speaker 1: know they're trading very tight. It's below ninety basis points

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Speaker 1: on the Bloomberg Index today, plus the new issue concession

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Speaker 1: is almost zero, and you're just seeing this ton of supply.

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Speaker 1: But you know, it just keeps keeps getting tight, and

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Speaker 1: yet you still see value. And I'd also say that

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Speaker 1: on a total return basis, you're not doing very well

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Speaker 1: because of the duration. How do you how do you

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Speaker 1: get the value out of it?

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Speaker 2: Yeah, we'll leave it.

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Speaker 5: We'll put aside the duration question because I think that's

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Speaker 5: more a case for the base rates.

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Speaker 2: But you know, clearly there is a lot of duration.

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Speaker 5: But just looking at the in the in the credit space,

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Speaker 5: but just looking at the spread component, I think again

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Speaker 5: it goes back to while spreads are relatively tight, losses

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Speaker 5: are going to remain very minimal in our in our view,

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Speaker 5: and really when you look at Corporate America or really

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Speaker 5: corporations around the world, they're in very good shape. Profits

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Speaker 5: are there was a bit of a propit correction, a

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Speaker 5: mid cycle correction, but they're recovering.

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Speaker 2: Margins are fine.

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Speaker 5: They tend to they seemingly have some pricing power here. Uh,

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Speaker 5: And then you know for a lot of them, and

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Speaker 5: you know, it's sort of like a if you're a

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Speaker 5: mortgage holder and you locked in your thirty year mortgage

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Speaker 5: and you know, the United States we have a thirty

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Speaker 5: year mortgage capability. You know, if you locked your mortgage

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Speaker 5: in at two or three percent, you're feeling pretty flush

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Speaker 5: right now. And I think the same thing for Corporate America,

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Speaker 5: they've locked in a lot of their they've fixed their

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Speaker 5: cost of debt at very low levels, so they're not

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Speaker 5: really feeling the pinch from rise and rates. Now over

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Speaker 5: time they're going to have to refinance that that debt,

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Speaker 5: but they're not feeling the effects of the tightening and

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Speaker 5: from the Fed. So all in all, investment grade metrics

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Speaker 5: fundamentals look very solid and they're supporting what you know

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Speaker 5: is is a tight market, yes, but one that which

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Speaker 5: which is also unlikely.

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Speaker 2: To see a lot of us.

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Speaker 5: So while you know you may be able to pick

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Speaker 5: up seventy basis points are more risk premium.

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Speaker 2: Right, that doesn't sound like a lot, but.

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Speaker 5: If you compound that over time, that's a significant pick

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Speaker 5: up over treasuries, and we think you lean into that

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Speaker 5: and you know you can go down into the triple

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Speaker 5: B market even and feel pretty comfortable in that space.

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Speaker 1: And on rates, are you thinking more like three three

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Speaker 1: Fed cuts this year or is it going down to two?

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Speaker 1: And what what's your view?

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Speaker 2: Yeah?

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Speaker 5: I think cyclically we still see inflation bottoming here, We're

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Speaker 5: in a bottoming process and the Fed will be able

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Speaker 5: to cut rates. It's in a relatively good position and

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Speaker 5: I think if I had to, you know, make a choice,

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Speaker 5: I think it's more likely to be two cuts this

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Speaker 5: year because the economic data and inflation h you know,

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Speaker 5: in the last mile has been pretty resilient. So I

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Speaker 5: think the FED will will kind of slow walk it

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Speaker 5: relative to what the expectations are, but that's that's still easing.

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Speaker 5: And I think you're going to see on the margin

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Speaker 5: financial condition supportive of the credit markets.

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Speaker 3: So given that you see this as a very sort

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Speaker 3: of a unique climate for credit, how are you shifting

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Speaker 3: your allocations? What are you buying, what are you selling?

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Speaker 3: What are you overweight underweight? And what do you like

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Speaker 3: and what do you not like?

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Speaker 5: Sure, so we tend to live in that triple B

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Speaker 5: double B space, that's our We tend to tilt into

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Speaker 5: that from a risk premium perspective and compound that risk

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Speaker 5: bring me over time, and we'll extend further down that

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Speaker 5: quality spectrum when the timing is good. I think today's environment,

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Speaker 5: because of where spreads are and some of the uncertainties

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Speaker 5: that are out there, I think now is a good

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Speaker 5: time to you know, take a little bit of chips

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Speaker 5: off the table on the lower end side and stick

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Speaker 5: to that triple B double B area where you're getting

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Speaker 5: really kind of the sweet spot in terms of enough spread,

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Speaker 5: compensation and relatively low level of risk and pretty decent fundamentals.

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Speaker 5: So that's an aggregate where we're saying, so we're kind

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Speaker 5: of straddling in between the investment grade and high yield

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Speaker 5: space on the investment grade side. In terms of the

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Speaker 5: sectors that we favor on, we like really still like

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Speaker 5: the finance sector. We're overweight that and simply you get

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Speaker 5: more carry out of that space. Now, most of that

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Speaker 5: is in the banking sector, and I know, you know,

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Speaker 5: there's been a lot of trouble in the banking sector,

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Speaker 5: but we're really in the major banks where you know,

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Speaker 5: we're talking about the major money center banks both in

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Speaker 5: the United States and the champions in Europe. Those are

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Speaker 5: our main positions, you know, and I like them because

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Speaker 5: they've been deregulated, I mean, excuse me, regulated very harshly, right,

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Speaker 5: and that means higher capital ratues and really pristine balance sheets.

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Speaker 5: So they're in a you know, from a creditor perspective,

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Speaker 5: that's a that's a nice place to be and you

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Speaker 5: can pick up some extra spread there. I also like

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Speaker 5: the technology sector because the companies that are in there

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Speaker 5: tend to grow faster than GDP, and so in nominal terms,

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Speaker 5: are growing pretty well here and are able to easily

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Speaker 5: able to service their debt. Moving on into the high

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Speaker 5: yield space, really here it's more about item selection. So

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Speaker 5: there is a lot of dispersion within high yield, and

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Speaker 5: I think as a bond picker you can make hay

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Speaker 5: out of that. If I had a point to one

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Speaker 5: sector that I think is really interesting, its media and

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Speaker 5: communications on the cable TV front. This is a sector

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Speaker 5: that's sectors that have been really supremely disrupted.

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Speaker 2: There will be winners and losers.

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Speaker 5: You can see some of the areas that I think

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Speaker 5: are been unfairly punished.

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Speaker 2: For example, be cable TV.

