1 00:00:17,880 --> 00:00:20,400 Speaker 1: Hello, and welcome to the Credit Edge Wiki Munkets podcast. 2 00:00:20,680 --> 00:00:23,720 Speaker 1: My name is James Crumby. I'm a senior editor at Bloomberg, and. 3 00:00:23,640 --> 00:00:26,520 Speaker 2: I'm Rob Schiffman, a senior analyst covering tech at Bloomberg 4 00:00:26,520 --> 00:00:28,640 Speaker 2: Intelligence and co head of our US High Grade and 5 00:00:28,680 --> 00:00:31,360 Speaker 2: High Yield research teams. This week, we're a very pleased 6 00:00:31,360 --> 00:00:34,640 Speaker 2: to welcome Robert Kahn, the director of Global Developed Credit 7 00:00:34,680 --> 00:00:37,800 Speaker 2: at Double Line, the employee owned money management firm. Ay 8 00:00:37,920 --> 00:00:39,000 Speaker 2: doing today, Robert doing well? 9 00:00:39,040 --> 00:00:40,479 Speaker 3: Thank you, happy to be here? 10 00:00:40,600 --> 00:00:43,440 Speaker 2: Awesome? Oh great. For those of you who don't know Robert, 11 00:00:43,440 --> 00:00:45,920 Speaker 2: he joined Double Line in twenty twelve and is a 12 00:00:45,960 --> 00:00:49,520 Speaker 2: portfolio manager and the director of the GDC greup. He's 13 00:00:49,520 --> 00:00:52,680 Speaker 2: also a permanent member of the Fixed Income Asset Allocation Committee. 14 00:00:52,880 --> 00:00:55,040 Speaker 2: The firm manages around one hundred million dollars in client 15 00:00:55,040 --> 00:00:57,960 Speaker 2: assets and is among the most followed thought leaders on 16 00:00:58,000 --> 00:01:01,120 Speaker 2: the street. With a pre eminent fixing come franchise. We 17 00:01:01,200 --> 00:01:03,960 Speaker 2: are pumped to hear your views on credit markets and 18 00:01:04,040 --> 00:01:05,960 Speaker 2: to get some first hand insight into what the smart 19 00:01:06,000 --> 00:01:08,319 Speaker 2: money is doing. So, James, why don't you kick us off? 20 00:01:09,080 --> 00:01:11,720 Speaker 1: Yeah? So, credit markets have brushed off a recent bout 21 00:01:11,760 --> 00:01:14,480 Speaker 1: of distress and are seeing a barrage of debt issuance, 22 00:01:14,520 --> 00:01:17,640 Speaker 1: mostly from tech companies looking to fund a gigantic buildout 23 00:01:17,640 --> 00:01:21,440 Speaker 1: of AI and associated infrastructure. Big tech has a lot 24 00:01:21,440 --> 00:01:23,320 Speaker 1: of cash on hand, but there's still concerned about how 25 00:01:23,360 --> 00:01:26,560 Speaker 1: this massive increase in spending will hit earnings. Meta the 26 00:01:26,600 --> 00:01:30,080 Speaker 1: Facebook and Instagram provider, so it's stocked. Priced tank by 27 00:01:30,080 --> 00:01:32,200 Speaker 1: more than ten percent last week, chopping off about two 28 00:01:32,280 --> 00:01:35,080 Speaker 1: hundred billion dollars in market cap, But that didn't stop 29 00:01:35,080 --> 00:01:37,920 Speaker 1: investors placing one hundred and twenty five billion dollars in 30 00:01:38,000 --> 00:01:41,440 Speaker 1: orders for a thirty billion fundraise on the same day, 31 00:01:41,680 --> 00:01:44,360 Speaker 1: setting the record for the biggest order book ever for 32 00:01:44,400 --> 00:01:47,960 Speaker 1: a corporate bond deal. Investors just can't get enough tech 33 00:01:48,000 --> 00:01:49,800 Speaker 1: bonds at the moment, it seems, and there's a lot 34 00:01:49,880 --> 00:01:52,880 Speaker 1: more to come in both public and private markets. But 35 00:01:53,000 --> 00:01:57,200 Speaker 1: anytime we see such massive demand for bonds or debt, 36 00:01:57,400 --> 00:01:59,960 Speaker 1: alarm bells do ring the FOMO The buy now are 37 00:02:00,160 --> 00:02:03,480 Speaker 1: questions later? Robert, is this a positive market signal? Are 38 00:02:03,480 --> 00:02:05,680 Speaker 1: you joining the gold rush into AI? Or should we 39 00:02:05,720 --> 00:02:06,960 Speaker 1: be a bit more cautious here? 40 00:02:07,440 --> 00:02:11,280 Speaker 3: I think we're supposed to be cautious, so you to 41 00:02:11,320 --> 00:02:13,840 Speaker 3: zoom out a little bit when a sector of the 42 00:02:13,840 --> 00:02:17,000 Speaker 3: credit markets is small or nonexistent, and then this becomes 43 00:02:17,560 --> 00:02:20,000 Speaker 3: more frequent and then becomes large, which it's not yet, 44 00:02:20,240 --> 00:02:22,920 Speaker 3: but when it gets momentum, you're supposed to be cautious. 45 00:02:23,800 --> 00:02:27,720 Speaker 3: These transactions, particularly and particularly investment grade are sort of 46 00:02:27,760 --> 00:02:30,639 Speaker 3: novel in terms of the way they're structured, the features 47 00:02:30,639 --> 00:02:33,079 Speaker 3: in terms of being off balance sheet, and I think 48 00:02:33,080 --> 00:02:36,280 Speaker 3: you're supposed to be careful. Of course, we don't know yet. 49 00:02:36,360 --> 00:02:40,760 Speaker 3: It's unknowable at the moment whether these capital projects will 50 00:02:40,760 --> 00:02:44,000 Speaker 3: actually be profitable, and we also don't know how many 51 00:02:44,000 --> 00:02:46,120 Speaker 3: are ultimately will be built. You can think of it 52 00:02:46,160 --> 00:02:49,120 Speaker 3: as if you think of it more simply, it's really 53 00:02:49,160 --> 00:02:53,440 Speaker 3: they're building capacity. And when you build capacity and fixed assets, 54 00:02:53,960 --> 00:02:57,680 Speaker 3: sometimes you build too much or not enough. Because these 55 00:02:57,720 --> 00:03:00,720 Speaker 3: projects take time, they take years to put together. By 56 00:03:00,720 --> 00:03:03,040 Speaker 3: the time they come online, there might be I don't know, 57 00:03:03,040 --> 00:03:06,400 Speaker 3: there could be one hundred more projects coming online that 58 00:03:06,480 --> 00:03:09,360 Speaker 3: could be sufficient or insufficient. It's really unknown, So I 59 00:03:09,360 --> 00:03:14,360 Speaker 3: think you have to have a level of skepticism. Speaking 60 00:03:14,360 --> 00:03:18,200 Speaker 3: about the investment grade companies, they clearly have rock solid 61 00:03:18,280 --> 00:03:22,480 Speaker 3: balance sheets and so they can handle whatever comes of 62 00:03:22,520 --> 00:03:25,399 Speaker 3: these projects. If they build too much. Certainly, I don't 63 00:03:25,400 --> 00:03:28,840 Speaker 3: think it will be a material impairment for these for 64 00:03:28,880 --> 00:03:32,960 Speaker 3: the MAG seven so called MAG seven, these very large companies, 65 00:03:33,400 --> 00:03:35,600 Speaker 3: but for the projects themselves it could be a problem. 66 00:03:36,000 --> 00:03:38,119 Speaker 3: And of course there's a spill out over into other 67 00:03:38,200 --> 00:03:42,120 Speaker 3: areas of the economy. So these data centers use power, 68 00:03:42,360 --> 00:03:48,080 Speaker 3: they consume materials, they use chemicals. Who knows what the 69 00:03:48,160 --> 00:03:51,120 Speaker 3: spillover will be if the music stops. So I think 70 00:03:51,120 --> 00:03:54,160 Speaker 3: you have to be not only cautious about the tech sector, 71 00:03:54,200 --> 00:03:59,200 Speaker 3: but the tangential related sectors that are providing support for 72 00:03:59,280 --> 00:04:00,000 Speaker 3: these new projects. 73 00:04:01,840 --> 00:04:03,880 Speaker 2: Yeah, I think there's a ton We're going to dig 74 00:04:03,920 --> 00:04:09,240 Speaker 2: into details more into this AI tech trade, but I'd 75 00:04:09,280 --> 00:04:10,800 Speaker 2: love to just get a little bit of a sense 76 00:04:10,840 --> 00:04:13,040 Speaker 2: from you and that this is such an industry driven 77 00:04:13,080 --> 00:04:17,279 Speaker 2: by short term results, and we're obviously seeing markets still rally. 78 00:04:18,760 --> 00:04:21,840 Speaker 2: How do you maintain a long term investment horizon in 79 00:04:21,880 --> 00:04:25,679 Speaker 2: your decision making when so many people are focused on 80 00:04:26,080 --> 00:04:28,400 Speaker 2: how you're outperforming today and tomorrow. 81 00:04:29,200 --> 00:04:32,200 Speaker 3: Well, you can't focus on short term results. It's a 82 00:04:32,279 --> 00:04:37,120 Speaker 3: simple proposition that's hard to stick to. When markets get 83 00:04:37,400 --> 00:04:41,240 Speaker 3: rich in valuation, you're supposed to be cautious That could 84 00:04:41,320 --> 00:04:45,680 Speaker 3: lead to underperformance for a short period of time or 85 00:04:45,720 --> 00:04:48,680 Speaker 3: maybe not. It depends on the situation. But sticking to 86 00:04:48,760 --> 00:04:51,679 Speaker 3: investment discipline is the only tool in the toolkit. Really, 87 00:04:52,240 --> 00:04:56,039 Speaker 3: when the opportunities are light, then you have to be 88 00:04:56,080 --> 00:04:58,880 Speaker 3: stepping back. I think it's important to communicate to you 89 00:04:58,920 --> 00:05:01,760 Speaker 3: investors and tell them what you're doing, and when will 90 00:05:01,800 --> 00:05:05,400 Speaker 3: you outperform and when will you underperform? I think in 91 00:05:05,400 --> 00:05:09,320 Speaker 3: this current environment, double line telling investors that we see 92 00:05:09,360 --> 00:05:11,680 Speaker 3: the things that everyone else sees, we're thinking about them, 93 00:05:12,360 --> 00:05:16,160 Speaker 3: and we're cautious. I think that that helps our cause. Luckily, 94 00:05:16,200 --> 00:05:20,960 Speaker 3: our performance is good now. But as valuations get higher 95 00:05:21,000 --> 00:05:25,039 Speaker 3: and higher, is credit spreads get tighter and tighter, you know, 96 00:05:25,400 --> 00:05:27,960 Speaker 3: performance will be harder and harder to come by. If 97 00:05:27,960 --> 00:05:30,640 Speaker 3: we want to have a level of risk management, that's important. 98 00:05:30,800 --> 00:05:32,760 Speaker 3: So I guess I leave it there. 99 00:05:32,760 --> 00:05:35,320 Speaker 2: Well just well, just let's set a baseline then, because 100 00:05:35,320 --> 00:05:39,400 Speaker 2: I've heard you say cautious now twice. So where do 101 00:05:39,440 --> 00:05:43,560 Speaker 2: you think fair value is right now for IG and 102 00:05:43,640 --> 00:05:46,000 Speaker 2: high yield? And what are those one or two things 103 00:05:46,000 --> 00:05:48,640 Speaker 2: that you're cautious about that you think that the market 104 00:05:48,680 --> 00:05:49,160 Speaker 2: is missing. 