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

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

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Speaker 2: I'm Rob Schiffman, a senior analyst covering tech at Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Mitch Garfin, Co,

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Speaker 2: head of US Leverage Finance at Blackrock.

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Speaker 3: How are you doing, Mitch, I'm doing great? Thank you?

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Speaker 3: How are you guys?

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Speaker 2: Awesome? Mitch works on black Rock's Fundamental fixed income platform.

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Speaker 2: He's responsible for managing the US high yield and global

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Speaker 2: high yield strategies, and also has oversight of US leverage

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Speaker 2: loan strategies.

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Speaker 1: So just to set the scene here before we start,

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Speaker 1: global markets are getting slammed by trade wars and growing

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Speaker 1: concerns about the US government's attack on federal reserve independence.

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Speaker 1: US equity markets and the dollar have both dropped. Yields

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Speaker 1: are also up. There's no safe haven bid for treasuries

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Speaker 1: as in other periods of elevated volatility, and global investors

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Speaker 1: are trying to find alternatives to US assets as the

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Speaker 1: storm rages on. Analysts meanwhile slashing earnings estimates, fearing that

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Speaker 1: a severe economic slowdown is coming, and the risk of stagflation,

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Speaker 1: which would be bad for corporate borrowers, is up. We

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Speaker 1: are staring at a lot of red on the screen today.

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Speaker 1: Despite all of this, the credit market reaction has been

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Speaker 1: relatively muted. Spreads have moved higher, but only really back

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Speaker 1: to something that more closely resembles fair value after years

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Speaker 1: of trading way too tight. We're starting to see some

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Speaker 1: big fund outflows, leverage loan deals for buyouts are getting

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Speaker 1: hung and primary market issuance has all but stopped in

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Speaker 1: some parts of the credit markets. And there are definitely

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Speaker 1: some signs of stress out there given the very troubling

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Speaker 1: macro and geopolitical outlook. Though, we're probably going to see

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Speaker 1: some more repricing wider and credit, especially in high yield

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Speaker 1: bonds and loans. But what do you think, Mitch am

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Speaker 1: I being too negative? How would you characterize the longer

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Speaker 1: term impact on credit markets of all this turmoil, especially

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Speaker 1: at the lower quality end.

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Speaker 3: Thanks James.

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Speaker 4: I think there are some elements of what you are

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Speaker 4: suggesting that are fairly accurate. I think there are other

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Speaker 4: parts of that that are maybe a little bit more

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Speaker 4: on the aggressive side. And I have some thoughts and

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Speaker 4: some views that I'd love to share. To take the

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Speaker 4: other side of that, I'm not necessarily suggesting that it's

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Speaker 4: all rosy and we have an optimistic view and spreads

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Speaker 4: are going tighter tomorrow. But I don't think it's as

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Speaker 4: draconian as maybe the backdrop that you're suggesting.

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Speaker 1: So in more specific terms, though, do you think that

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Speaker 1: spreads will not blow out from it? Do you think

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Speaker 1: that fundamentals won't suffer as much as some people feel

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Speaker 1: poetically we go into recession?

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Speaker 3: Yeah?

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Speaker 4: No, I do think you know we're going to see

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Speaker 4: some deterioration in fundamentals. I think it's also important to

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Speaker 4: understand the starting point for where fundamentals are, which I'll

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Speaker 4: get into in more detail.

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Speaker 3: On a second.

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Speaker 4: But I also think it's important to understand the big

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Speaker 4: pick sure of what the high yield market is today

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Speaker 4: versus what it isn't, It's important to understand the compositional

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Speaker 4: differences over time, which I think will lead us to

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Speaker 4: the better outcome that I'm suggesting. And so let's put

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Speaker 4: that in some number terms. There's been a significant upgrading

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Speaker 4: of credit quality within the high yield market over the

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Speaker 4: last fifteen or twenty years.

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Speaker 3: Put some numbers behind it.