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Speaker 5: I think people are derated that sector and are worried

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Speaker 5: about growth. I think it's over. They're too much worries

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Speaker 5: about that particular area. So we're putting some chips on

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Speaker 5: the table there. And then in terms of areas that

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Speaker 5: we're also looking at this securitized space, which we also

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Speaker 5: consider a credit space. Obviously, I like the higher end

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Speaker 5: of the COLO market, meaning the higher tiers. The triple

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Speaker 5: A level is the double AMENTS single a commercial and

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Speaker 5: consumer abs are still pretty good, pretty attractive yield for

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Speaker 5: the amount of duration that.

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Speaker 2: You need to take.

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Speaker 5: And then i'd watch out on commercial mortgage back security.

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Speaker 5: We're still bearish on commercial real estate. And you know,

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Speaker 5: alongside commercial real estate, I think one of our you know,

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Speaker 5: our uses that rates are going to remain higher for

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Speaker 5: longer here, and that also means a discount rate, right,

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Speaker 5: is going to remain higher the cost of capital, and

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Speaker 5: any entity that is really dependent on the cost of

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Speaker 5: capital coming down to save itself is going to be

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Speaker 5: in trouble, right, So a lot of real state projects

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Speaker 5: are like this. In the commercial real estate side, particularly

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Speaker 5: in the office space, there's going to be pain there.

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Speaker 5: I'd draw you back to the LBOs we were talking about.

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Speaker 5: There were initially funded at a sufur plus a little bit,

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Speaker 5: you know, so our sofa plus five hundred and sofur

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Speaker 5: being you know, only a tiny amount. They were funding

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Speaker 5: themselves at five or six percent. Today their cost of

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Speaker 5: capital on the DEA side is ten twelve. So those

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Speaker 5: companies are going to have difficulty going forward.

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Speaker 4: Matt, this is Steve Flennagan from Bloomberg Intelligence. I understand

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Speaker 4: you said you favor cable media, both in triple B

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Speaker 4: and w B. I was just wondering, if you're concerned

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Speaker 4: about M and A in the space, if that could

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Speaker 4: be a good thing. There's obviously, you know, there was

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Speaker 4: a lot of speculation about Charter going after ALTCUSA, and

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Speaker 4: Charter is obviously a huge name both in investment grade

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Speaker 4: and is the biggest name in high yield, and some

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Speaker 4: nervousness about them going forward with a more levered ALTCUSA.

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Speaker 4: It's just wondering if your thoughts on the cable space,

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Speaker 4: if you think consolidation is good.

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Speaker 2: I think consolidation is good for cable.

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Speaker 5: They need to defend their market share, and I think

380
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Speaker 5: it's better for Charter to do something like that than

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Speaker 5: to spend it on growth, you know, you know, trying

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Speaker 5: to break into new markets through organic growth. I think

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Speaker 5: it makes much more sense to acquire and you know,

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Speaker 5: gain efficiencies through that means. You know, and they're getting

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Speaker 5: impinged on from you know, cable overbuilders as well as

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Speaker 5: from concerns about fixed wireless capabilities, which we think is overdone.

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Speaker 5: But by and large, a lot of these markets are

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Speaker 5: still oligopolies. They'll be giving up some to fix wireless,

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Speaker 5: but cable should be able to continue to grow some

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Speaker 5: on the top line in the market. It's treating them

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Speaker 5: like they're going to be no there's going to be

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Speaker 5: no growth or even negative growth.

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Speaker 2: I think that's where the you.

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Speaker 5: Know, sort of the the mistake is made in terms

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Speaker 5: of being too negative on those particular sets.

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Speaker 2: Actually they still amount of free cash flow.

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Speaker 5: Oh yeah, I mean they're they're generating a lot of

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Speaker 5: extra free cash flow. Charter Is Autisa is a bit

399
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Speaker 5: more constrained because they're investing fiber to the home, and

400
00:21:16,480 --> 00:21:20,439
Speaker 5: of course they have more leverage. But underneath that, you know,

401
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Speaker 5: these companies on an on lever basis are generating a

402
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Speaker 5: significant amount of cash flow off of what I think

403
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Speaker 5: are very defensible assets over the long run.

404
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Speaker 1: On the banks, Matt, you mentioned you like the banks,

405
00:21:34,440 --> 00:21:36,879
Speaker 1: A lot of people do, but they still trade wide

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Speaker 1: to the rest of investment grade. And also there's this

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Speaker 1: as you mentioned, commercial real estate, travel brewing. You know,

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Speaker 1: some people say it could wipe out hundreds of banks

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Speaker 1: in the US. Obviously they're the smaller ones, and maybe

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Speaker 1: the big banks will be beneficiaries potentially in the long term.

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Speaker 1: But I just find it hard to kind of believe

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Speaker 1: that you're going to get that level of distress throughout

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Speaker 1: banks and you're not going to get a negative impact

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Speaker 1: on on on all of the banks. How do you

415
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Speaker 1: kind of square those views?

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Speaker 5: Well, this is uh, this is an interesting point in

417
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Speaker 5: one of which that there is some concern about the

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Speaker 5: financial industry from that perspective, the banking market and you

419
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Speaker 5: know with banks and financial always worried about systemic risks, right,

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Speaker 5: you know, we've gotten a couple iterations that over the

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Speaker 5: past you know, a decade or so here, you know,

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Speaker 5: I think number one is uh, I think that obviously

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Speaker 5: the biggest concern about commercial real estate exists in the

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Speaker 5: regional side, and the majors really have they don't have

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Speaker 5: any you know, uh exposure worth talking about, So we

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Speaker 5: don't think it's a risk for the larger banks.

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Speaker 2: They'll continue to go on their merry way.

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Speaker 5: When you get into the next tier of banks. There

429
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Speaker 5: are certainly commercial real state exposures grow in size, and

430
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Speaker 5: some have bigger ones than others. But I think, you know, again,

431
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Speaker 5: commercial real estate is a very broad sectoring includes multifamilies.

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Speaker 5: It concludes office space includes a lot of different types

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Speaker 5: of properties. Not all of them will go into distress.

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Speaker 5: And so as far as we can tell when we

435
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Speaker 5: look through the numbers, it shouldn't lead to significant pain

436
00:23:15,240 --> 00:23:18,280
Speaker 5: for the larger sized regional banks. There's you know, a

437
00:23:18,320 --> 00:23:21,680
Speaker 5: couple that could stub their toe in this area. But

438
00:23:22,080 --> 00:23:26,080
Speaker 5: you know, one we learned is NYCB. But that's a

439
00:23:26,080 --> 00:23:28,200
Speaker 5: little bit of a unique case. So I don't think

440
00:23:28,240 --> 00:23:31,040
Speaker 5: it's going to be a case where a commercial real

441
00:23:31,200 --> 00:23:37,200
Speaker 5: estate you know, decline leads to a systemic banking crisis

442
00:23:37,480 --> 00:23:38,840
Speaker 5: in the United States or elsewhere.