105 00:05:50,000 --> 00:05:51,440 Speaker 3: Well, I think when you talk at a spread level, 106 00:05:51,480 --> 00:05:53,800 Speaker 3: you're kind of missing what's happening underneath the hood. So 107 00:05:54,680 --> 00:05:58,760 Speaker 3: I think it's more interesting to talk about the fact 108 00:05:58,760 --> 00:06:01,880 Speaker 3: that there's, at least in low investment grade a significant 109 00:06:01,880 --> 00:06:04,800 Speaker 3: amount of dispersion. And so I think it's all about 110 00:06:05,320 --> 00:06:08,760 Speaker 3: credit selection really more than anything else. Fair value at 111 00:06:08,760 --> 00:06:11,320 Speaker 3: the index level, I don't really think about it that way. 112 00:06:11,320 --> 00:06:14,520 Speaker 3: I think about fair value building up from our portfolio 113 00:06:14,680 --> 00:06:17,160 Speaker 3: name by name, and does it does do the credits 114 00:06:17,160 --> 00:06:20,520 Speaker 3: we own make sense? So when I talk about high dispersion, 115 00:06:20,520 --> 00:06:22,919 Speaker 3: what that means is if you take high yield, the 116 00:06:23,240 --> 00:06:28,640 Speaker 3: single BE index spread is about two eighty or so, 117 00:06:29,080 --> 00:06:31,560 Speaker 3: it's about where the index is. The index High held 118 00:06:31,600 --> 00:06:35,320 Speaker 3: index spread is about two eighty six. The spread on 119 00:06:35,360 --> 00:06:37,480 Speaker 3: the single B index is about the same. But there's 120 00:06:37,520 --> 00:06:40,479 Speaker 3: a lot of dispersion, meaning that there are many credits 121 00:06:40,480 --> 00:06:42,839 Speaker 3: that are much tighter than to eighty, and there are 122 00:06:42,839 --> 00:06:45,920 Speaker 3: many credits are much wider than to eighty. There are 123 00:06:45,920 --> 00:06:47,960 Speaker 3: some credits that are in the low two hundreds, there's 124 00:06:48,000 --> 00:06:52,360 Speaker 3: some credits that are a thousand over And according to 125 00:06:52,400 --> 00:06:55,360 Speaker 3: some research, I see the dispersion that that difference between 126 00:06:56,440 --> 00:06:59,719 Speaker 3: UH the names that are higher than the index spread 127 00:06:59,760 --> 00:07:02,200 Speaker 3: and and lower than the index spread is now the 128 00:07:02,240 --> 00:07:06,520 Speaker 3: eightieth six percentile, so it's only fourteen percent of the time. 129 00:07:06,680 --> 00:07:11,280 Speaker 3: Is the variation between spreads higher the loan index is similar, 130 00:07:11,400 --> 00:07:13,400 Speaker 3: I don't. I think it's in the seventies. So the 131 00:07:13,440 --> 00:07:15,680 Speaker 3: difference between the tightest spread and the lower and the 132 00:07:15,720 --> 00:07:19,680 Speaker 3: widest spread is still usually lower than it is now, 133 00:07:19,960 --> 00:07:23,080 Speaker 3: so only twenty five percent of the time this difference 134 00:07:23,120 --> 00:07:26,360 Speaker 3: is higher. So fair value I think you have to 135 00:07:26,400 --> 00:07:28,800 Speaker 3: look on on a credit by credit basis. If I'm 136 00:07:28,920 --> 00:07:34,040 Speaker 3: looking at a chemical company with deteriorating financials and an 137 00:07:34,200 --> 00:07:38,560 Speaker 3: uncertain outlook and it has a tight spread to the 138 00:07:38,640 --> 00:07:42,520 Speaker 3: hyield index, that seems pretty rich. If I'm looking at 139 00:07:42,520 --> 00:07:47,400 Speaker 3: a very stable, let's say, insurance business that's been growing 140 00:07:48,520 --> 00:07:52,960 Speaker 3: and has stable learnings and cash flows and is kind 141 00:07:52,960 --> 00:07:54,960 Speaker 3: of you know, on index or maybe a little tight 142 00:07:54,960 --> 00:07:58,280 Speaker 3: to the index, that seems that seems reasonable to me. 143 00:07:58,440 --> 00:08:02,239 Speaker 3: So what the market is doing is they're paying for quality. 144 00:08:02,480 --> 00:08:05,880 Speaker 3: So the tight spread credits are inside the index, and 145 00:08:05,960 --> 00:08:10,200 Speaker 3: the credits that have uncertainty are wide to the wide 146 00:08:10,240 --> 00:08:12,920 Speaker 3: of the index. Where they're talking about high yield bank 147 00:08:12,960 --> 00:08:16,680 Speaker 3: loans or investment grade for that matter. In the investment 148 00:08:16,680 --> 00:08:19,080 Speaker 3: grade space, for example, BDCs have widened out because there's 149 00:08:19,080 --> 00:08:23,240 Speaker 3: great concerns about BDC's the stocks have been sort of 150 00:08:23,240 --> 00:08:27,240 Speaker 3: repriced over the last few months. Worries about quite simply 151 00:08:27,320 --> 00:08:30,440 Speaker 3: rates falling interest rates don't help BDCs because they're floating rate. 152 00:08:30,840 --> 00:08:34,440 Speaker 3: But then credit concerns with the headlines of first brands 153 00:08:34,480 --> 00:08:37,560 Speaker 3: and so on, and so if you put that all together, 154 00:08:37,760 --> 00:08:40,040 Speaker 3: it's hard at the index level to say eighty base 155 00:08:40,120 --> 00:08:42,560 Speaker 3: points on the investment grade index as a whole, is 156 00:08:42,600 --> 00:08:44,560 Speaker 3: that the right price, or is two eighty six on 157 00:08:44,640 --> 00:08:49,319 Speaker 3: the on the high old index seem fair? I'd see 158 00:08:49,320 --> 00:08:52,320 Speaker 3: they both seem very tight and leave little room for mistake. 159 00:08:52,679 --> 00:08:55,280 Speaker 3: Is I guess the way I would characterize it, I 160 00:08:55,280 --> 00:08:58,600 Speaker 3: could say, you know what, maybe something that would be 161 00:08:58,679 --> 00:09:01,400 Speaker 3: quite fair quote fair ves value in a stable, growing 162 00:09:01,440 --> 00:09:07,480 Speaker 3: economy would be a little wider exactly how wide? I think, 163 00:09:07,480 --> 00:09:10,000 Speaker 3: even more from the bottom up, as I mentioned before. 164 00:09:11,040 --> 00:09:12,600 Speaker 1: And when you go back to Tech and look at 165 00:09:12,600 --> 00:09:15,000 Speaker 1: that Robert, you know the deal we talked about Meta. 166 00:09:15,440 --> 00:09:17,640 Speaker 1: You know, they came out with initial price talk on 167 00:09:17,679 --> 00:09:20,720 Speaker 1: that new deal quite a bit wider than where they priced, 168 00:09:20,800 --> 00:09:24,480 Speaker 1: just because of the massive demand for those bonds despite 169 00:09:24,480 --> 00:09:26,640 Speaker 1: the fact that you know the stock price was tanking 170 00:09:26,679 --> 00:09:29,200 Speaker 1: on the same day. You know, what do you do 171 00:09:29,240 --> 00:09:31,880 Speaker 1: in that situation? Do you just not participate? I mean 172 00:09:31,920 --> 00:09:33,520 Speaker 1: you've kind of forced to, right. 173 00:09:33,840 --> 00:09:38,400 Speaker 3: Well, we're not forced to. I think if you are 174 00:09:38,440 --> 00:09:40,880 Speaker 3: an active manager, which we are, we're not forced to 175 00:09:40,920 --> 00:09:43,720 Speaker 3: buy anything. So if there's a position that we don't like, 176 00:09:44,400 --> 00:09:46,240 Speaker 3: a credit we don't like, then we don't need to 177 00:09:46,240 --> 00:09:47,959 Speaker 3: own it. If there's something we like a lot, then 178 00:09:47,960 --> 00:09:50,920 Speaker 3: we do own it. I also point on you know, 179 00:09:51,000 --> 00:09:53,079 Speaker 3: most of the money we manage is multisector, and so 180 00:09:53,160 --> 00:09:56,120 Speaker 3: the pitch for that is if the corporate credit market 181 00:09:56,160 --> 00:09:58,400 Speaker 3: gets a little too nutty, then we can allocate to 182 00:09:58,440 --> 00:10:02,400 Speaker 3: other areas of the fixed income So we can stick 183 00:10:02,440 --> 00:10:05,080 Speaker 3: true to that discipline because we have the flexibility to 184 00:10:05,120 --> 00:10:09,200 Speaker 3: say no and move money around if necessary. So I 185 00:10:09,200 --> 00:10:12,240 Speaker 3: think active management is very important now. I think another 186 00:10:12,320 --> 00:10:14,520 Speaker 3: theme that maybe people don't talk about as much is 187 00:10:14,800 --> 00:10:19,880 Speaker 3: since the financial crisis, active management hasn't been as important 188 00:10:19,880 --> 00:10:22,040 Speaker 3: when rates are taken to zero because it's all sort 189 00:10:22,080 --> 00:10:26,600 Speaker 3: of liquidity trade where the worst credits actually perform the 190 00:10:26,640 --> 00:10:29,679 Speaker 3: best and the most unprofitable companies and the equity markets 191 00:10:29,720 --> 00:10:34,280 Speaker 3: outperform an environment where we're no longer in QE and 192 00:10:35,080 --> 00:10:38,200 Speaker 3: we have higher base rates. Credits need to live on 193 00:10:38,200 --> 00:10:42,040 Speaker 3: their own performance, and I think credit selection has been 194 00:10:42,120 --> 00:10:44,560 Speaker 3: very important twenty twenty five and will continue into twenty 195 00:10:44,640 --> 00:10:47,520 Speaker 3: twenty six. So I don't think you have to own anything. 196 00:10:47,840 --> 00:10:50,160 Speaker 3: I think you have to be careful, very careful of 197 00:10:50,320 --> 00:10:52,920 Speaker 3: credit selection, and I think credit selection will be rewarded. 