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Speaker 4: WB risk was about thirty five percent of the market

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Speaker 4: back then. Today it's fifty to fifty plus percent. Triple

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Speaker 4: c's were about twenty percent of the market. Today it's

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Speaker 4: about twelve percent. So we've seen this, this high grading

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Speaker 4: of the high yield market, and yes, some of that

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Speaker 4: has come at the expense of the leverage low market.

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Speaker 4: It's also come at the expense of the private credit markets.

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Speaker 4: But the point here is that with a higher quality market,

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Speaker 4: with larger, more global, more diverse buid businesses that we're

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Speaker 4: underwriting within high yields, the fundamental starting point is definitely

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Speaker 4: much better, but it should provide more cushion, more ability

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Speaker 4: to withstand the economic volatility that we're likely going to

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Speaker 4: see in the coming months, in the coming quarters.

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Speaker 2: So, Mitch, you know, in December, high yield bonds for

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Speaker 2: trading in the low to mid seven percent range, and

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Speaker 2: we're only in the low eight percent range now, but

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Speaker 2: spreads are one hundred and fifty basis points wider. You know,

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Speaker 2: the real question about high yields is that you know,

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Speaker 2: what are high yields? You know they're higher than investment

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Speaker 2: grade yields, but you know what really is a high

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Speaker 2: yield And I'm just wondering, like, you know, with this

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Speaker 2: sort of eight percent sort of range, how much do

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Speaker 2: you think overall risk is being priced into the market

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Speaker 2: right now.

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Speaker 4: I think there's a significant amount of risk being priced

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Speaker 4: into the market. But it's also very much a bifurcated market, right,

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Speaker 4: so just looking at the headline level doesn't necessarily tell

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Speaker 4: the full story. Right there's you know, more than ten

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Speaker 4: percent of the market trading at yields greater than twelve, thirteen,

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Speaker 4: fourteen percent somewhere. In that context, it's not just about

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Speaker 4: yields obviously, it's you know, it's about spreads. And we've

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Speaker 4: we've gone back and forth debating the yield environment the

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Speaker 4: spread environment, you know what, what is it?

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Speaker 3: And I think you have to consider both spreads.

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Speaker 4: You're right, spreads have widened I guess one hundred and

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Speaker 4: fifty basis points from the tights as of today. The

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Speaker 4: move that we're seeing today is probably another twenty maybe

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Speaker 4: twenty five basis points wider, So maybe it's more like

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Speaker 4: one seventy five.

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Speaker 1: Uh.

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Speaker 4: The you know, the move that we saw a week

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Speaker 4: or two ago was out two hundred basis points to.

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Speaker 3: Spreads of four fifty. I'm not suggesting, you.

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Speaker 4: Know, these are you know, the widest levels we're going

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Speaker 4: to see, because they are not right. We're likely to

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Speaker 4: see spreads widen from here as we see further deterioration

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Speaker 4: in in risk assets, in overall credit quality. That said,

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Speaker 4: you know, what is the what is the right level?

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Speaker 3: Over time?

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Speaker 4: You know, as we've seen slowdowns or recessions or defaults

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Speaker 4: pick up, you know, we've seen you know, spreads anywhere

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Speaker 4: from six to eight hundred. Certainly there are points in

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Speaker 4: time that you'll point to that we've seen spreads materially

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Speaker 4: higher than that. I'm taking out the global financial crisis.

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Speaker 4: I think this is very different than what we saw

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Speaker 4: in the Global financial crisis. And so if I look

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Speaker 4: at relative valuations, we're probably thirty percent of the way

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Speaker 4: if we're including today's move of the way to where we.

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Speaker 3: Were in sort of the average period during those those slowdowns.