443
00:23:38,840 --> 00:23:40,159
Speaker 2: I just don't think that will happen.

444
00:23:40,720 --> 00:23:44,560
Speaker 5: Now, the FED will more than likely have to roll

445
00:23:44,640 --> 00:23:47,160
Speaker 5: up some smaller banks. You're going to need to see

446
00:23:47,200 --> 00:23:51,399
Speaker 5: consolidation in the banking system one way or another. That

447
00:23:51,440 --> 00:23:54,080
Speaker 5: can happen through m and A, or it can happen

448
00:23:54,160 --> 00:23:58,080
Speaker 5: through failures or other banks taking over a failed institution.

449
00:23:59,000 --> 00:24:01,160
Speaker 5: What what I think is the FED is very good

450
00:24:01,200 --> 00:24:05,159
Speaker 5: at handling one off situations. So if some you know,

451
00:24:05,800 --> 00:24:11,359
Speaker 5: mid size bank were to stumble and potentially to systemic

452
00:24:12,200 --> 00:24:15,760
Speaker 5: you know, linkages back to the banking system, they're very

453
00:24:15,760 --> 00:24:18,239
Speaker 5: good at kind of ring fencing that bank, absorbing it

454
00:24:18,280 --> 00:24:21,840
Speaker 5: and moving on. And I think that's what you know

455
00:24:22,080 --> 00:24:24,399
Speaker 5: the banker regular is designed to do now, and I

456
00:24:24,440 --> 00:24:27,159
Speaker 5: think that system will work, So I'm not going to

457
00:24:27,200 --> 00:24:31,080
Speaker 5: get too carried away with concerns about that. But clearly

458
00:24:31,119 --> 00:24:34,040
Speaker 5: we have to keep your eyes wide opened, particularly when

459
00:24:34,040 --> 00:24:36,280
Speaker 5: you're investing in the regional side, and really you're not

460
00:24:36,320 --> 00:24:39,520
Speaker 5: getting that big of a premium to jump from you know,

461
00:24:39,680 --> 00:24:42,760
Speaker 5: a premier money center bank to you know, a more

462
00:24:42,800 --> 00:24:46,200
Speaker 5: mid tier bank that might have more stresses in that area.

463
00:24:46,359 --> 00:24:50,080
Speaker 1: And given how interconnected everything is, and also the loans

464
00:24:50,119 --> 00:24:52,719
Speaker 1: you know, from these banks to companies, you don't think

465
00:24:52,760 --> 00:24:54,480
Speaker 1: it's going to cause a broad a contagion.

466
00:24:55,520 --> 00:24:56,000
Speaker 2: I don't.

467
00:24:56,560 --> 00:24:59,639
Speaker 5: So last year you got a sense of the you know,

468
00:25:00,560 --> 00:25:02,480
Speaker 5: one of my first sectors that I covered as a

469
00:25:02,760 --> 00:25:04,879
Speaker 5: young analyst when I was beginning of my career was

470
00:25:04,920 --> 00:25:08,640
Speaker 5: the banking market, so I know it pretty well. And

471
00:25:08,760 --> 00:25:11,719
Speaker 5: with banks, what you need to worry about our holes

472
00:25:11,720 --> 00:25:13,800
Speaker 5: on the balance sheet, right, and we got.

473
00:25:13,680 --> 00:25:15,120
Speaker 2: A glimpse of this last year.

474
00:25:15,200 --> 00:25:17,000
Speaker 5: The hole in the balance sheet was really a marked

475
00:25:17,000 --> 00:25:20,240
Speaker 5: to market issue. And it wasn't that you know, the

476
00:25:20,320 --> 00:25:23,359
Speaker 5: treasuries or the mortage backed securities that those banks held

477
00:25:23,400 --> 00:25:25,440
Speaker 5: were going to default, but there was a mark to

478
00:25:25,520 --> 00:25:29,960
Speaker 5: market issue. That over time would have healed itself, but

479
00:25:30,119 --> 00:25:31,720
Speaker 5: the banks ran out of time because there was a

480
00:25:31,760 --> 00:25:36,320
Speaker 5: flight of depositors'.

481
00:25:34,640 --> 00:25:35,840
Speaker 2: That's a different kind of risk.

482
00:25:35,880 --> 00:25:38,240
Speaker 5: I think we're beyond that, particularly as the FED is

483
00:25:38,280 --> 00:25:40,919
Speaker 5: easy and it looks like the liquidity in the banking

484
00:25:40,960 --> 00:25:47,080
Speaker 5: system is recovered and looking quite fine. Then you wonder,

485
00:25:47,400 --> 00:25:49,320
Speaker 5: all right, are there are other holes on the balance

486
00:25:49,359 --> 00:25:53,120
Speaker 5: sheet of the banking system? And I like the only

487
00:25:53,160 --> 00:25:55,760
Speaker 5: thing we can look at is on the commercial realistic

488
00:25:55,960 --> 00:25:59,600
Speaker 5: state side, and those are just not big enough relative

489
00:25:59,640 --> 00:26:01,040
Speaker 5: to what's reserved already.

490
00:26:02,119 --> 00:26:04,639
Speaker 3: Matt, you spoke about how your bonds and also bank

491
00:26:04,680 --> 00:26:07,520
Speaker 3: loans or what some people call leverage loans, and there's

492
00:26:07,600 --> 00:26:11,560
Speaker 3: now a third credible large market private credit. Can you

493
00:26:11,600 --> 00:26:14,480
Speaker 3: address what your thoughts about private credit is, especially the

494
00:26:14,480 --> 00:26:16,760
Speaker 3: direct lending part. I know they've been pairing a little

495
00:26:16,760 --> 00:26:19,919
Speaker 3: bit back with the banks coming really coming back to

496
00:26:20,000 --> 00:26:24,320
Speaker 3: foreign sale or creation increasing. But there is here to stay,

497
00:26:24,359 --> 00:26:26,920
Speaker 3: many people say, and what's your take on it?

498
00:26:28,080 --> 00:26:30,440
Speaker 5: I think it is here to stay, and I would

499
00:26:30,440 --> 00:26:34,159
Speaker 5: go further and say that there's a graying between the

500
00:26:34,200 --> 00:26:36,760
Speaker 5: private in the public markets.

501
00:26:37,840 --> 00:26:40,520
Speaker 2: And if you think of you think about how.

502
00:26:40,440 --> 00:26:45,639
Speaker 5: Corporate credit is rationed out in the economy. The level

503
00:26:45,720 --> 00:26:48,600
Speaker 5: of credit rides along top of the economy.

504
00:26:48,600 --> 00:26:49,560
Speaker 2: So of a long.