198 00:10:53,480 --> 00:10:56,640 Speaker 3: It was rewarded this year with years not over yet, 199 00:10:56,679 --> 00:10:59,280 Speaker 3: but I think it will continue to be rewarded next year. 200 00:11:00,559 --> 00:11:03,240 Speaker 2: There's a lot of layers to this credit selection, even 201 00:11:03,280 --> 00:11:06,360 Speaker 2: inside of credits. So for something like Meta one is 202 00:11:06,400 --> 00:11:10,040 Speaker 2: you know they should bonds as far out as with 203 00:11:10,120 --> 00:11:13,199 Speaker 2: fifty year maturities. Interesting to get your thoughts on how 204 00:11:13,200 --> 00:11:16,679 Speaker 2: people should evaluate tech names fifty years out and how 205 00:11:16,720 --> 00:11:20,120 Speaker 2: you value that. But more specifically, companies like this are 206 00:11:20,160 --> 00:11:25,000 Speaker 2: now issuing somewhat liquid private deals, and I'm wondering how 207 00:11:25,040 --> 00:11:28,679 Speaker 2: you're discerning between am I supposed to be owning a 208 00:11:28,920 --> 00:11:33,720 Speaker 2: more liquid public deal or something that's giving me a 209 00:11:33,720 --> 00:11:36,960 Speaker 2: little bit more yield through an SPV that might not 210 00:11:37,040 --> 00:11:39,880 Speaker 2: be as liquid. How are you determining fair value of 211 00:11:40,160 --> 00:11:42,560 Speaker 2: public versus privates within the same name. 212 00:11:43,679 --> 00:11:48,640 Speaker 3: Well, to answer your second question, first, it depends on 213 00:11:48,679 --> 00:11:51,800 Speaker 3: where you're putting it. So people often pay for liquidity 214 00:11:51,840 --> 00:11:54,199 Speaker 3: when they don't need it, and so in a strategy 215 00:11:54,240 --> 00:11:58,160 Speaker 3: that does not need as much liquidity, maybe it's some 216 00:11:58,200 --> 00:12:00,840 Speaker 3: sort of SMA or private fund that we're managing where 217 00:12:00,840 --> 00:12:04,199 Speaker 3: we liquidity is not a primary concern, then we should 218 00:12:04,200 --> 00:12:06,480 Speaker 3: get paid for that ill liquidity, and we're happy to 219 00:12:06,520 --> 00:12:09,840 Speaker 3: do that, all else being equal, credit you know, credit 220 00:12:09,880 --> 00:12:13,839 Speaker 3: neutral rates neutral. If it's just less liquid and we're 221 00:12:13,880 --> 00:12:17,360 Speaker 3: putting in a place where it's appropriate, then that's totally fine. 222 00:12:18,240 --> 00:12:21,800 Speaker 3: We have other funds at our firm that have daily 223 00:12:21,960 --> 00:12:25,920 Speaker 3: liquidity demands, and so if we are accepting illiquidity, we 224 00:12:25,960 --> 00:12:28,560 Speaker 3: have to determine whether that's the right place. So that's 225 00:12:28,600 --> 00:12:31,480 Speaker 3: just a simple question of are you putting in the 226 00:12:31,520 --> 00:12:35,480 Speaker 3: right place? And then the question is does that SPV 227 00:12:35,679 --> 00:12:39,200 Speaker 3: have substantially more credit risk because of the nature of 228 00:12:39,200 --> 00:12:42,000 Speaker 3: the structure than the parent company. Of course it does, 229 00:12:42,840 --> 00:12:45,360 Speaker 3: and then you have to evaluate that credit risk. I 230 00:12:45,400 --> 00:12:48,400 Speaker 3: think that these are generally structured I'm speaking more broadly 231 00:12:48,440 --> 00:12:52,559 Speaker 3: now in a way that the credit risk is pretty 232 00:12:52,559 --> 00:12:55,600 Speaker 3: well buttoned up. So you're taking ill equity risk. I 233 00:12:55,600 --> 00:12:58,560 Speaker 3: think you're taking some extension risk depending on how these 234 00:12:58,600 --> 00:13:02,600 Speaker 3: projects unfold, and so those are acceptable and putting them 235 00:13:02,640 --> 00:13:05,439 Speaker 3: in the right place is fine in terms of thirty year. 236 00:13:05,679 --> 00:13:07,920 Speaker 3: You know, we're not super excited here at the firm 237 00:13:07,920 --> 00:13:11,839 Speaker 3: about long duration assets anyways, because we're worried about steepening curve, 238 00:13:12,640 --> 00:13:14,920 Speaker 3: and then of course when you layer credit risk on 239 00:13:14,960 --> 00:13:18,040 Speaker 3: top of that, it's not our favorite trade. So that's 240 00:13:18,080 --> 00:13:20,720 Speaker 3: not something that we're super excited about, like long duration 241 00:13:22,520 --> 00:13:26,320 Speaker 3: interest rate exposure to begin with, and then add long 242 00:13:26,400 --> 00:13:29,600 Speaker 3: duration tech exposure on top of that. That wouldn't be 243 00:13:30,040 --> 00:13:32,679 Speaker 3: our cup of tea, as people say, so not for us. 244 00:13:33,200 --> 00:13:36,319 Speaker 3: But you know, keeping it on the shorter end private 245 00:13:36,800 --> 00:13:41,160 Speaker 3: versus public, taking additional illiquidity risk, I think that's totally 246 00:13:41,200 --> 00:13:42,720 Speaker 3: fine as long as you're putting in the right place. 247 00:13:45,640 --> 00:13:48,240 Speaker 2: And what was your view on the Bigniet deal? Did 248 00:13:48,280 --> 00:13:51,679 Speaker 2: you think that was fairly valued? You know that it's 249 00:13:51,720 --> 00:13:54,400 Speaker 2: one of these transactions that broke ten points higher than 250 00:13:55,120 --> 00:14:00,000 Speaker 2: we're we're priced. You know, how does that suit you? 251 00:14:03,280 --> 00:14:06,040 Speaker 3: I wasn't super excited about it, to be honest. I 252 00:14:06,040 --> 00:14:09,960 Speaker 3: think it's neither fish nor foul. It's not really a 253 00:14:10,040 --> 00:14:12,680 Speaker 3: standard investment grade deal, and I think there's a lot 254 00:14:12,720 --> 00:14:14,600 Speaker 3: to look at in the high old space where you 255 00:14:14,600 --> 00:14:20,760 Speaker 3: can replicate a similar type of yield profile. So I 256 00:14:20,760 --> 00:14:22,160 Speaker 3: thought it was fine. I didn't think it was something 257 00:14:22,160 --> 00:14:24,680 Speaker 3: you had to buy. I'd say that. I think if 258 00:14:24,680 --> 00:14:26,760 Speaker 3: you bought, if you got it at new issue at 259 00:14:27,520 --> 00:14:31,080 Speaker 3: where it was originally priced, that that was interesting. But 260 00:14:31,120 --> 00:14:32,640 Speaker 3: then where it's trading in a market, I don't think 261 00:14:32,680 --> 00:14:37,000 Speaker 3: it represents anything really unique. Again, because you have to 262 00:14:37,000 --> 00:14:40,160 Speaker 3: get paid for the liquidity, for the extension risk. You 263 00:14:40,200 --> 00:14:42,160 Speaker 3: price all that in. You know the uniqueness of the 264 00:14:42,200 --> 00:14:46,760 Speaker 3: structure that's worth something, and so is it cheap. I 265 00:14:46,760 --> 00:14:49,840 Speaker 3: didn't think it was particularly cheap, but maybe it's fair value. 266 00:14:49,880 --> 00:14:53,320 Speaker 3: But it wasn't some kind of unique opportunity. 267 00:14:54,520 --> 00:14:59,480 Speaker 2: And you've got better insight than most into what the 268 00:14:59,520 --> 00:15:03,000 Speaker 2: supply looks like over the next few months. So I 269 00:15:03,000 --> 00:15:06,040 Speaker 2: think the market was a little bit surprised by the 270 00:15:06,080 --> 00:15:10,080 Speaker 2: size of metas deals. Now we're sort of hearing whispers 271 00:15:10,080 --> 00:15:15,000 Speaker 2: of thirty eight billion coming out of Oracle. Alphabet does 272 00:15:15,920 --> 00:15:18,080 Speaker 2: more in dollars in euros than I think people would 273 00:15:18,080 --> 00:15:21,600 Speaker 2: have anticipated based upon what they're cashflow looks like, what 274 00:15:21,680 --> 00:15:23,720 Speaker 2: does the calendar look like to you? What are you 275 00:15:23,840 --> 00:15:26,800 Speaker 2: seeing in terms of people lining up private deals, people 276 00:15:26,800 --> 00:15:30,080 Speaker 2: lining up public deals. Are we going to see now 277 00:15:30,120 --> 00:15:32,880 Speaker 2: a standard sort of twenty five billion dollars at the 278 00:15:33,000 --> 00:15:37,560 Speaker 2: new size of the jumbo deal for the next six 279 00:15:37,560 --> 00:15:41,280 Speaker 2: to twelve twenty four months or these aberrations. 280 00:15:41,760 --> 00:15:44,040 Speaker 3: Well, it's hard to predict exactly the size and timing, 281 00:15:44,080 --> 00:15:46,160 Speaker 3: but i'd stay from a higher level. We have been 282 00:15:46,600 --> 00:15:50,560 Speaker 3: below a trend in terms of issuance and M and 283 00:15:50,560 --> 00:15:53,560 Speaker 3: A transactions. These aren't M and A transactions, but in 284 00:15:53,640 --> 00:15:56,800 Speaker 3: terms of just overall corporate issuance has been down since 285 00:15:56,880 --> 00:15:59,960 Speaker 3: the pandemic. So corporate debt as a percentage of GDP 286 00:16:00,280 --> 00:16:06,320 Speaker 3: since twenty twenty has been going down. That's unusual when 287 00:16:06,320 --> 00:16:09,520 Speaker 3: you're not in a recession. So I would expect corporate 288 00:16:09,560 --> 00:16:12,280 Speaker 3: istionins to go up. Putting aside a for a second, 289 00:16:12,640 --> 00:16:14,840 Speaker 3: just because M and A normalizes and you get a 290 00:16:14,880 --> 00:16:17,600 Speaker 3: more normal M and A calendar, you get above trend 291 00:16:17,760 --> 00:16:20,479 Speaker 3: M and A, and then of course you have these projects, 292 00:16:20,880 --> 00:16:25,000 Speaker 3: these AI data center infrastructure build out projects. I think 293 00:16:25,040 --> 00:16:28,120 Speaker 3: we have substantial growth insuans. The exact size is a 294 00:16:28,160 --> 00:16:31,640 Speaker 3: little bit hard to pin down, partly because of timing. 295 00:16:31,760 --> 00:16:33,280 Speaker 3: There's a calendar effect. As we get to the end 296 00:16:33,280 --> 00:16:35,440 Speaker 3: of the year, you know, we probably have a couple weeks. 297 00:16:35,480 --> 00:16:37,440 Speaker 3: People don't want a price during Thanksgiving, they don't want 298 00:16:37,440 --> 00:16:40,000 Speaker 3: a price during Christmas. So what does the rest of 299 00:16:40,040 --> 00:16:42,320 Speaker 3: the year hold. I don't know, but let's say over 300 00:16:42,320 --> 00:16:45,800 Speaker 3: the next six months, I would expect a very strong calendar. 301 00:16:45,840 --> 00:16:48,920 Speaker 3: There is very strong demand. We know that the credit 302 00:16:49,000 --> 00:16:55,080 Speaker 3: markets overall are undersupplied, and so investors are happy to 303 00:16:55,120 --> 00:16:58,160 Speaker 3: receive more paper. You can see how these deals are subscribed, 304 00:16:58,160 --> 00:17:01,479 Speaker 3: how they trade on the break. Those are the indications 305 00:17:01,480 --> 00:17:05,600 Speaker 3: that the market is happy to see those, and then 306 00:17:05,640 --> 00:17:08,000 Speaker 3: in below investment grate inside we haven't seen any LBOs really. 