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Speaker 4: What that means for us, and what I've been recommending

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Speaker 4: to clients is that it makes sense to focus on

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Speaker 4: the higher quality part of the market. If you have

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Speaker 4: one hundred dollars to spend, you don't spend it all today,

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Speaker 4: you probably look to the higher quality part of the

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Speaker 4: market by twenty five thirty percent of what you're thinking

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Speaker 4: about allocating to the acid class. You're never going to

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Speaker 4: all the wides in high yield spreads, and when it

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Speaker 4: feels the worst, most investors are unlikely to allocate capital

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Speaker 4: to the asset class. That is precisely you know when

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Speaker 4: we think the right time to be allocating capital to

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Speaker 4: the asset class is. And so we've had a couple

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Speaker 4: of conversations with clients overtime in the last few weeks,

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Speaker 4: when spreads are out to four fifty, suggested buying the

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Speaker 4: the higher quality part of the market, and that trade

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Speaker 4: you would have worked out reasonably well. I'm not suggesting

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Speaker 4: it will work out well over the next you know,

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Speaker 4: two months, three months, four months, there will be volatility,

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Speaker 4: there will be wire spreads. But I think you use

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Speaker 4: that volatility wider spread environment to further add add capital

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Speaker 4: to your position.

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Speaker 1: In terms of the spread widening thoughment you mentioned that

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Speaker 1: it could go wider. I mean it seems like it

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Speaker 1: probably will. I just wondered if you had any kind

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Speaker 1: of sense of how to quantify that. You say, obviously

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Speaker 1: that the market is better quality now, so maybe there's

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Speaker 1: less widening than in previous events. But some people are

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Speaker 1: saying that this, you know, potentially is worse than than

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Speaker 1: what we've seen before just because there is no FED backstop.

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Speaker 1: There is kind of a self inflicted damage on the

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Speaker 1: US economy. There are lots of unknowns. There is, you know,

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Speaker 1: huge uncertainty about how the tariff's thing in the trade

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Speaker 1: war shakes out. So so how how wide does it go?

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Speaker 4: Yeah, I think you're right there. There is uncertainty out there.

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Speaker 4: You know, from an earnings perspective, right, first quarter will

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Speaker 4: likely be very good, but earnings guidance for the second

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Speaker 4: quarter and the rest of the year will remain uncertain.

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Speaker 4: I don't think a lot of companies will give a

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Speaker 4: very clear guidance just given the economic backdrop.

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Speaker 3: But some part of that is already priced in.

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Speaker 4: Right, We've seen a significant downtrade inequity markets. The high

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Speaker 4: old market obviously is decently wider in terms of spread,

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Speaker 4: But is there room for further further spread widening? You absolutely,

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Speaker 4: you know, it's tough to put a number on it.

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Speaker 4: But I would say is that the fundamental backdrop, the

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Speaker 4: starting point is very strong.

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Speaker 3: So if I look at leverage.

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Speaker 4: Metrics, debt tbada at you know, roughly four times pretty

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Speaker 4: good for a starting point heading into a potential slowdown.

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Speaker 4: The lower market a little bit weaker than that. I

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Speaker 4: look at interest coverage levels, you know, very strong, north

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Speaker 4: of five times off of the peaks of call it

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Speaker 4: six times ibadata interest, right, So some deterioration there, and

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Speaker 4: you might expect with an economics slowdown or a shallow recession,

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Speaker 4: that you would see further deterioration and therefore spread widening.

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Speaker 4: So I can see the environment getting us from you know,

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Speaker 4: call it four four twenty five today out to you know,

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Speaker 4: five hundred or six hundred. In that context, it's it's

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Speaker 4: tough for me to speculate to suggest that spreads are

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Speaker 4: going to seven hundred eight hundred without knowing what that

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Speaker 4: backdrop looks like. But I feel really comfortable about the

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Speaker 4: types of issuers that we're underwriting. Uh, the the stronger

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Speaker 4: cash flow stability, less of an impact from a tariff

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Speaker 4: standpoint of direct impact, I should say, And so I

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Speaker 4: think companies within our market will hold up better than

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Speaker 4: they have historically when there's you know, it's been a

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Speaker 4: much lower quality type compositional risk within the acid class

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Speaker 4: so yeah, I'm expecting volatility. I'm expecting some spread windening,

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Speaker 4: but we're going to use that opportunistically and add to positions,

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Speaker 4: add to sectors that we like that have strong, stable

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Speaker 4: cash flow. Right, So the sectors that we're focused on

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Speaker 4: within technology, really like software given the recurring revenue stream,

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Speaker 4: Really like the insurance brokers for a number of reasons,

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Speaker 4: but you know, the non discretionary aspect to it, very

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Speaker 4: strong pricing power, less economically sensitive, and that you know,

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Speaker 4: strong stability of cash flow that the acid class offers.