505
00:26:49,480 --> 00:26:51,480
Speaker 5: History you could see if you looked at the pile

506
00:26:51,560 --> 00:26:54,439
Speaker 5: of credit, it's just grown with the economy at a

507
00:26:54,440 --> 00:26:55,840
Speaker 5: pretty consistent pace.

508
00:26:57,280 --> 00:26:59,440
Speaker 2: And there's been disintermediation along the way.

509
00:26:59,560 --> 00:27:02,760
Speaker 5: So so who holds that and where it's you know,

510
00:27:02,880 --> 00:27:06,719
Speaker 5: resides and what balance sheets changed over time. So obviously

511
00:27:06,800 --> 00:27:09,119
Speaker 5: it's gone from the banks. The banks are still huge

512
00:27:09,960 --> 00:27:14,520
Speaker 5: in your mediaries, uh, in the economy, but there obviously

513
00:27:14,560 --> 00:27:16,680
Speaker 5: was an investment grade corporate market, then a high yelled

514
00:27:16,720 --> 00:27:20,000
Speaker 5: corporate market. Then bank loans emerged and become even a

515
00:27:20,000 --> 00:27:22,040
Speaker 5: bigger market than high yield now on the back of

516
00:27:22,119 --> 00:27:26,600
Speaker 5: clos rising in prominence. And then on the other side,

517
00:27:26,600 --> 00:27:29,520
Speaker 5: private credit now has taken in much bigger share of

518
00:27:29,880 --> 00:27:34,680
Speaker 5: that total credit issuance, and their opportunity has come through

519
00:27:35,000 --> 00:27:39,320
Speaker 5: the regulation that we talked about on mainstream banks. So

520
00:27:39,480 --> 00:27:43,639
Speaker 5: regulation has kind of opened up a window for private

521
00:27:43,680 --> 00:27:47,560
Speaker 5: credit to come through. And when you think of private credit,

522
00:27:47,800 --> 00:27:51,200
Speaker 5: really it kind of mirror images what's on the public side.

523
00:27:51,200 --> 00:27:54,959
Speaker 5: By that, I mean you can have investment ray, private

524
00:27:55,000 --> 00:27:59,760
Speaker 5: credit and down equality leverage. Of course, leveraged loans that

525
00:27:59,800 --> 00:28:04,720
Speaker 5: are private or leverage high yield. You also can you

526
00:28:04,760 --> 00:28:08,240
Speaker 5: also have a club based market in the private in

527
00:28:08,280 --> 00:28:10,119
Speaker 5: the private sector, I think that's going to morph to

528
00:28:10,200 --> 00:28:13,720
Speaker 5: more of a syndication based market, and you have on

529
00:28:13,760 --> 00:28:16,879
Speaker 5: the private sector or something that's ill liquid, but I

530
00:28:16,880 --> 00:28:20,000
Speaker 5: think that is gaining liquidity over time, and I think

531
00:28:20,000 --> 00:28:22,199
Speaker 5: those trends are going to continue and private is just

532
00:28:22,240 --> 00:28:25,280
Speaker 5: going to continue to grow alongside. So I think if

533
00:28:25,280 --> 00:28:28,439
Speaker 5: you look out five to ten years, investors are going

534
00:28:28,480 --> 00:28:31,439
Speaker 5: to be comfortable invest in looking at both the public

535
00:28:31,520 --> 00:28:34,080
Speaker 5: and the private space. And I think you're going to

536
00:28:34,080 --> 00:28:39,000
Speaker 5: get increasing transparency into the private market. Interestingly, so this

537
00:28:39,120 --> 00:28:41,920
Speaker 5: notion of it being kind of opaque and not trading,

538
00:28:42,240 --> 00:28:45,480
Speaker 5: I think over time there's going to be enough interest

539
00:28:46,000 --> 00:28:51,240
Speaker 5: to actually pierce that veil and to actually make it liquid.

540
00:28:51,280 --> 00:28:55,000
Speaker 2: And certainly the banks will, the Wall Street banks.

541
00:28:54,760 --> 00:28:57,920
Speaker 5: Will love to make this liquid so they can trade it,

542
00:28:58,360 --> 00:28:59,600
Speaker 5: so it takes money doing so.

543
00:29:00,000 --> 00:29:02,760
Speaker 1: It's just like the bank loan market, I mean syndicated.

544
00:29:03,120 --> 00:29:05,040
Speaker 1: I mean sounds exactly the same to me, just the

545
00:29:05,080 --> 00:29:06,800
Speaker 1: way we've got with credit exactly the same.

546
00:29:07,000 --> 00:29:08,920
Speaker 2: Okay, it's exactly the same.

547
00:29:09,320 --> 00:29:12,720
Speaker 5: I think there's the same rationale for how it develops

548
00:29:12,760 --> 00:29:16,640
Speaker 5: and what the uh sort of the impetus is for

549
00:29:16,720 --> 00:29:19,040
Speaker 5: it to change into something a bit more mainstream. I

550
00:29:19,040 --> 00:29:22,800
Speaker 5: think it's in a lot of people's best interests to see, well,

551
00:29:22,840 --> 00:29:23,680
Speaker 5: I shouldn't.

552
00:29:23,320 --> 00:29:25,240
Speaker 2: Say a lot of people's best interests.

553
00:29:25,280 --> 00:29:28,880
Speaker 5: I'm sure a lot of private asset managers will love

554
00:29:28,920 --> 00:29:31,760
Speaker 5: it to remain you know, opaque and ill liquid because

555
00:29:31,760 --> 00:29:34,400
Speaker 5: they can get a bigger, uh, you know fee for

556
00:29:34,480 --> 00:29:38,320
Speaker 5: doing that. And some clients like it, to be quite honesty,

557
00:29:38,480 --> 00:29:42,000
Speaker 5: they like the fact that. I have some institutional clients

558
00:29:42,000 --> 00:29:44,640
Speaker 5: that like the fact that it's not priced. It reduces

559
00:29:44,720 --> 00:29:50,480
Speaker 5: the volatility seemingly. But I think we're credit cycles and

560
00:29:50,520 --> 00:29:53,480
Speaker 5: the testing of the credit the private credit market through

561
00:29:53,480 --> 00:29:55,480
Speaker 5: credit cycles, I think you're going to run into a

562
00:29:55,520 --> 00:29:59,560
Speaker 5: situation where eventually there'll be a demand for more.

563
00:30:01,120 --> 00:30:02,560
Speaker 2: Liquidity and more.