307 00:17:08,040 --> 00:17:12,080 Speaker 3: We've seen the one electronic arts deal. We've seen that 308 00:17:12,600 --> 00:17:17,200 Speaker 3: BASF is selling their coding is business to Carlisle. We're 309 00:17:17,240 --> 00:17:19,480 Speaker 3: going to start to see things more of those types 310 00:17:19,480 --> 00:17:21,480 Speaker 3: of transactions as well. So I think it's going to 311 00:17:21,520 --> 00:17:24,479 Speaker 3: be busy both from the investment grade and blow investment 312 00:17:24,480 --> 00:17:26,919 Speaker 3: grade side into twenty twenty six. I think that will 313 00:17:26,960 --> 00:17:28,720 Speaker 3: be the story for twenty twenty six new issue. 314 00:17:30,440 --> 00:17:32,960 Speaker 1: How much is double Line Patta spacing in this AI 315 00:17:33,240 --> 00:17:35,600 Speaker 1: new issue story right now, I mean you buying meso, 316 00:17:35,720 --> 00:17:37,000 Speaker 1: you're buying everything as it comes out. 317 00:17:37,480 --> 00:17:39,520 Speaker 3: We're justly yeah, we're definitely not buying everything as it 318 00:17:39,560 --> 00:17:43,240 Speaker 3: comes out. Salesmen like to hear that you're buying everything 319 00:17:43,280 --> 00:17:45,399 Speaker 3: as it comes out. I mean, I would be everyone 320 00:17:45,480 --> 00:17:47,639 Speaker 3: every salesman's best friend if I said, yeah, we buy everything, 321 00:17:47,640 --> 00:17:48,600 Speaker 3: but no, absolutely not. 322 00:17:50,440 --> 00:17:50,800 Speaker 2: I don't know. 323 00:17:50,840 --> 00:17:52,639 Speaker 3: We had to account on the number of times I 324 00:17:52,720 --> 00:17:57,399 Speaker 3: use cautious, but I'm When you have an emerging sector 325 00:17:57,440 --> 00:17:59,480 Speaker 3: of the credit market, I think that you have to 326 00:17:59,520 --> 00:18:04,719 Speaker 3: be maybe use a different word, careful and and ad 327 00:18:04,720 --> 00:18:08,880 Speaker 3: mitigate how much exposure you have to these areas. There's 328 00:18:08,880 --> 00:18:12,280 Speaker 3: a technical perspective where people pile in and then all 329 00:18:12,320 --> 00:18:15,119 Speaker 3: of a sudden they you know, maybe don't they decide 330 00:18:15,280 --> 00:18:17,040 Speaker 3: they don't want as much as they as they bought 331 00:18:17,040 --> 00:18:20,439 Speaker 3: in the first place. These credits need to season, These 332 00:18:20,440 --> 00:18:24,440 Speaker 3: structures need a season because they're somewhat novel. So we're 333 00:18:24,480 --> 00:18:29,320 Speaker 3: certainly not buying every deal. We're actually buying a well 334 00:18:29,359 --> 00:18:31,719 Speaker 3: I should say holding. Sometimes we buy and then we trade. 335 00:18:31,720 --> 00:18:34,879 Speaker 3: But overall exposure i'd say is modest. 336 00:18:34,880 --> 00:18:38,600 Speaker 1: And in terms of expressing that caution, are you buying CDs? 337 00:18:38,600 --> 00:18:40,360 Speaker 1: I mean the oracle CDs popped up, and I think 338 00:18:40,400 --> 00:18:42,200 Speaker 1: METS is going to come out with CDs because it's 339 00:18:42,200 --> 00:18:44,440 Speaker 1: the man for it. But are you hedging yourself through 340 00:18:44,480 --> 00:18:45,080 Speaker 1: the swoops? 341 00:18:46,119 --> 00:18:48,120 Speaker 3: We can do that, but we would do that more 342 00:18:48,200 --> 00:18:51,960 Speaker 3: as a strategic position as opposed to a risk management perspective. 343 00:18:52,000 --> 00:18:54,159 Speaker 3: If we own too much of something, we're in a 344 00:18:54,160 --> 00:18:56,760 Speaker 3: position where we can just sell that exposure in the 345 00:18:56,800 --> 00:19:00,280 Speaker 3: cash market, So we can use CDs really more firstategic 346 00:19:00,320 --> 00:19:03,440 Speaker 3: purposes if we think that there's a way to buy 347 00:19:03,440 --> 00:19:07,360 Speaker 3: something cheap that way, But we really use CDs as 348 00:19:07,359 --> 00:19:10,840 Speaker 3: a risk management tool, I'd say quite lightly. That's just 349 00:19:10,880 --> 00:19:13,439 Speaker 3: the way our firm operates. We tend to be managing 350 00:19:13,440 --> 00:19:16,879 Speaker 3: on a cash basis. We like to buy and hold 351 00:19:16,920 --> 00:19:19,600 Speaker 3: exposure that we can manage and move in and out of, 352 00:19:19,720 --> 00:19:22,760 Speaker 3: So we don't like to own so much of something 353 00:19:22,840 --> 00:19:25,919 Speaker 3: that we're stuck in it and have to use synthetic 354 00:19:26,720 --> 00:19:31,360 Speaker 3: tools to mitigate risk. That's just our style, So that's 355 00:19:31,359 --> 00:19:32,080 Speaker 3: how we operate. 356 00:19:34,160 --> 00:19:38,720 Speaker 2: The market has shifted somewhat from banking syndicates to buy 357 00:19:38,720 --> 00:19:44,919 Speaker 2: side syndicates. Are you guys approaching companies on private deals 358 00:19:45,160 --> 00:19:51,359 Speaker 2: as anchor tenants or syndicated transactions for names or projects 359 00:19:51,760 --> 00:19:54,879 Speaker 2: that you like, And is that a real opportunity where 360 00:19:55,320 --> 00:19:58,000 Speaker 2: again you can get in at much better levels than 361 00:19:59,119 --> 00:20:02,240 Speaker 2: where something ultimate trades when there's liquidity. 362 00:20:03,840 --> 00:20:07,760 Speaker 3: I'd say broadly no, there are specific situations where we 363 00:20:07,800 --> 00:20:10,720 Speaker 3: know a credit well, I'd say, I have to zoom 364 00:20:10,720 --> 00:20:14,280 Speaker 3: back and say, our philosophy here is that there are 365 00:20:14,280 --> 00:20:16,560 Speaker 3: credits that we have covered here for a very long time. 366 00:20:16,840 --> 00:20:19,119 Speaker 3: We know the companies, we know the management team, we 367 00:20:19,240 --> 00:20:21,840 Speaker 3: know how they operate in good times and bad, and 368 00:20:21,880 --> 00:20:24,040 Speaker 3: we're happy to provide them capital either in a direct 369 00:20:24,080 --> 00:20:28,240 Speaker 3: way or indirect way as the opportunities come. But you know, 370 00:20:28,280 --> 00:20:31,800 Speaker 3: we're not what you would consider a private credit firm overall, 371 00:20:32,280 --> 00:20:34,080 Speaker 3: so we don't have a bunch of bankers knocking on 372 00:20:34,160 --> 00:20:40,320 Speaker 3: doors to you know, help finance their businesses. We're more 373 00:20:40,440 --> 00:20:44,520 Speaker 3: passive in our orientation where we generally speaking, are looking 374 00:20:44,600 --> 00:20:46,720 Speaker 3: with the market gives us and we decide what to 375 00:20:46,760 --> 00:20:50,800 Speaker 3: buy or sell based on what's out there in the market, 376 00:20:51,160 --> 00:20:53,600 Speaker 3: and it's to select few opportunities where we think that 377 00:20:53,640 --> 00:20:57,000 Speaker 3: there's a specific situation where we have a relationship. What 378 00:20:57,160 --> 00:21:00,240 Speaker 3: we lean into let's say that's the minority as post 379 00:21:00,240 --> 00:21:02,919 Speaker 3: of the majority of what we do. And we've definitely 380 00:21:03,000 --> 00:21:06,800 Speaker 3: been vocal about our views on private credit, which I 381 00:21:06,800 --> 00:21:08,560 Speaker 3: can get into for a minute. I'm in private credit 382 00:21:08,600 --> 00:21:13,920 Speaker 3: in twenty twenty was an outstanding opportunity, and we participated 383 00:21:13,920 --> 00:21:16,240 Speaker 3: in ways we could to provide capital when the capital 384 00:21:16,240 --> 00:21:21,159 Speaker 3: markets were frozen, and those were epic opportunities where you 385 00:21:21,359 --> 00:21:24,600 Speaker 3: had double digit yields with amount of security that made 386 00:21:25,040 --> 00:21:29,600 Speaker 3: the risk of impairment deminimous. In my estimation, that turned 387 00:21:29,600 --> 00:21:32,160 Speaker 3: out to be true the way those seasoned fast forward 388 00:21:32,240 --> 00:21:34,919 Speaker 3: to today, I don't think there's any alpha in private credit. 389 00:21:35,040 --> 00:21:37,080 Speaker 3: I put out a video in twenty twenty three that 390 00:21:37,080 --> 00:21:38,960 Speaker 3: I believe is posted on the double Line website where 391 00:21:38,960 --> 00:21:41,560 Speaker 3: I thought that the returns of private credit and public 392 00:21:41,600 --> 00:21:46,040 Speaker 3: credit would converge so effectively be no benefit to being 393 00:21:46,040 --> 00:21:49,560 Speaker 3: in private credit. There has to be a yield benefit, 394 00:21:49,600 --> 00:21:54,080 Speaker 3: otherwise you're not getting compensated for the liquidity, for the 395 00:21:54,280 --> 00:21:58,359 Speaker 3: concentration risk, for the credit risk. To me, if I 396 00:21:58,400 --> 00:22:02,520 Speaker 3: think about private credit today, it's just a riskier cohortive credits. 