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Speaker 4: Aerospace and defense another one, uh, primarily US supply chains

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Speaker 4: backlogs are very strong, should lead to good earnings expansion

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Speaker 4: over time. And on the flip side, avoiding sectors that

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Speaker 4: are more directly exposed to tariffs like autos and retail, consumer,

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Speaker 4: consumer products and the like should provide us with a

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Speaker 4: good portfolio construction to benefit some near term volatility.

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Speaker 2: Yeah. The problem that I've been running into and everyone's

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Speaker 2: asking me as a tech sector analyst is how I'm

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Speaker 2: modeling out this year, and I'm finding it really difficult

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Speaker 2: when there's so many big picture questions and when we're

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Speaker 2: in this sort of self first ask questions later market,

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Speaker 2: having a real gauge of what risk premium should be

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Speaker 2: or difficult. I know you started out, you talked a

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Speaker 2: lot about your research team. You started out as an

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Speaker 2: IG research analyst. How do you utilize that bottoms up

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Speaker 2: analysis to really get a good gauge of bigger pictures

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Speaker 2: credit risk in an uncertain macro environment like it's how

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Speaker 2: do you get comfortable framing out that we're not going

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Speaker 2: to spreads of a thousand when we have no idea

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Speaker 2: what's going to be coming out of Washington tomorrow.

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Speaker 4: Yeah, it's not about having the certainty. It's about thinking

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Speaker 4: about the different sort of alternatives or the probabilities associated

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Speaker 4: with different outcomes and looking to to to price that

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Speaker 4: into some of the assumptions that you're making to give

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Speaker 4: you greater greater clarity on what that but what that

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Speaker 4: outcome may look like. Right, So I would not sit

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Speaker 4: here and tell you with one hundred percent certainty that

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Speaker 4: anything is happening.

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Speaker 3: Right, There's a lot of uncertainty out there.

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Speaker 4: But if we can take a step back, think about

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Speaker 4: the key drivers that are driving credit risk. Understand you

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Speaker 4: know what underpins credit quality? Focused on where a company

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Speaker 4: is generating their rev you their EBITDA, their cash flow,

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Speaker 4: assigned probabilities to different economic environments and outcomes, and and

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Speaker 4: look at what that conclusion is. That gives us greater

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Speaker 4: clarity on what the potential range of outcomes are. And

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Speaker 4: then obviously you know that there there's risks that you're

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Speaker 4: taking by by choosing to you know, get long risk

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Speaker 4: or be underweight you know, credit risk at different you know,

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Speaker 4: in different sectors, at different valuation levels. But I think

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Speaker 4: doing that hard work from the bottoms up, which is

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Speaker 4: what we've always done and how we've built our business

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Speaker 4: over time, I think is really rewarded throughout a cycle.

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Speaker 4: It's not just about the next one month or three

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Speaker 4: months or six months for us, It's it's about how

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Speaker 4: we underwriting credit over the next twelve to eighteen months

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Speaker 4: and in fact, maybe even longer than that. Yes, you

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Speaker 4: need to withstand the volatility in the near term, but

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Speaker 4: you need to think through some of these environments and understand.

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Speaker 3: What things may look like on the other side as well.

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Speaker 2: Yeah, and I you know, you started to mention some sectors.

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Speaker 2: I do want to talk about that more. But before

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Speaker 2: we get into that, what are just that bigger this

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Speaker 2: bigger picture of sort of liquidity in the market, rising

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Speaker 2: default risks like are the markets functioning right now? Are

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Speaker 2: you able to trade in size what you want? Are

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Speaker 2: you getting are you getting bids on things that you

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Speaker 2: don't love? Or is it sell what you have to

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Speaker 2: not what you want to.

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Speaker 4: Yeah, liquidity in general is fine. We're able to do

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Speaker 4: what we want to do when we want to do it.

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Speaker 4: I'm not suggesting that every minute of.

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Speaker 3: Every day is that way.