564
00:30:02,400 --> 00:30:05,640
Speaker 5: Transparent transparency into that market. That's going to make it

565
00:30:05,640 --> 00:30:09,200
Speaker 5: a little less profitable for the asset manager, but I

566
00:30:09,200 --> 00:30:10,880
Speaker 5: think it's going to lead to a lot of opportunities

567
00:30:10,920 --> 00:30:11,600
Speaker 5: for investors.

568
00:30:11,840 --> 00:30:13,800
Speaker 3: Does seem like there's nothing new on the sun. It's

569
00:30:13,840 --> 00:30:16,240
Speaker 3: just the old leveraged loan market. But if I could

570
00:30:16,280 --> 00:30:19,600
Speaker 3: switch you to the global opportunity. You're based in the US,

571
00:30:19,640 --> 00:30:22,400
Speaker 3: but you're visiting here in London. You're talking to investors

572
00:30:22,440 --> 00:30:25,200
Speaker 3: all around the world. When you look at investing, where

573
00:30:25,200 --> 00:30:28,600
Speaker 3: do you find the best opportunities? US, Europe, emerging markets?

574
00:30:30,080 --> 00:30:32,920
Speaker 5: So I look at I still think the US is

575
00:30:33,040 --> 00:30:37,160
Speaker 5: probably the most attractive market. So you know, i'd say

576
00:30:37,160 --> 00:30:40,840
Speaker 5: that from a base rate perspective. You know, among development markets,

577
00:30:40,840 --> 00:30:45,480
Speaker 5: you're still getting very good growth. Uh you're getting above

578
00:30:45,520 --> 00:30:49,640
Speaker 5: average yields for the most part, and you know you're you've.

579
00:30:49,440 --> 00:30:51,960
Speaker 2: Got a dubbish tilting fed and so on.

580
00:30:52,120 --> 00:30:55,719
Speaker 5: So that sets up very well for investors, both in

581
00:30:55,760 --> 00:30:59,840
Speaker 5: the treasury market and in the risk assets for you

582
00:31:00,400 --> 00:31:02,840
Speaker 5: based investors. When you go to Europe, it's more or

583
00:31:02,920 --> 00:31:05,520
Speaker 5: less the same kind of track fundamentally. It's just you're

584
00:31:05,520 --> 00:31:08,440
Speaker 5: starting with a much lower yield to begin with, not

585
00:31:08,520 --> 00:31:10,240
Speaker 5: so much in the case of the UK, but certainly

586
00:31:10,320 --> 00:31:14,200
Speaker 5: when you start moving into the continental Europe. Japan's off

587
00:31:14,240 --> 00:31:18,800
Speaker 5: in his own, you know, as usual, up in its

588
00:31:18,840 --> 00:31:22,440
Speaker 5: own bubble, and you know, we may get a watershed

589
00:31:22,440 --> 00:31:25,000
Speaker 5: event tire where the Bank of Japan is.

590
00:31:24,920 --> 00:31:28,560
Speaker 2: Going to move And I don't want to extrapolate forward, what.

591
00:31:28,560 --> 00:31:32,440
Speaker 5: The Bank of Japan is going to do, or you know, well,

592
00:31:32,560 --> 00:31:33,400
Speaker 5: let's put it this away.

593
00:31:33,320 --> 00:31:34,560
Speaker 2: To talk about the Bank of Japan.

594
00:31:34,760 --> 00:31:40,000
Speaker 5: I think that there are some really important structural changes

595
00:31:40,040 --> 00:31:41,240
Speaker 5: taking place in Japan.

596
00:31:41,640 --> 00:31:44,440
Speaker 2: It's just they're going to be glacial in nature.

597
00:31:44,680 --> 00:31:49,320
Speaker 5: So the Bank of Japan will adjust their monetary policy,

598
00:31:49,360 --> 00:31:52,360
Speaker 5: but it'll be very very small increment, and it'll be

599
00:31:52,440 --> 00:31:55,320
Speaker 5: the caboose of yields going forward and remain the carry

600
00:31:55,360 --> 00:32:01,800
Speaker 5: trade funding currency of preference. I will say one thing

601
00:32:01,880 --> 00:32:05,240
Speaker 5: that's interesting from our perspective is the carry trades, you know,

602
00:32:05,280 --> 00:32:08,320
Speaker 5: speaking of the yen carry trades, the carry trades into

603
00:32:08,360 --> 00:32:10,800
Speaker 5: emerging markets. I think there's a really continues to be

604
00:32:10,840 --> 00:32:15,600
Speaker 5: a good setup for them. Again dubbish fed soft landing,

605
00:32:16,400 --> 00:32:20,440
Speaker 5: bottoming inflation. So I'll give you examples like someplace like Mexico,

606
00:32:20,480 --> 00:32:25,040
Speaker 5: which I think is interesting because it's benefiting a lot

607
00:32:25,240 --> 00:32:29,480
Speaker 5: tremendously from nearshoring. You're getting about a nine to ten

608
00:32:29,520 --> 00:32:31,440
Speaker 5: percent yield in that market.

609
00:32:31,520 --> 00:32:32,760
Speaker 2: They're also easing.

610
00:32:32,800 --> 00:32:36,560
Speaker 5: From a central bank perspective, that's a really attractive market

611
00:32:36,640 --> 00:32:41,280
Speaker 5: to earn, you know, good carry in an error in

612
00:32:41,320 --> 00:32:45,200
Speaker 5: a cyclical environment where carries becoming more scarce.

613
00:32:46,120 --> 00:32:50,520
Speaker 3: So we're starting to see some diversions between and we

614
00:32:50,640 --> 00:32:53,080
Speaker 3: have for a while now, but in a more sharper way.

615
00:32:53,600 --> 00:32:56,160
Speaker 3: Inflation's starting to moderate, and you're starting to see a

616
00:32:56,280 --> 00:32:59,240
Speaker 3: little bit into Pand can you explain to us why

617
00:32:59,320 --> 00:33:02,400
Speaker 3: we haven't seen more inflation in Japan versus the rest

618
00:33:02,440 --> 00:33:05,040
Speaker 3: of the world, and what will happen to all that

619
00:33:05,520 --> 00:33:08,600
Speaker 3: cash that the Japanese investor is sitting on if with

620
00:33:09,080 --> 00:33:11,000
Speaker 3: monetary policy sort of diverging.