397 00:22:02,560 --> 00:22:04,520 Speaker 3: It's not bad or worse, it's just a different positioning 398 00:22:05,560 --> 00:22:08,879 Speaker 3: they're mostly B three B minus. They tend to be 399 00:22:08,920 --> 00:22:14,240 Speaker 3: more concentrated, holding larger positions, often with a software tilt 400 00:22:14,280 --> 00:22:17,879 Speaker 3: to it. So that's a different trade. You know, you 401 00:22:17,880 --> 00:22:19,360 Speaker 3: could say whether you like it or not, but it's 402 00:22:19,400 --> 00:22:22,560 Speaker 3: different than investing in the High Old Index or the 403 00:22:22,600 --> 00:22:28,399 Speaker 3: Bank Loane index. Those are broadly diversified, they're higher in 404 00:22:28,440 --> 00:22:31,280 Speaker 3: credit quality, and of course they're liquid. You can trade, 405 00:22:31,520 --> 00:22:33,480 Speaker 3: you know, depending on the strategy, you can be in 406 00:22:33,480 --> 00:22:36,760 Speaker 3: a daily liquity fund where you can get in and 407 00:22:36,760 --> 00:22:39,240 Speaker 3: out every day. So it's a completely different trade. And 408 00:22:39,280 --> 00:22:42,520 Speaker 3: because those spreads have compressed and the returns have compressed, 409 00:22:44,280 --> 00:22:46,720 Speaker 3: I don't think there's a big opportunity there. Frankly so, 410 00:22:46,880 --> 00:22:49,840 Speaker 3: and some of the private credit managers have gone publicly 411 00:22:49,880 --> 00:22:53,480 Speaker 3: and said that expect lower returns. I believe Blackstone. The 412 00:22:53,520 --> 00:22:57,040 Speaker 3: Blackstone CEO John Gray was in the press somewhere saying 413 00:22:57,200 --> 00:23:00,800 Speaker 3: expect lower returns. So if you're going to get mid 414 00:23:00,840 --> 00:23:03,880 Speaker 3: to high single digit returns in private credit, well that's 415 00:23:03,960 --> 00:23:06,320 Speaker 3: what ail index is doing here to date so far. 416 00:23:06,920 --> 00:23:10,000 Speaker 3: So where's the advantage That would be my question, And 417 00:23:10,040 --> 00:23:13,520 Speaker 3: that goes to your question about chasing companies directly. If 418 00:23:13,560 --> 00:23:16,959 Speaker 3: you're trying to finance a company right now, directly you're 419 00:23:17,160 --> 00:23:20,560 Speaker 3: competing on fees and terms, and I don't think it's Uh, 420 00:23:20,840 --> 00:23:23,120 Speaker 3: we don't want to get into that environment where we're 421 00:23:23,680 --> 00:23:27,000 Speaker 3: winning by the tightest spread in the loosest terms. I 422 00:23:27,040 --> 00:23:29,800 Speaker 3: don't think that's something we want to be doing. So 423 00:23:29,960 --> 00:23:31,879 Speaker 3: we don't think we have a competitive advantage in terms 424 00:23:31,880 --> 00:23:36,280 Speaker 3: of anything else, like in terms of providing financing to 425 00:23:36,320 --> 00:23:38,959 Speaker 3: someone on an with a set of terms, and so 426 00:23:39,080 --> 00:23:41,919 Speaker 3: it's not something we're really super excited about now, although 427 00:23:41,920 --> 00:23:43,840 Speaker 3: in twenty twenty we were very excited about it because 428 00:23:44,359 --> 00:23:47,280 Speaker 3: if we're one of very few people providing capital, then 429 00:23:47,280 --> 00:23:49,399 Speaker 3: we get pricing and we get terms, we have the 430 00:23:49,400 --> 00:23:52,439 Speaker 3: structure we want, then that's that's quite exciting. Then we 431 00:23:52,440 --> 00:23:53,639 Speaker 3: want to lean into it. Definitely. 432 00:23:53,680 --> 00:23:55,840 Speaker 1: It's a really interesting debate you've hit on. You know, 433 00:23:55,880 --> 00:23:58,359 Speaker 1: we've discussed this for some time. I remember this time 434 00:23:58,480 --> 00:24:01,280 Speaker 1: last year we were talking with PIMCO the advantage in 435 00:24:01,440 --> 00:24:04,400 Speaker 1: public and private. They said at that time, I think 436 00:24:04,440 --> 00:24:08,040 Speaker 1: that there was about a one hundred basis points advantage 437 00:24:08,080 --> 00:24:11,439 Speaker 1: to going private and you know, sacrificing liquidity. Then we 438 00:24:11,600 --> 00:24:13,760 Speaker 1: you know, come May, we were talking to Dimensional, which 439 00:24:13,800 --> 00:24:17,000 Speaker 1: had a very academic approach, and they actually found over 440 00:24:17,040 --> 00:24:19,439 Speaker 1: a long term that high yield public high yield did 441 00:24:19,480 --> 00:24:22,880 Speaker 1: better than private And then switched back to a couple 442 00:24:22,920 --> 00:24:24,840 Speaker 1: of weeks ago, and we had Blackstone on this show 443 00:24:24,880 --> 00:24:29,600 Speaker 1: talking about a two hundred basis points premium on private 444 00:24:29,880 --> 00:24:33,040 Speaker 1: IG over public IG. And then we got into the 445 00:24:33,080 --> 00:24:36,239 Speaker 1: whole area bespoke financing and you know, you're tailoring it 446 00:24:36,280 --> 00:24:38,960 Speaker 1: to your exact needs all that stuff. So people are 447 00:24:39,040 --> 00:24:40,520 Speaker 1: kind of all over the place in terms of where 448 00:24:40,520 --> 00:24:43,400 Speaker 1: they think private might shake out. And also I would 449 00:24:43,400 --> 00:24:46,439 Speaker 1: add that your colleague Jeff Gundlack at our event in 450 00:24:46,480 --> 00:24:50,880 Speaker 1: the summer compared private credit to CDOs, which obviously blew 451 00:24:50,960 --> 00:24:53,320 Speaker 1: up the financial world and the rest of the world 452 00:24:53,520 --> 00:24:56,920 Speaker 1: in two thousand and eight. So there's so much divergence. 453 00:24:57,359 --> 00:25:00,159 Speaker 1: Don't you find, though, that your your end use is 454 00:25:00,160 --> 00:25:03,320 Speaker 1: your customers want private because that's what's host at the moment. 455 00:25:04,400 --> 00:25:07,080 Speaker 3: I actually know, I think that there's been such a 456 00:25:07,080 --> 00:25:09,960 Speaker 3: boom in private credit that I think our clients are 457 00:25:09,960 --> 00:25:13,479 Speaker 3: actually asking questions of the level of skepticism. They know 458 00:25:13,560 --> 00:25:16,399 Speaker 3: that they're called constantly from private credit managers with the 459 00:25:16,400 --> 00:25:20,920 Speaker 3: newest fund they've committed a lot of capital. I think 460 00:25:20,960 --> 00:25:23,280 Speaker 3: in some cases the returns have been good. Sometimes in 461 00:25:23,320 --> 00:25:26,680 Speaker 3: some cases the returns have not been so good, and 462 00:25:26,920 --> 00:25:29,440 Speaker 3: they're not clamoring for more of it. If anything, they're 463 00:25:29,480 --> 00:25:33,920 Speaker 3: interested in alternatives ways to diversify their exposure away from 464 00:25:33,960 --> 00:25:38,840 Speaker 3: private credit, and those are the types of solutions we're providing. 465 00:25:39,240 --> 00:25:41,560 Speaker 3: You mentioned how people have been quoting how you there's 466 00:25:41,560 --> 00:25:46,639 Speaker 3: a yield advantage in private versus public, different managersment mentioning 467 00:25:46,640 --> 00:25:49,640 Speaker 3: different yields. I point out that yields are not returns. 468 00:25:50,200 --> 00:25:52,680 Speaker 3: So there could be credits that have a higher yield 469 00:25:52,680 --> 00:25:55,359 Speaker 3: but ultimately become impaired and the returns are lower or 470 00:25:55,400 --> 00:25:57,160 Speaker 3: at least get marked down for some period of time, 471 00:25:58,000 --> 00:26:01,560 Speaker 3: so you can uh. I mean in the public market, 472 00:26:01,600 --> 00:26:03,680 Speaker 3: you see that bank loans versus HIG yield, bank loans 473 00:26:03,760 --> 00:26:06,280 Speaker 3: yield more, and I have I have a total return 474 00:26:06,320 --> 00:26:09,520 Speaker 3: that that is lower than the high old market. So 475 00:26:09,760 --> 00:26:11,679 Speaker 3: I think it's very important to point out that that 476 00:26:11,760 --> 00:26:15,640 Speaker 3: yields are not returns. Uh. But no, uh uh, back 477 00:26:15,840 --> 00:26:18,640 Speaker 3: back to what I was saying before. If anything, we're 478 00:26:18,640 --> 00:26:22,000 Speaker 3: getting more clients asking questions about private credit, and the 479 00:26:22,080 --> 00:26:25,080 Speaker 3: number of questions seem to be increasing in frequency, where 480 00:26:25,080 --> 00:26:27,240 Speaker 3: it was more of a trickle. Now it seems like, 481 00:26:27,560 --> 00:26:29,240 Speaker 3: I don't know. Several times a week people want to 482 00:26:29,280 --> 00:26:30,919 Speaker 3: know what do we think about private credit, what do 483 00:26:30,920 --> 00:26:33,240 Speaker 3: we think about the credit markets overall? And how do 484 00:26:33,280 --> 00:26:34,199 Speaker 3: we put this all together? 485 00:26:35,560 --> 00:26:39,160 Speaker 2: So again I'm just hearing hints of caution and I'm 486 00:26:39,560 --> 00:26:43,199 Speaker 2: I'm trying to squeeze out now, how you convert in 487 00:26:44,000 --> 00:26:47,119 Speaker 2: those yields out there to return? So where do you 488 00:26:47,200 --> 00:26:50,359 Speaker 2: see the best opportunities, what are the sectors, what's the duration, 489 00:26:50,640 --> 00:26:52,800 Speaker 2: what are the ratings? How do we hone in on 490 00:26:54,320 --> 00:26:56,600 Speaker 2: how to outsmart? How to outsmart this market? 491 00:26:57,200 --> 00:26:58,960 Speaker 3: Yeah, well, I can tell you what we're doing. Maybe 492 00:26:58,960 --> 00:27:01,040 Speaker 3: that's the easiest way to do it. And we have 493 00:27:01,760 --> 00:27:04,920 Speaker 3: strategies that have a variety of different risk profiles, so 494 00:27:05,080 --> 00:27:07,639 Speaker 3: I can start more general and we can get specific 495 00:27:07,720 --> 00:27:10,560 Speaker 3: if you want. But we have been as a firm 496 00:27:10,760 --> 00:27:14,800 Speaker 3: trimming credit risk. I feel like maybe for eighteen months. 497 00:27:15,359 --> 00:27:18,120 Speaker 3: We do it very gradually. So a credit we liked 498 00:27:18,440 --> 00:27:21,080 Speaker 3: that was a nine percent bond gets refired into a 499 00:27:21,119 --> 00:27:23,760 Speaker 3: six percent bond. We don't think it should be six percent, 500 00:27:23,840 --> 00:27:26,399 Speaker 3: and we just let it go. We're worried about sectors 501 00:27:26,520 --> 00:27:31,439 Speaker 3: in the corporate credit market. We've been worried about, you know, 502 00:27:31,480 --> 00:27:34,639 Speaker 3: some of the cyclical stuff like chemicals, worrying about the 503 00:27:34,680 --> 00:27:38,280 Speaker 3: housing market because housing market. The housing market has been 504 00:27:38,359 --> 00:27:41,440 Speaker 3: languishing because of high rates, and so our housing exposure 505 00:27:41,480 --> 00:27:43,840 Speaker 3: goes down and then you go and sell on and 506 00:27:43,840 --> 00:27:48,359 Speaker 3: sell retail other sectors. So as we raise cash in 507 00:27:48,440 --> 00:27:50,640 Speaker 3: these sectors, then we have to do something with it. 508 00:27:50,880 --> 00:27:53,920 Speaker 3: We've been moving it in some cases last year when 509 00:27:53,960 --> 00:27:57,200 Speaker 3: spreads we're tight, moved it to treasury and agency mortgages, 510 00:27:57,720 --> 00:27:59,959 Speaker 3: which worked out fabulously when we have the taper tan 511 00:28:00,359 --> 00:28:01,680 Speaker 3: not the tape. And it was a long time ago, 512 00:28:01,720 --> 00:28:05,399 Speaker 3: the tariff, the Liberation day. So when Liberation Day happened 513 00:28:05,440 --> 00:28:08,280 Speaker 3: and we were sitting with higher exposures to treasuries and 514 00:28:08,320 --> 00:28:11,240 Speaker 3: agency mortgages, that look great. And of course there was 515 00:28:11,280 --> 00:28:14,720 Speaker 3: a great buying opportunity that lasted for a moment and 516 00:28:14,760 --> 00:28:18,080 Speaker 3: then spread snap right back. So now if you look today, 517 00:28:18,119 --> 00:28:19,840 Speaker 3: it looks the same as it did at the beginning 518 00:28:19,880 --> 00:28:22,720 Speaker 3: of the year. What are we doing now the same 519 00:28:22,800 --> 00:28:24,919 Speaker 3: concerns that I just mentioned. Rotating out of some of 520 00:28:24,920 --> 00:28:29,840 Speaker 3: the cyclical names, sickle sectors, we like other sectors of 521 00:28:29,880 --> 00:28:33,640 Speaker 3: the fixed income market better. We like CMBs. Why because 522 00:28:34,080 --> 00:28:37,760 Speaker 3: sectors that get beaten up CMBs got really walloped during 523 00:28:37,760 --> 00:28:41,280 Speaker 3: the pandemic. Those tend to have the tightest underwriting standards. 