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Speaker 4: When there's uncertainty, when there's volatility, as you know, trading activity,

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Speaker 4: you know, can can dry up for you know, a

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Speaker 4: short period of time. But that hasn't you think about

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Speaker 4: what we've seen over the last month or so with

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Speaker 4: that volatility, with that uncertainty, that hasn't got in the

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Speaker 4: way of our ability to manage portfolios and move risk around. So,

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Speaker 4: for example, as I'm sure you're aware, the acid class

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Speaker 4: has seen eleven twelve plus billion dollars of outflows over

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Speaker 4: the last two weeks. We manage a large pool of capital,

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Speaker 4: large portfolios, and we've not been immune to some of

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Speaker 4: the outflows that the acid class has witnessed.

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Speaker 3: We have done plenty of things in managing our portfolios

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Speaker 3: to make sure that we deal with.

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Speaker 4: The outflows that we have, the same risk that we

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Speaker 4: had yesterday and the day before, and the risk that

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Speaker 4: we want to have tomorrow.

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Speaker 3: Right, So what have we done? There have been a

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Speaker 3: few notable trades in the portfolio.

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Speaker 4: We've taken our loan exposure from call it eleven percent

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Speaker 4: down two or three percent to eight or eight and

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Speaker 4: a half percent. I think, you know, some of the

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Speaker 4: sales that we made there were pretty timely. The high

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Speaker 4: yield market was experiencing some weakness. The loan market was

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Speaker 4: holding up better, uh, you know for the first few days,

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Speaker 4: and we used that opportunity to reduce some of our.

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Speaker 3: Exposure in loans.

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Speaker 4: You know, when most loan prices were still ninety nine

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Speaker 4: ninety nine and a half to the plus. We've seen

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Speaker 4: some deterioration there by two or three points in the

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Speaker 4: loan asset class. So that was a reasonably thoughtful trade.

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Speaker 4: We've also, you know, high graded the portfolio to an extent.

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Speaker 4: We've sold lower quality risks, more more single bee, more

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Speaker 4: triple C exposure, and you have been focusing more on

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Speaker 4: higher quality credit and higher quality credits doesn't just mean

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Speaker 4: double b's, double b's and single bees issuers and sectors

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Speaker 4: that have greater stability of cash flow that I alluded

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Speaker 4: to to earlier. So there's you know a lot of

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Speaker 4: things that we've been doing in the portfolio.

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Speaker 3: At a sector level.

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Speaker 4: We've reduced and maintained underweights in auto in detail, and

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Speaker 4: energy some of the sectors that have been more exposed.

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Speaker 4: But to you to your specific point on liquidity, as

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Speaker 4: you know, there's been a significant uptakeing the amount of

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Speaker 4: portfolio trading that has gotten done, both in the investment

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Speaker 4: grade market and the high yield markets, and we've been

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Speaker 4: at the forefront of some of that activity. In recent weeks,

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Speaker 4: we were very involved in some of that trading activity.

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Speaker 3: Uh. You know, dealers.

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Speaker 4: Have positioned themselves in such a way to be able

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Speaker 4: to be buyers of credit risks during periods of stress

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Speaker 4: or volatility given some of the trades that they've done

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Speaker 4: on the other side, and we've really been the beneficiary

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Speaker 4: of many of.

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Speaker 3: Those trades, right. So some you know, over the last

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Speaker 3: couple of weeks when.

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Speaker 4: We were trading, we were getting done at levels that

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Speaker 4: were fairly close to mid market. When bidass breads head

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Speaker 4: widened from half to three cores of a point to

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Speaker 4: a full point.

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Speaker 3: So I think.

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Speaker 4: Utilizing all the tools that are at our fingertips, including

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Speaker 4: using liquid products, et aps, CD acts, et cetera, has

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Speaker 4: been has been part of our toolkit to manage riskool.