621
00:33:11,480 --> 00:33:16,720
Speaker 5: So a lot of people follow closely Japan because they're

622
00:33:16,760 --> 00:33:19,800
Speaker 5: interested in whereas all of those excess savings going to

623
00:33:19,800 --> 00:33:21,880
Speaker 5: go around the world, they like to invest in it

624
00:33:21,920 --> 00:33:25,520
Speaker 5: overseas when it's more attractive. Of late, it hasn't been

625
00:33:25,720 --> 00:33:28,880
Speaker 5: attractive for an investor that needs to hedge back to

626
00:33:29,280 --> 00:33:33,400
Speaker 5: yen right, so the hedge costs has been too prohibitive

627
00:33:34,400 --> 00:33:38,320
Speaker 5: for a yen based investor to really buy heavily in

628
00:33:38,400 --> 00:33:40,479
Speaker 5: places like the US, for example, and the carry out

629
00:33:40,520 --> 00:33:43,480
Speaker 5: other characteris in em work for them, but not so

630
00:33:43,600 --> 00:33:48,560
Speaker 5: much in the In the US, I think Bank of

631
00:33:48,640 --> 00:33:51,800
Speaker 5: Japan moves are probably less important than what the FED

632
00:33:51,840 --> 00:33:55,200
Speaker 5: does if the FED comes down enough. But our crystal ball,

633
00:33:55,280 --> 00:34:00,320
Speaker 5: we don't see enough moves by the FED and enough

634
00:34:00,360 --> 00:34:02,560
Speaker 5: moves by the Bank of Japan to really change the

635
00:34:02,600 --> 00:34:07,920
Speaker 5: calculus significantly enough on the hedging cost. So unfortunately, I

636
00:34:08,000 --> 00:34:09,400
Speaker 5: like to see some of that money coming into the

637
00:34:09,480 --> 00:34:13,360
Speaker 5: United States, it is probably not, at least at this juncture.

638
00:34:14,000 --> 00:34:16,600
Speaker 5: You probably need to see something of a much more

639
00:34:16,680 --> 00:34:20,279
Speaker 5: steeper Yell curve globally to start to see some of

640
00:34:20,280 --> 00:34:22,920
Speaker 5: that money flow outside of Japan.

641
00:34:23,000 --> 00:34:24,319
Speaker 2: And on the other hand, you know.

642
00:34:24,280 --> 00:34:27,239
Speaker 5: On the long end of the JGB market, now you

643
00:34:27,239 --> 00:34:30,120
Speaker 5: can get two percent doesn't sound like a lot. Put

644
00:34:30,160 --> 00:34:33,840
Speaker 5: to a end based investor, they're probably going to stay home.

645
00:34:33,640 --> 00:34:34,879
Speaker 2: And buy that.

646
00:34:36,280 --> 00:34:38,439
Speaker 1: I'm surprised, Matt you didn't mention China in your will

647
00:34:38,440 --> 00:34:40,840
Speaker 1: to it just now. But you know, Chinese junk bonds

648
00:34:40,840 --> 00:34:43,400
Speaker 1: have done the best in the world, although a lot

649
00:34:43,400 --> 00:34:45,080
Speaker 1: of people have been telling us for a while that

650
00:34:45,120 --> 00:34:47,279
Speaker 1: they are uninvestable. I just wonder what you'll view on

651
00:34:47,280 --> 00:34:48,960
Speaker 1: that was well, China.

652
00:34:48,760 --> 00:34:54,600
Speaker 5: Has been really underperforming relative to expectations for a while now,

653
00:34:55,160 --> 00:34:59,919
Speaker 5: and I think their ideology has trump sort of the capitalism,

654
00:35:00,120 --> 00:35:02,880
Speaker 5: if you will, And that's the biggest issue that I

655
00:35:02,880 --> 00:35:08,160
Speaker 5: think outside investors have about, you know, putting capital into

656
00:35:08,200 --> 00:35:11,600
Speaker 5: that market, and I think there are good reasons to

657
00:35:11,640 --> 00:35:15,240
Speaker 5: be concerned about that. I think fundamentally, I'm concerned about

658
00:35:15,800 --> 00:35:20,360
Speaker 5: China's long run growth potential because of these actions they've taken.

659
00:35:20,800 --> 00:35:26,040
Speaker 5: Now cyclically, last year, their economy, you know, was said

660
00:35:26,080 --> 00:35:29,120
Speaker 5: to grow what five percent whatever the target was, they

661
00:35:29,160 --> 00:35:32,440
Speaker 5: grew much less than that. This year they have an

662
00:35:32,480 --> 00:35:36,400
Speaker 5: ambitious target. I think they'll do better than last year

663
00:35:36,920 --> 00:35:41,640
Speaker 5: based on a relatively moderate amount of policy moves by

664
00:35:41,640 --> 00:35:46,480
Speaker 5: the government, both in monetary terms and through lending through

665
00:35:46,480 --> 00:35:51,560
Speaker 5: the lending channel and fiscal policy. So that allows growth

666
00:35:51,560 --> 00:35:53,400
Speaker 5: to kind of stabilize and maybe even have a bit

667
00:35:53,400 --> 00:35:57,120
Speaker 5: of a cyclical pop. But the long term trends don't

668
00:35:57,320 --> 00:36:02,759
Speaker 5: look super good to foreign investor to buy, you know,

669
00:36:03,600 --> 00:36:06,560
Speaker 5: and make investments into into that market. And you're seeing

670
00:36:06,560 --> 00:36:10,760
Speaker 5: a lot of flows from outside of the equity market,

671
00:36:11,520 --> 00:36:13,279
Speaker 5: you know, to leave the equity market there and to

672
00:36:13,400 --> 00:36:18,880
Speaker 5: also really shun Chinese say investment grate in high yield bonds.

673
00:36:19,560 --> 00:36:21,200
Speaker 1: So if you had to pick one out of all

674
00:36:21,239 --> 00:36:24,120
Speaker 1: the things you look at every day, best opportunity for

675
00:36:24,160 --> 00:36:25,080
Speaker 1: this year, what do you think that.

676
00:36:26,960 --> 00:36:29,319
Speaker 5: I think the best opportunities for this year are going

677
00:36:29,360 --> 00:36:31,400
Speaker 5: to come in terms of returns are going to come

678
00:36:31,400 --> 00:36:34,279
Speaker 5: from the carry trades in the emerging market space. That's

679
00:36:34,320 --> 00:36:37,640
Speaker 5: where you probably get your highest absolute return. In the

680
00:36:37,719 --> 00:36:40,960
Speaker 5: develop market space, I think it's going to be relatively boring.

681
00:36:41,080 --> 00:36:44,120
Speaker 5: But I think, you know, I think within the United States,

682
00:36:44,239 --> 00:36:48,279
Speaker 5: I think that coupled with some you know, bets in

683
00:36:48,280 --> 00:36:51,120
Speaker 5: the in the credit market, I think, you know, treasuries,

684
00:36:51,160 --> 00:36:52,640
Speaker 5: I think you're going to look like at a four

685
00:36:52,719 --> 00:36:57,040
Speaker 5: or five return with a chance of maybe a higher

686
00:36:57,080 --> 00:37:01,400
Speaker 5: single digit much less likely to get a negative return

687
00:37:01,440 --> 00:37:02,520
Speaker 5: in the treasure market.