524 00:28:41,560 --> 00:28:46,560 Speaker 3: And CMBs assets have been repriced. So if they were 525 00:28:46,640 --> 00:28:48,680 Speaker 3: marked at one hundred and now they're marked down to thirty, well, 526 00:28:48,680 --> 00:28:50,720 Speaker 3: if the thirty is probably more realistic, particularly if it 527 00:28:50,800 --> 00:28:53,600 Speaker 3: actually traded, but traded hands at thirty, you know that 528 00:28:53,640 --> 00:28:55,880 Speaker 3: the value is thirty, not one hundred, and so it's 529 00:28:55,920 --> 00:28:57,720 Speaker 3: easier to lend when you have that sort of marked 530 00:28:57,720 --> 00:29:00,640 Speaker 3: to market and the under ranting standards are are tight. 531 00:29:01,240 --> 00:29:04,560 Speaker 3: And so if I can get high corporates are in 532 00:29:04,680 --> 00:29:07,360 Speaker 3: high sixes, If I can get high sixes in a 533 00:29:07,400 --> 00:29:14,320 Speaker 3: CMBs structure that has more conservative lendings, more conservative structure 534 00:29:14,320 --> 00:29:16,920 Speaker 3: in terms of lending standards, and I now know what 535 00:29:16,960 --> 00:29:21,040 Speaker 3: the asset is worth, those are interesting. And CMBs, of 536 00:29:21,080 --> 00:29:25,200 Speaker 3: course is not just office space. It's industrials and hospitals 537 00:29:25,240 --> 00:29:27,440 Speaker 3: and all sorts of things mixed in their residential and 538 00:29:27,520 --> 00:29:30,080 Speaker 3: so it's a mix of assets, and you can construct 539 00:29:30,080 --> 00:29:33,920 Speaker 3: a portfolio that has the right risk profile. Non agency 540 00:29:34,040 --> 00:29:38,800 Speaker 3: residential mortgage back securities. Most housing activity has been an emic. 541 00:29:39,200 --> 00:29:42,040 Speaker 3: But what that means is most borrowers have a very 542 00:29:42,120 --> 00:29:44,840 Speaker 3: large cushion in terms of equity cushion, and so if 543 00:29:44,840 --> 00:29:47,440 Speaker 3: you have a thirty forty percent equity cushion, then the 544 00:29:47,560 --> 00:29:49,880 Speaker 3: risk of impairment if something bad happens. The real estate 545 00:29:49,960 --> 00:29:53,480 Speaker 3: market is low, and just like CMBs, underwriting standards have 546 00:29:53,560 --> 00:29:57,280 Speaker 3: been very tight. So while you could argue that underwriting 547 00:29:57,280 --> 00:30:01,400 Speaker 3: standards in corporate credit are loose, in that market, they're tight. 548 00:30:01,840 --> 00:30:04,840 Speaker 3: So we've been moving, we've been allocating more money away 549 00:30:04,840 --> 00:30:08,400 Speaker 3: from corporate credit over the last year or so. And 550 00:30:08,480 --> 00:30:11,800 Speaker 3: so if you look back in time, maybe in twenty 551 00:30:11,960 --> 00:30:16,000 Speaker 3: twenty two, twenty three, twenty four, twenty twenty two, we 552 00:30:16,040 --> 00:30:18,400 Speaker 3: had spread wide now a lot, and I thought at 553 00:30:18,440 --> 00:30:20,920 Speaker 3: the time the corporate credit was quite cheap. I thought 554 00:30:20,920 --> 00:30:23,240 Speaker 3: that we should be overweight corporate credit, which we were 555 00:30:23,280 --> 00:30:25,959 Speaker 3: at the time, So we had more corporate credit than 556 00:30:26,000 --> 00:30:29,560 Speaker 3: some of the other things I just mentioned. R and 557 00:30:29,600 --> 00:30:31,840 Speaker 3: BS might have been a very small allocation at the time. 558 00:30:32,760 --> 00:30:35,800 Speaker 3: But then as we move forward in time and credit 559 00:30:35,880 --> 00:30:40,840 Speaker 3: spreads tightened and we had to reallocate, and so we've 560 00:30:40,880 --> 00:30:44,240 Speaker 3: moved from being maybe more corporate focused to now more 561 00:30:44,280 --> 00:30:47,400 Speaker 3: focused on some of these securitized sectors. That's how we're 562 00:30:47,960 --> 00:30:49,840 Speaker 3: solving the puzzle right now. 563 00:30:50,160 --> 00:30:51,480 Speaker 1: Not all of that has done well though. There have 564 00:30:51,560 --> 00:30:53,600 Speaker 1: been some blow ups eating on the triple as in 565 00:30:53,640 --> 00:30:55,880 Speaker 1: some of those. I mean, they maybe are idiosyncratic, but 566 00:30:56,320 --> 00:30:58,440 Speaker 1: do you have to do more credit work now to 567 00:30:58,800 --> 00:30:59,920 Speaker 1: analyze those structures. 568 00:31:00,120 --> 00:31:03,080 Speaker 3: Well. I think the blow ups are the opportunity in 569 00:31:03,120 --> 00:31:06,440 Speaker 3: a way, because I said sectors that are under stress, 570 00:31:07,000 --> 00:31:09,280 Speaker 3: once they come through that stress tend to be quite 571 00:31:09,320 --> 00:31:12,680 Speaker 3: clean for the next few years. In the corporate credit market, 572 00:31:12,960 --> 00:31:17,040 Speaker 3: the analogous sector with the energy energy, there is a 573 00:31:17,080 --> 00:31:20,000 Speaker 3: wave of shale financing in the high old space and 574 00:31:20,040 --> 00:31:23,120 Speaker 3: I don't know was that twenty thirteen, twenty fourteen, something 575 00:31:23,200 --> 00:31:25,400 Speaker 3: like that, and then oil went from one hundred to 576 00:31:25,440 --> 00:31:27,760 Speaker 3: thirty and there was a wave of defaults. Many of 577 00:31:27,760 --> 00:31:30,320 Speaker 3: those companies were wiped out, some still limped along, and 578 00:31:30,360 --> 00:31:33,640 Speaker 3: then we had the pandemic where famously oil went negative 579 00:31:33,840 --> 00:31:35,840 Speaker 3: in May of twenty twenty, and then we had another 580 00:31:35,840 --> 00:31:38,720 Speaker 3: wave of defaults. Now you look at high old energy, 581 00:31:38,760 --> 00:31:43,200 Speaker 3: it's very clean. The companies are self funding, they have 582 00:31:43,280 --> 00:31:46,400 Speaker 3: low leverage, they generate cash flow, and so what was 583 00:31:46,480 --> 00:31:49,440 Speaker 3: the most dangerous part of the credit markets or the 584 00:31:49,480 --> 00:31:52,640 Speaker 3: high old corporate markets, I should say energy is now 585 00:31:52,640 --> 00:31:55,360 Speaker 3: one of the safest and so we're applying that same 586 00:31:55,400 --> 00:31:58,640 Speaker 3: sort of logic with CNBAS. What was quite dangerous in 587 00:31:58,680 --> 00:32:02,400 Speaker 3: twenty twenty and has gone through this period of stress, 588 00:32:02,480 --> 00:32:04,680 Speaker 3: we think is actually one of the areas that's most 589 00:32:04,720 --> 00:32:09,760 Speaker 3: stafe because investors become you know, shell shocked from it 590 00:32:09,800 --> 00:32:12,480 Speaker 3: and don't want to touch it. Well, when that's the when, 591 00:32:12,800 --> 00:32:15,400 Speaker 3: when that happens, that's actually a great environment to invest in. 592 00:32:15,520 --> 00:32:18,760 Speaker 3: So that's why we we think that that's very interesting 593 00:32:18,840 --> 00:32:19,480 Speaker 3: right now. 594 00:32:20,280 --> 00:32:22,760 Speaker 1: Right right when you look at the returns of this year, 595 00:32:22,760 --> 00:32:25,120 Speaker 1: it's kind of interesting that the investment grade debt has 596 00:32:25,120 --> 00:32:28,480 Speaker 1: done better than the junk you know, Triple b's of 597 00:32:28,480 --> 00:32:32,000 Speaker 1: wayout performed Triple c's, possibly because of the fear around 598 00:32:32,000 --> 00:32:33,960 Speaker 1: cockroaches and all this stuff at the post end of 599 00:32:34,000 --> 00:32:36,560 Speaker 1: the market. But it doesn't often happen that in a 600 00:32:36,680 --> 00:32:38,800 Speaker 1: very risk on year, like you know, Trump gets re 601 00:32:38,880 --> 00:32:41,280 Speaker 1: elected and everyone's risk one again. But but what's happened 602 00:32:41,280 --> 00:32:45,080 Speaker 1: to junk bonds? Are you are you really long I 603 00:32:45,200 --> 00:32:47,280 Speaker 1: G and then short high yield as a result, and 604 00:32:47,600 --> 00:32:50,880 Speaker 1: are you worried at all about potential releveraging because of 605 00:32:51,000 --> 00:32:55,040 Speaker 1: M and A. You know, potential slowdown in earnings. You know, 606 00:32:55,080 --> 00:32:58,560 Speaker 1: the economy might start to sputter. Is there is there 607 00:32:58,680 --> 00:33:00,320 Speaker 1: risk in I gent? 608 00:33:00,920 --> 00:33:03,560 Speaker 3: Well, I think I'd first say that if you look 609 00:33:03,600 --> 00:33:07,000 Speaker 3: at the returns where investment grade is outperforming high yield, 610 00:33:07,000 --> 00:33:09,200 Speaker 3: a lot of that is duration. So if you look 611 00:33:09,240 --> 00:33:12,680 Speaker 3: at access returns, look at it right now, double b's 612 00:33:12,720 --> 00:33:15,840 Speaker 3: have actually outperformed on an access return or yield or 613 00:33:15,920 --> 00:33:20,080 Speaker 3: return over over treasuries more than triple b's. Double b's 614 00:33:20,120 --> 00:33:22,120 Speaker 3: are up on an access basis around two and a 615 00:33:22,120 --> 00:33:25,560 Speaker 3: half percent, Triple b's only one twenty eight. So on 616 00:33:25,560 --> 00:33:28,480 Speaker 3: an access basis, you'd be better off in high yield. 