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Speaker 1: On a related note, Mitch and the kind of borrower

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Speaker 1: that you'd like to buy the debt of, you know,

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Speaker 1: the high quality stable have scale, low leverage. You know,

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Speaker 1: these sort of defensive names. That's that's you know, essentially

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Speaker 1: everyone wants that and everyone comes on that show, on

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Speaker 1: the show and talks about that stuff. They want to

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Speaker 1: get hold of this stuff, but there isn't a lot

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Speaker 1: of net new supply of it. So you know, for

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Speaker 1: someone running a huge portfolio, you know, black Rock biggest

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Speaker 1: in the market, how do you scale it?

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Speaker 4: Yeah, I guess I would, you know the the original

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Speaker 4: comment there. I just want to make a clarifying point.

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Speaker 3: While we have high.

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Speaker 4: Graded to to an extent, if you look at two

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Speaker 4: of our biggest overweights, you know, one technology on the

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Speaker 4: software side and two insurance brokers more focused on the

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Speaker 4: property casualty side. These are credits that we've underwritten, sectors

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Speaker 4: that we've underwritten at a time where leverage is higher,

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Speaker 4: not necessarily lower, on the back of M and A

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Speaker 4: that has been primarily debt financed. But what we feel

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Speaker 4: good about, what we feel comfortable about is the strong

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Speaker 4: stability of cash flow that underpins those sectors.

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Speaker 3: Right. It's less dependent.

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Speaker 4: On the the you know, the the economy, uh and

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Speaker 4: more dependent on the strong stable cashow that recurring revenue

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Speaker 4: stream that we're getting out.

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Speaker 3: Of those issuers, out of those sectors.

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Speaker 4: So while I would agree with you that at the

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Speaker 4: present time most people are focused on the higher quality

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Speaker 4: part of the market, it doesn't mean that's the only

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Speaker 4: thing that we're doing.

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Speaker 3: Right.

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Speaker 4: We have built a h you, we've built portfolios, we've

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Speaker 4: built a business underwriting credit across the quality spectrum, and

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Speaker 4: we're not shy about going down in quality.

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Speaker 2: Right.

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Speaker 4: If you look at our overall composition, we are underweight

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Speaker 4: double B risk, we are overweight single BE risk, and

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Speaker 4: we are flat to slightly overweight triple c's even in

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Speaker 4: the current environment, and I would specify within triple c's

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Speaker 4: we own the higher quality part of the triple C

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Speaker 4: market and have a fairly significant underweight to the right tail,

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Speaker 4: the higher beta, more stress or distressed part of the market.

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Speaker 3: So I think that that's the first point.

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Speaker 4: The second point is we have really strong relationships with issuers,

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Speaker 4: with banks, with private equity sponsors, and when deals come

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Speaker 4: to the market, we are at the forefront of engaging

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Speaker 4: with all of those constituents to help define or at

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Speaker 4: least attempt to define the types of deals that are

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Speaker 4: coming to market such that if and when we decide

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Speaker 4: to participate, you know, we are hopefully getting more significant

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Speaker 4: allocations within that process. And that has worked out really

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Speaker 4: well for us over a long period of time. We

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Speaker 4: have a dedicated team on the capital markets front that

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Speaker 4: works very closely with the banks, with issuers, with private responsors,

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Speaker 4: and my partner Dave Delbos, you know, he has done

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Speaker 4: a tremendous job leading the effort, working with a lot

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Speaker 4: of our private responsors, thus making sure that we're getting

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Speaker 4: good quality, you know, well underwritten deals into the portfolio.

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Speaker 2: You know, what you're saying makes complete sense. I'm trying

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Speaker 2: to understand physically how able you are to execute on it.

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Speaker 2: Like you've rattled off a lot more sectors that you

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Speaker 2: don't like than you do like, So how easy is

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Speaker 2: it to get lighter in those spaces? And maybe you

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Speaker 2: could talk a little bit more in depth about some

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Speaker 2: of those places that you don't like, like retail, and

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Speaker 2: you know what the real concerns like, do you do

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Speaker 2: you see defaults going up meaningfully in the in the

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Speaker 2: spaces that you don't like or is it just a

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Speaker 2: matter of spread widening?