688
00:37:03,160 --> 00:37:05,960
Speaker 2: So let's call it mid to high single digit returns.

689
00:37:05,960 --> 00:37:07,520
Speaker 5: And on top of that, if you can invest in

690
00:37:07,520 --> 00:37:10,279
Speaker 5: the spread sector, you're going to add about a couple

691
00:37:10,320 --> 00:37:11,640
Speaker 5: one hundred to two hundred.

692
00:37:11,400 --> 00:37:15,839
Speaker 2: Basis points of return. That's not too shabby to when

693
00:37:15,880 --> 00:37:17,400
Speaker 2: you're thinking about investing.

694
00:37:17,040 --> 00:37:20,600
Speaker 5: In, certainly relative to what we used to be expecting,

695
00:37:20,640 --> 00:37:23,520
Speaker 5: you know, during the GFC and you know the QE.

696
00:37:23,280 --> 00:37:26,080
Speaker 1: Or Yeah, so maybe a five percent return on investment

697
00:37:26,080 --> 00:37:27,359
Speaker 1: grade US bunds.

698
00:37:27,040 --> 00:37:30,120
Speaker 2: This year, I think that's a good bet.

699
00:37:30,560 --> 00:37:32,600
Speaker 1: Okay, And what about the risks? I mean, what are

700
00:37:32,600 --> 00:37:36,560
Speaker 1: you most worried about? You sound very very optimistic and

701
00:37:37,120 --> 00:37:39,080
Speaker 1: other than the spreads being a little bit too tight.

702
00:37:39,120 --> 00:37:41,239
Speaker 1: But but you know, is there anything that keeps you

703
00:37:41,320 --> 00:37:41,879
Speaker 1: up at night worrying?

704
00:37:43,320 --> 00:37:45,440
Speaker 5: Well, I'm an optimist, but I you know, also a

705
00:37:45,440 --> 00:37:49,040
Speaker 5: fixing investor, which means I've got to think about those downsides.

706
00:37:49,600 --> 00:37:52,880
Speaker 5: I think from a cyclical perspective they're twofold. One is

707
00:37:53,680 --> 00:37:56,320
Speaker 5: there are elections out there. I think I was reading somewhere.

708
00:37:56,360 --> 00:38:00,960
Speaker 5: I think seventy percent of the world has people'll have

709
00:38:01,040 --> 00:38:05,600
Speaker 5: some sort of election. So many many countries have elections

710
00:38:05,600 --> 00:38:09,799
Speaker 5: for a lot of cases their leaders here, and I

711
00:38:09,840 --> 00:38:13,319
Speaker 5: think as these elections take place, obviously they can lead

712
00:38:13,360 --> 00:38:17,280
Speaker 5: to some volatility. The most important one is the US

713
00:38:18,120 --> 00:38:22,960
Speaker 5: that has implications for the world in terms of geopolitics,

714
00:38:24,040 --> 00:38:29,120
Speaker 5: aside from important considerations domestically for US citizens.

715
00:38:29,520 --> 00:38:32,120
Speaker 2: So that's something that I think could lead.

716
00:38:31,920 --> 00:38:36,160
Speaker 5: To some more volatility as that as that election approaches.

717
00:38:36,800 --> 00:38:39,440
Speaker 1: Thanks very much, let's think about that. Matt Egan, co

718
00:38:39,560 --> 00:38:41,640
Speaker 1: head of the Full Discretion team at Loomis Sales. Brilliant

719
00:38:41,680 --> 00:38:42,600
Speaker 1: to have you on the credit edge.

720
00:38:42,680 --> 00:38:44,160
Speaker 2: Cheers, Thank you very much.

721
00:38:44,440 --> 00:38:45,839
Speaker 1: Also want to say a big thanks to Lisa Lead

722
00:38:45,880 --> 00:38:47,719
Speaker 1: with Bloomberg News in London. Brilliant to see you again,

723
00:38:47,760 --> 00:38:50,600
Speaker 1: Thank you, thanks for having me read all of Lisa's

724
00:38:50,600 --> 00:38:53,080
Speaker 1: great scoops on the Bloomberg terminal and of course at

725
00:38:53,120 --> 00:38:57,520
Speaker 1: Bloomberg dot com. So Steve Flynn at Bloomberg Intelligence. As

726
00:38:57,600 --> 00:39:00,759
Speaker 1: we discussed you look at telecoms and media. There's some

727
00:39:00,760 --> 00:39:03,520
Speaker 1: great stuff on the terminal under your byline. But I

728
00:39:03,560 --> 00:39:06,440
Speaker 1: just wanted to ask, you know, we didn't mention it

729
00:39:06,520 --> 00:39:11,399
Speaker 1: in a conversation with Matt Egan Loomis, but Paramount, that's

730
00:39:11,400 --> 00:39:13,360
Speaker 1: a big story right now, isn't it. What's going on

731
00:39:13,400 --> 00:39:15,400
Speaker 1: there right right now? There's there's talk of a merger,

732
00:39:15,480 --> 00:39:17,560
Speaker 1: there's talk of it, you know, getting better, there's talk

733
00:39:17,560 --> 00:39:18,759
Speaker 1: of an opportunity. What's going on.

734
00:39:18,920 --> 00:39:20,719
Speaker 4: Yeah, So it's interesting that Matt said he that he

735
00:39:20,800 --> 00:39:23,360
Speaker 4: likes media. One of the most interesting names is Paramount,

736
00:39:23,360 --> 00:39:27,000
Speaker 4: and it's one of the the widest UH name in communications.

737
00:39:27,000 --> 00:39:30,120
Speaker 4: In investment grade, the bonds trade very wide, and there's

738
00:39:30,120 --> 00:39:33,360
Speaker 4: a lot going on here. There's been NonStop speculation about

739
00:39:33,360 --> 00:39:36,799
Speaker 4: some sort of m and a event potentially between either

740
00:39:36,840 --> 00:39:39,759
Speaker 4: Paramount or it's controlling shareholder, National Amusements.

741
00:39:40,280 --> 00:39:40,400
Speaker 5: UH.

742
00:39:40,520 --> 00:39:43,719
Speaker 4: The companies also on the cusp of investment grade. It's

743
00:39:43,920 --> 00:39:46,680
Speaker 4: rated low trible b across the board. S and P

744
00:39:46,800 --> 00:39:49,640
Speaker 4: has placed their rating on review for a potential downgrade.