617 00:33:28,560 --> 00:33:32,200 Speaker 3: On a toll return basis, the duration has helped investment 618 00:33:32,200 --> 00:33:35,480 Speaker 3: grade credit. I think if you look where where we 619 00:33:35,560 --> 00:33:39,920 Speaker 3: are now, we are in a carry environment, that spreads 620 00:33:39,920 --> 00:33:41,960 Speaker 3: could tighten a little bit more. I can't say that 621 00:33:42,040 --> 00:33:44,640 Speaker 3: you know this is the end. We could certainly go tighter, 622 00:33:44,680 --> 00:33:47,000 Speaker 3: but let's just say there's a lot more room to 623 00:33:47,080 --> 00:33:51,880 Speaker 3: widen than tighten. It's quite asymmetric. So in a carry year, 624 00:33:52,200 --> 00:33:54,960 Speaker 3: and if you're in an environment where credits threads are 625 00:33:55,040 --> 00:33:58,200 Speaker 3: very tight, and it's all about carry. Then again, you 626 00:33:58,240 --> 00:34:00,760 Speaker 3: want to think about credit risk and up in quality 627 00:34:00,960 --> 00:34:02,920 Speaker 3: is certainly a mantra that we have been saying at 628 00:34:02,920 --> 00:34:05,200 Speaker 3: double line for a while. We tell our clients what 629 00:34:05,240 --> 00:34:07,000 Speaker 3: are we doing? When we tell them what we're doing 630 00:34:07,000 --> 00:34:10,600 Speaker 3: with their portfolios, we are moving up in quality. So yes, 631 00:34:11,000 --> 00:34:15,200 Speaker 3: that's more investment grade than high yield. In terms of duration, 632 00:34:15,280 --> 00:34:18,440 Speaker 3: that's a little different, so we are inside the index. 633 00:34:18,520 --> 00:34:22,480 Speaker 3: In terms of duration, the investment grade index is what 634 00:34:22,680 --> 00:34:27,560 Speaker 3: six duration of six or so, we've been focusing on 635 00:34:27,960 --> 00:34:31,399 Speaker 3: the ten years in in basically keep it to keep 636 00:34:31,400 --> 00:34:34,239 Speaker 3: it simple. So we think that the long end has 637 00:34:34,360 --> 00:34:38,560 Speaker 3: risk of steepening further, and so we don't want to 638 00:34:38,560 --> 00:34:40,719 Speaker 3: be exposed there and we wont want to be up 639 00:34:40,760 --> 00:34:44,160 Speaker 3: in quality in terms of credit quality. So I think 640 00:34:44,200 --> 00:34:48,040 Speaker 3: that the trend of investment grade being competitive, I don't 641 00:34:48,080 --> 00:34:50,440 Speaker 3: know if it's going to outperform, but certainly competitive with 642 00:34:50,520 --> 00:34:54,200 Speaker 3: investment with high yield next year, I think that that's 643 00:34:54,200 --> 00:34:56,359 Speaker 3: definitely in the cards. I thought that investment grade would 644 00:34:56,360 --> 00:35:00,000 Speaker 3: be competitive with I yield this year. I didn't necessar 645 00:35:00,239 --> 00:35:02,880 Speaker 3: predict as much of a duration rally as what occurred, 646 00:35:03,480 --> 00:35:05,959 Speaker 3: so it turned out to actually outperform, but I thought 647 00:35:05,960 --> 00:35:10,880 Speaker 3: it would perform well because of the phenomenon of weaker 648 00:35:10,920 --> 00:35:14,720 Speaker 3: credit deterioration and the dispersion that I talked about earlier. 649 00:35:15,080 --> 00:35:17,120 Speaker 3: I think that story continues into next year, where the 650 00:35:17,120 --> 00:35:21,839 Speaker 3: dispersion is continues, you know dispersion. Usually it results itself 651 00:35:21,920 --> 00:35:24,359 Speaker 3: one of two ways. You get a tightening of all 652 00:35:24,440 --> 00:35:27,720 Speaker 3: this so that the you know, single B, triple c's 653 00:35:27,760 --> 00:35:31,520 Speaker 3: that are wide join the type market. Where you get 654 00:35:31,520 --> 00:35:35,399 Speaker 3: it tight where everything is tight, or you get widening. Now, 655 00:35:36,360 --> 00:35:39,160 Speaker 3: we already had the type market that was that was 656 00:35:39,239 --> 00:35:44,520 Speaker 3: last year where everything was spreads. Spreads were all compressed 657 00:35:44,560 --> 00:35:47,239 Speaker 3: within one range depending on rating, and then we've been 658 00:35:47,239 --> 00:35:51,160 Speaker 3: slowly decompressing. I think that decompression continues over time. It 659 00:35:51,200 --> 00:35:53,359 Speaker 3: usually starts with a sector. So we've been worried about 660 00:35:53,400 --> 00:35:56,879 Speaker 3: real estate for a while because of high rates. Then 661 00:35:56,920 --> 00:36:00,799 Speaker 3: you add chemicals, then you add retail. People are worried 662 00:36:00,800 --> 00:36:03,920 Speaker 3: about the consumer. When you are adding things to the list, 663 00:36:04,520 --> 00:36:08,040 Speaker 3: That growing list tends to keep going. You keep adding 664 00:36:08,040 --> 00:36:09,720 Speaker 3: things to the list, and then all of a sudden, 665 00:36:09,760 --> 00:36:12,200 Speaker 3: spreads widen a little bit and then they wilden a 666 00:36:12,239 --> 00:36:14,520 Speaker 3: little bit more. But this could take some times, so 667 00:36:15,120 --> 00:36:17,680 Speaker 3: this isn't something that all of a sudden the economy 668 00:36:17,680 --> 00:36:20,160 Speaker 3: falls apart on January first. I don't think that. I 669 00:36:20,280 --> 00:36:22,160 Speaker 3: think that this could take a couple of years to 670 00:36:22,200 --> 00:36:24,640 Speaker 3: play out. I think the liquidity in the market, the 671 00:36:24,680 --> 00:36:30,240 Speaker 3: AI spending, the FED lowering rates, deregulation coming, fiscal spending, 672 00:36:30,280 --> 00:36:32,040 Speaker 3: all that we've got. I don't know how many how 673 00:36:32,120 --> 00:36:34,600 Speaker 3: much stimulus is coming, there's a lot of it, and 674 00:36:34,680 --> 00:36:39,760 Speaker 3: so betting against all that stimulative impulse into the economy 675 00:36:39,840 --> 00:36:42,000 Speaker 3: is that would be a strong position to take. I'm 676 00:36:42,000 --> 00:36:44,280 Speaker 3: not taking that. I think what more likely to happen 677 00:36:45,400 --> 00:36:47,439 Speaker 3: is that we continue with the trend we're going where 678 00:36:47,480 --> 00:36:54,840 Speaker 3: we have some simmering, simmering stress under the hood, but 679 00:36:55,080 --> 00:36:58,439 Speaker 3: the market keeps roaring with these big mega deals, big 680 00:36:58,520 --> 00:37:03,200 Speaker 3: mega AI deals, The blow investment grade market ramps up 681 00:37:03,320 --> 00:37:07,000 Speaker 3: LBO activity, and I actually think we are likely to 682 00:37:07,000 --> 00:37:09,919 Speaker 3: have a leg up and risk the equity markets find 683 00:37:09,960 --> 00:37:15,280 Speaker 3: new hides next year. Multiples expand, credit spreads stay very tight, 684 00:37:16,000 --> 00:37:20,239 Speaker 3: and instead of a decline in corporate credit as a 685 00:37:20,239 --> 00:37:22,920 Speaker 3: percent of GDP, we start to see a resurgence, a 686 00:37:23,000 --> 00:37:26,239 Speaker 3: growth in corporate credit as a percentage of GDP, and 687 00:37:26,320 --> 00:37:29,080 Speaker 3: we see growth in the overall number of issuers in 688 00:37:29,120 --> 00:37:32,120 Speaker 3: the investment grade and hyld market, and that would set 689 00:37:32,160 --> 00:37:36,440 Speaker 3: the table for instead of caution, maybe concern. We go 690 00:37:36,480 --> 00:37:39,200 Speaker 3: from caution to concern under under that scenario, and I'm 691 00:37:39,239 --> 00:37:42,680 Speaker 3: waiting for that. I think that that's probably at least 692 00:37:42,680 --> 00:37:44,800 Speaker 3: a year away. It could be two years. The timing 693 00:37:44,880 --> 00:37:49,160 Speaker 3: is very difficult to predict. So that's where I think 694 00:37:49,200 --> 00:37:49,640 Speaker 3: we're going. 695 00:37:51,320 --> 00:37:53,760 Speaker 2: Well, you started to list out a wall of worry. 696 00:37:53,800 --> 00:37:56,840 Speaker 2: I think that's our life is fixed income analysts, as 697 00:37:56,880 --> 00:37:59,640 Speaker 2: that's all we do is worry. But what actually has 698 00:37:59,640 --> 00:38:01,880 Speaker 2: to get up to that next leg? It sounds like 699 00:38:01,920 --> 00:38:04,120 Speaker 2: you're also describing a little bit of a Goldilock scenario 700 00:38:04,280 --> 00:38:12,040 Speaker 2: where spider tight but the fundamentals are fine, and from 701 00:38:12,200 --> 00:38:16,360 Speaker 2: a fiscal policy standpoint, it's also positive. What has to happen, 702 00:38:16,440 --> 00:38:19,760 Speaker 2: Like we've seen a couple of these one off blow ups, 703 00:38:20,200 --> 00:38:23,200 Speaker 2: What has to happen for this market to go significantly wider, 704 00:38:23,239 --> 00:38:28,160 Speaker 2: for people to lose confidence, for everyone to say wow, 705 00:38:28,560 --> 00:38:30,800 Speaker 2: this We knew this was way too tight for too long, 706 00:38:31,040 --> 00:38:32,840 Speaker 2: and we were just waiting for this event. What is 707 00:38:32,880 --> 00:38:36,280 Speaker 2: that black tail? What is the black swan? 708 00:38:36,360 --> 00:38:39,320 Speaker 3: Event in the immediate term would be a growth scare 709 00:38:39,560 --> 00:38:44,400 Speaker 3: that the market has misperceived the amount of growth in 710 00:38:44,400 --> 00:38:46,600 Speaker 3: the economy, which I don't think is a high risk. 711 00:38:46,719 --> 00:38:49,240 Speaker 3: I think that we're going to have good enough growth 712 00:38:50,200 --> 00:38:53,279 Speaker 3: into next year that I don't see that as sort 713 00:38:53,280 --> 00:38:56,080 Speaker 3: of a shock that causes a repricing of risk. But 714 00:38:56,320 --> 00:38:59,239 Speaker 3: that would be one I think. The other one that 715 00:38:59,840 --> 00:39:03,520 Speaker 3: you have to worry about is that the AI bubble pops. 716 00:39:03,800 --> 00:39:07,360 Speaker 3: That certainly could be something, it seems very very early 717 00:39:07,400 --> 00:39:10,240 Speaker 3: for that. We see these headlines constantly and they grab attention, 718 00:39:10,320 --> 00:39:13,279 Speaker 3: but there hasn't been that many transactions. We could list 719 00:39:13,320 --> 00:39:15,200 Speaker 3: them all. I don't know we could use Maybe we 720 00:39:15,200 --> 00:39:17,360 Speaker 3: need all ten fingers, but we don't need our toes. 721 00:39:17,440 --> 00:39:23,239 Speaker 3: So there's been a handful of investment rate transactions. There's 722 00:39:23,280 --> 00:39:26,520 Speaker 3: been another handful of high yield deals, but by no 723 00:39:26,600 --> 00:39:29,040 Speaker 3: way is it a significant amount of the corporate credit 724 00:39:29,080 --> 00:39:32,799 Speaker 3: market or the economy as a whole. It looks like 725 00:39:32,840 --> 00:39:36,440 Speaker 3: it's going to be as time rolls on, with the 726 00:39:36,600 --> 00:39:41,000 Speaker 3: trillions of dollars being spent, we roll a year forward, 727 00:39:41,000 --> 00:39:42,920 Speaker 3: two years forward, it's going to be a pretty significant 728 00:39:43,719 --> 00:39:47,160 Speaker 3: percentage of the credit markets and the equity market, and 729 00:39:47,239 --> 00:39:50,200 Speaker 3: then at some point it's going to have to be 730 00:39:50,520 --> 00:39:53,759 Speaker 3: proven that these projects are profitable or not. And if 731 00:39:53,760 --> 00:39:57,239 Speaker 3: they're profitable, I think things will keep humming along. If 732 00:39:57,280 --> 00:39:58,799 Speaker 3: we find that most of them are not, then there's 733 00:39:58,840 --> 00:40:01,040 Speaker 3: going to be a severe reaction. I kind of think 734 00:40:01,080 --> 00:40:04,719 Speaker 3: about it as people like to talk about the dot 735 00:40:04,760 --> 00:40:07,840 Speaker 3: com era and the dot com bust. So Cisco in 736 00:40:07,960 --> 00:40:11,160 Speaker 3: nineteen ninety was growing faster than Nvidia. People forget that. 737 00:40:11,280 --> 00:40:14,839 Speaker 3: It was the darling of the era, and it grew 738 00:40:15,000 --> 00:40:18,720 Speaker 3: through all the nineties, and I don't recall the multiples 739 00:40:18,760 --> 00:40:22,560 Speaker 3: of earnings, but it was, I believe, higher than Nvidia 740 00:40:22,680 --> 00:40:26,480 Speaker 3: is now. And then in twenty twenty, for it was 741 00:40:26,520 --> 00:40:29,279 Speaker 3: it twenty twenty or twenty twenty one. The earnings kept 742 00:40:29,280 --> 00:40:30,960 Speaker 3: growing and all of a sudden they had a negative 743 00:40:30,960 --> 00:40:34,960 Speaker 3: net income year. The stock drop seventy five percent. So 744 00:40:35,000 --> 00:40:41,640 Speaker 3: the music stopped. Because these fiber optic build out projects, 745 00:40:41,960 --> 00:40:44,520 Speaker 3: we built too many of them, many of them didn't 746 00:40:44,520 --> 00:40:47,919 Speaker 3: make sense, they were never actually lit, and the whole 747 00:40:47,920 --> 00:40:52,320 Speaker 3: market collapsed. So Cisco was a fine company still around today. 748 00:40:52,560 --> 00:40:56,239 Speaker 3: So the strong will survive, but I could see something 749 00:40:56,280 --> 00:40:58,680 Speaker 3: like that happening a few years maybe maybe not where 750 00:40:59,480 --> 00:41:02,239 Speaker 3: we realized the profitability of these of this all this 751 00:41:02,400 --> 00:41:04,359 Speaker 3: AI spending. Some of it's going to be great, some 752 00:41:04,400 --> 00:41:06,319 Speaker 3: of it's going to be terrible, and there could be 753 00:41:06,320 --> 00:41:08,480 Speaker 3: a washout from that. I think that's going to take 754 00:41:08,520 --> 00:41:12,680 Speaker 3: some time. That is not you know, happening anytime soon 755 00:41:12,680 --> 00:41:14,080 Speaker 3: in the next six months. I think that would take 756 00:41:14,160 --> 00:41:16,080 Speaker 3: years to happen. So I when you use that dot 757 00:41:16,120 --> 00:41:19,560 Speaker 3: com analogy, maybe we're in nineteen ninety two, three four. 758 00:41:20,239 --> 00:41:23,040 Speaker 3: We're not in ninety nine, two thousand, two thousand and one. 759 00:41:23,080 --> 00:41:24,440 Speaker 3: It's going to take some time for us to get 760 00:41:24,440 --> 00:41:25,680 Speaker 3: built out well. 761 00:41:25,719 --> 00:41:27,760 Speaker 2: I think the big difference between dot com and today 762 00:41:27,840 --> 00:41:31,319 Speaker 2: is dot Com created their own valuation multiples. They didn't 763 00:41:31,360 --> 00:41:35,920 Speaker 2: actually have revenues or cash flows being valued on eyeballs 764 00:41:36,000 --> 00:41:39,359 Speaker 2: or clicks versus today, you're actually seeing revenues pass through 765 00:41:39,360 --> 00:41:42,040 Speaker 2: the system. So I think that's why the level of 766 00:41:42,080 --> 00:41:45,160 Speaker 2: confidence is so much higher as well as it's really 767 00:41:45,200 --> 00:41:48,360 Speaker 2: the ones with the biggest balance sheets that are performing 768 00:41:48,440 --> 00:41:51,040 Speaker 2: the best as well, so well that it creates a 769 00:41:51,040 --> 00:41:51,720 Speaker 2: lot less concern. 770 00:41:51,800 --> 00:41:54,479 Speaker 3: It's true to some extent, but on their hand, it's 771 00:41:54,560 --> 00:41:59,080 Speaker 3: maybe not true because the big companies are have rock 772 00:41:59,120 --> 00:42:01,760 Speaker 3: solid balance sheets. You could argue stronger than the US 773 00:42:01,840 --> 00:42:04,839 Speaker 3: government in some ways. Some people try to make that comparison. 774 00:42:05,200 --> 00:42:07,200 Speaker 3: But back then we had very strong companies Cisco that 775 00:42:07,239 --> 00:42:11,360 Speaker 3: I mentioned, Dell, Microsoft, those are very strong companies, but 776 00:42:11,440 --> 00:42:13,480 Speaker 3: then we had some silly ones. We have plenty of 777 00:42:13,560 --> 00:42:16,920 Speaker 3: unprofitable tech now that's trading on multiple of earnings that 778 00:42:17,000 --> 00:42:19,600 Speaker 3: should be coming in five years. You know, you can 779 00:42:19,640 --> 00:42:21,320 Speaker 3: list off the companies that are trading at two hundred 780 00:42:21,320 --> 00:42:23,640 Speaker 3: times earnings or even times sales. I think there was 781 00:42:23,680 --> 00:42:28,840 Speaker 3: a Bloomberg story this morning about I forgot who it 782 00:42:28,880 --> 00:42:31,640 Speaker 3: was trading at two hundred times sales. Well, you're trading 783 00:42:31,680 --> 00:42:36,759 Speaker 3: on earnings and cash flows that are coming many, many 784 00:42:36,840 --> 00:42:40,600 Speaker 3: years in the future, and so if those earnings don't appear, 785 00:42:41,080 --> 00:42:45,279 Speaker 3: those stocks can certainly drop fifty sixty, seventy percent. So 786 00:42:45,320 --> 00:42:49,839 Speaker 3: that's the phenomenon still true. Not with Google, Alphabet, Microsoft, 787 00:42:50,280 --> 00:42:52,800 Speaker 3: Meta and so on, and they're not going to I 788 00:42:52,800 --> 00:42:54,839 Speaker 3: don't think they're likely to drop like that, but these 789 00:42:54,920 --> 00:42:59,680 Speaker 3: unprofitable tech companies certainly could surprise in a really horrible way, 790 00:43:00,040 --> 00:43:02,440 Speaker 3: drop seventy five percent, and that will have a very 791 00:43:02,640 --> 00:43:06,520 Speaker 3: negative effect on the equity markets. We'll spill into everything else. 792 00:43:07,239 --> 00:43:09,520 Speaker 1: And when it comes to fundraising, what's the appetite you 793 00:43:09,520 --> 00:43:14,879 Speaker 1: think from foreign investors to buy US corporate credit right now? 794 00:43:15,880 --> 00:43:17,680 Speaker 3: Well, I think what's really hot right now for US 795 00:43:17,760 --> 00:43:20,800 Speaker 3: I can only speak for where we're being successful is 796 00:43:20,800 --> 00:43:24,240 Speaker 3: is multisector credit. So for the reasons we've spoken about, 797 00:43:24,280 --> 00:43:26,520 Speaker 3: I think the pitch of being able to rotate to 798 00:43:26,920 --> 00:43:31,640 Speaker 3: safe income is very People find it very attractive. So 799 00:43:32,360 --> 00:43:34,719 Speaker 3: if you can get the same income with less risk, 800 00:43:35,520 --> 00:43:37,520 Speaker 3: that's kind of the holy grail. And so we find 801 00:43:37,560 --> 00:43:41,640 Speaker 3: that people are resonating resonating with that very strongly because 802 00:43:42,160 --> 00:43:44,480 Speaker 3: they see the same things we see, and they're trying 803 00:43:44,520 --> 00:43:47,799 Speaker 3: to mitigate mitigate risks as the economy heats up. So 804 00:43:48,280 --> 00:43:49,960 Speaker 3: I think that's an area that we find a lot 805 00:43:50,000 --> 00:43:53,520 Speaker 3: of demand. But I think overall credit as a whole 806 00:43:53,560 --> 00:43:56,000 Speaker 3: is in demand, and you know, as long as the 807 00:43:56,040 --> 00:44:00,239 Speaker 3: yield is there, the demand will be there. So I 808 00:44:00,239 --> 00:44:04,520 Speaker 3: expect overall credit marks be very strong for twenty twenty six. 809 00:44:05,760 --> 00:44:07,840 Speaker 1: Great stuff, Robert Cohen with Double Line. Has been a 810 00:44:07,840 --> 00:44:09,560 Speaker 1: great pleasure having you on the credit edge. 811 00:44:09,560 --> 00:44:11,680 Speaker 3: Many thanks, oh thank you, glad to be here. 812 00:44:11,760 --> 00:44:15,280 Speaker 1: Flats of fun, excellent and so Robert Schiffan with Bloomberg Intelligence, 813 00:44:15,320 --> 00:44:17,520 Speaker 1: thank you so much for joining us today. Thanks James 814 00:44:17,640 --> 00:44:20,480 Speaker 1: three even more analysis. Read all of Rob's great work 815 00:44:20,520 --> 00:44:23,480 Speaker 1: on the Bloomberg Terminal. Tech is his life. Call him. 816 00:44:23,880 --> 00:44:26,520 Speaker 1: Bloomberg Intelligence is part of our research department with five 817 00:44:26,600 --> 00:44:30,120 Speaker 1: hundred analysts and strategists working across all markets. 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And we have 826 00:44:54,760 --> 00:44:57,000 Speaker 1: a fantastic lineup of guests for the rest of the year. 827 00:44:57,040 --> 00:44:59,560 Speaker 1: So keep on listening. I'm James Cromby. It's been a 828 00:44:59,560 --> 00:45:02,239 Speaker 1: great pleasu. Haven't you join us again next week on 829 00:45:02,360 --> 00:45:03,239 Speaker 1: the Credit Edge. 830 00:45:06,760 --> 00:45:06,800 Speaker 2: H