745
00:39:50,000 --> 00:39:52,000
Speaker 4: So if they do downgrade them, then you get another

746
00:39:52,120 --> 00:39:53,919
Speaker 4: one of the raiders to downgrade them. They would fall

747
00:39:54,080 --> 00:39:56,200
Speaker 4: bea fallen angel, they would fall out of investment grade

748
00:39:56,200 --> 00:39:58,840
Speaker 4: into high yield. So you know, there's a lot of

749
00:39:58,880 --> 00:40:01,520
Speaker 4: moving parts going on here. The company does have a

750
00:40:01,600 --> 00:40:04,440
Speaker 4: lot of cash. The company started the year with a

751
00:40:04,440 --> 00:40:06,319
Speaker 4: lot of cash. They just did a big asset sell

752
00:40:06,360 --> 00:40:08,600
Speaker 4: that's going to close hopefully by the end of this year,

753
00:40:09,200 --> 00:40:12,560
Speaker 4: and they should do some a modest amount of free

754
00:40:12,560 --> 00:40:15,160
Speaker 4: cash flow this year. A lot of people are expecting

755
00:40:15,200 --> 00:40:17,719
Speaker 4: media overall to do a little bit better this year.

756
00:40:17,760 --> 00:40:19,480
Speaker 4: It's a political year, right, There'll be a lot of

757
00:40:19,520 --> 00:40:23,359
Speaker 4: advertising dollars, so that should help Paramount and a lot

758
00:40:23,360 --> 00:40:24,240
Speaker 4: of the media names.

759
00:40:24,400 --> 00:40:26,000
Speaker 1: One of the media names that sticks out there is

760
00:40:26,080 --> 00:40:28,840
Speaker 1: I Hunt Media. I've been covering them for years, but

761
00:40:28,840 --> 00:40:32,399
Speaker 1: mostly in the context of leverage distress bankruptcy. But your

762
00:40:32,480 --> 00:40:35,600
Speaker 1: latest note suggests that they could actually be doing better now,

763
00:40:35,920 --> 00:40:39,319
Speaker 1: and I'm very interested to hear that at least there

764
00:40:39,400 --> 00:40:42,880
Speaker 1: might be one potential beneficiary of this upcoming Trump button election.

765
00:40:42,960 --> 00:40:44,520
Speaker 1: What was that yeah, no, so.

766
00:40:44,560 --> 00:40:48,000
Speaker 4: That definitely helps radio, right, And so iHeart is a

767
00:40:48,080 --> 00:40:51,439
Speaker 4: highly leveraged name. Twenty twenty four should be a better

768
00:40:51,520 --> 00:40:54,600
Speaker 4: year for them. They should have better earnings, better EBITDA,

769
00:40:54,760 --> 00:40:58,359
Speaker 4: better free cash flow, and so the leverage is high,

770
00:40:58,440 --> 00:41:01,640
Speaker 4: but it should improve this year. And the company did

771
00:41:01,680 --> 00:41:04,560
Speaker 4: a small asset sale. They'll have some decent free cash flow.

772
00:41:04,600 --> 00:41:07,560
Speaker 4: They'll benefit from political advertising, and I'd expect them to

773
00:41:07,600 --> 00:41:12,560
Speaker 4: continue to be aggressive buying back their unsecure bonds, so

774
00:41:12,600 --> 00:41:14,960
Speaker 4: those are their lowest dollar price bonds. They've been pretty

775
00:41:14,960 --> 00:41:17,479
Speaker 4: aggressive in the market over the past year and a half.

776
00:41:17,520 --> 00:41:20,040
Speaker 4: I expect them to continue to do so. So they

777
00:41:20,200 --> 00:41:22,120
Speaker 4: you know what's nice is they have good liquidity and

778
00:41:22,160 --> 00:41:25,799
Speaker 4: they have good near term runway. However, they do have

779
00:41:25,840 --> 00:41:28,040
Speaker 4: some larger maturities a couple of years out which they

780
00:41:28,040 --> 00:41:29,360
Speaker 4: will eventually have to target.

781
00:41:29,680 --> 00:41:31,600
Speaker 1: But on this advertising thing around the election, don't we

782
00:41:31,600 --> 00:41:33,800
Speaker 1: always get that every four years? Why is this yet different?

783
00:41:34,080 --> 00:41:34,200
Speaker 5: Now?

784
00:41:34,440 --> 00:41:36,359
Speaker 4: I would say this years, it's not different.

785
00:41:36,400 --> 00:41:37,120
Speaker 2: It does. It happens.

786
00:41:37,320 --> 00:41:39,280
Speaker 4: You know every two years, you get a major election.

787
00:41:39,320 --> 00:41:42,719
Speaker 4: Every four years, obviously get a presidential election, so you know,

788
00:41:42,840 --> 00:41:44,960
Speaker 4: you do definitely see a big bump and you could

789
00:41:44,960 --> 00:41:47,440
Speaker 4: see it in a company like Iheart's ebatat right. So

790
00:41:47,520 --> 00:41:51,040
Speaker 4: even off for twenty twenty three wasn't great, twenty twenty

791
00:41:51,040 --> 00:41:53,759
Speaker 4: two was good, twenty twenty four is supposed to be

792
00:41:53,800 --> 00:41:54,759
Speaker 4: also good.

793
00:41:55,120 --> 00:41:57,600
Speaker 1: Steve Flynn, Bloomberg Intelligence, thank you so much for joining us.

794
00:41:57,880 --> 00:42:00,360
Speaker 1: Check out all of Steve's research on the Bloomberg Terminal.

795
00:42:00,360 --> 00:42:02,760
Speaker 1: It's really great stuff, or you can contact him directly

796
00:42:02,800 --> 00:42:05,920
Speaker 1: if you need more information. And thanks again to Matt Egan,

797
00:42:06,280 --> 00:42:08,480
Speaker 1: co head of the Full Discretion team at Loomis Sales.

798
00:42:08,520 --> 00:42:10,719
Speaker 1: And to Lisa Lee from Bloomberg News. Read all of

799
00:42:10,760 --> 00:42:13,560
Speaker 1: Lisa's great scoops on the Bloomberg Terminal and of course

800
00:42:13,600 --> 00:42:17,239
Speaker 1: at Bloomberg dot com. And please do subscribe wherever you

801
00:42:17,239 --> 00:42:20,520
Speaker 1: get your podcasts. We're on Apple, Google, Spotify and all

802
00:42:20,600 --> 00:42:24,120
Speaker 1: other great providers of podcasts. Give us a review, tell

803
00:42:24,120 --> 00:42:27,320
Speaker 1: your friends, or email me directly at jcrombieight at Bloomberg

804
00:42:27,440 --> 00:42:30,799
Speaker 1: dot net. I'm James Crombie. It's been a pleasure having

805
00:42:30,840 --> 00:42:33,400
Speaker 1: you join us again. Next week on the Credit Edge,