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Speaker 4: Yeah, you know, to the first point there. I think

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Speaker 4: it's also important to understand the magnitude. Right, in some

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Speaker 4: cases they are small underweights, but there are any of them,

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Speaker 4: and then some of the overweights that we're talking about,

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Speaker 4: they're more substantial in size and its scale.

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Speaker 3: So I think that's that's important to note.

403
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Speaker 4: I don't think defaults are going to increase very substantially.

404
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Speaker 4: We're coming from a very low starting point. To my

405
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Speaker 4: point earlier, I think fundamentals are generally in a reasonably

406
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Speaker 4: good spot. In fact, if you look at some of

407
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Speaker 4: the leverage metrics predimetrics that I was citing earlier, we

408
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Speaker 4: saw some improvement in the.

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Speaker 3: Fourth quarter versus the prior quarter.

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Speaker 4: Right, Yes we expect deterioration, Yes we expect a slowdown,

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Speaker 4: but I don't think you'll see a massive uptick in

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Speaker 4: default So maybe very low single digits, you know, one percent,

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Speaker 4: you know, sub one percent in some cases, a little

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Speaker 4: bit north.

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Speaker 3: Of that, maybe that becomes two three four percent.

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Speaker 4: I don't see the scenario at the present moment where

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Speaker 4: that becomes eight to ten percent similar to what we

418
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Speaker 4: saw in you know it well, I guess COVID was

419
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Speaker 4: less than that, and the global financial crisis was was

420
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Speaker 4: more than that. I don't see that being the path

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Speaker 4: forward over the next six two to twelve months. You know,

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Speaker 4: our views around some of the sectors that I was highlighting, retail, autos,

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Speaker 4: consumer products. You know, I think those are are generally

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Speaker 4: fairly straightforward and probably very well articulated.

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Speaker 1: Uh.

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Speaker 4: You know to your audience, you know, over the last

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Speaker 4: you know month or so, as you've talked about tariffs,

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Speaker 4: you know, the retail in particular, uh you're you're sourcing

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Speaker 4: from from China in particular, but not limited to China, Vietnam, Cambodia, Taiwan.

430
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Speaker 4: Uh So those those sector, that sector I think is

431
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Speaker 4: going to be uh somewhat challenged in the in the

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Speaker 4: current environment. Autos that that is, you know, going to

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Speaker 4: be a near term concern. There may be some or

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Speaker 4: there may have been some pre buy activities that is

435
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Speaker 4: going to you know, prop up some sales figures and

436
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Speaker 4: some of the financial metrics over the last month or so.

437
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Speaker 4: But as we know that that likely won't be sustained

438
00:24:09,800 --> 00:24:13,160
Speaker 4: and that will likely lead to a slowdown in demand.

439
00:24:13,240 --> 00:24:16,480
Speaker 4: That will also lead to UH, you know, some pressure

440
00:24:16,680 --> 00:24:21,879
Speaker 4: as margins get squeezed for for these oe ms On

441
00:24:21,920 --> 00:24:25,399
Speaker 4: the consumer products. Obviously, a lot of hard goods are

442
00:24:25,400 --> 00:24:30,080
Speaker 4: still imported from from Asia uh and that is going

443
00:24:30,080 --> 00:24:33,560
Speaker 4: to be challenged with the tarot environment you also have.

444
00:24:34,320 --> 00:24:38,440
Speaker 4: It's not just about tariffs, right, It's also about consumer

445
00:24:38,520 --> 00:24:40,840
Speaker 4: confidence and business confidence waning.

446
00:24:41,480 --> 00:24:41,640
Speaker 3: Right.

447
00:24:41,720 --> 00:24:46,400
Speaker 4: As you know, as the consumer pulls back the demand

448
00:24:46,480 --> 00:24:48,680
Speaker 4: for many of the goods that I'm highlighting, many of

449
00:24:48,680 --> 00:24:52,119
Speaker 4: the sectors that I'm highlighting are going to be challenged.

450
00:24:52,160 --> 00:24:55,359
Speaker 4: I'm not suggesting that's that's game over or overly problematic

451
00:24:55,359 --> 00:24:58,159
Speaker 4: form these sectors. They'll be challenged. It'll be interesting to

452
00:24:58,200 --> 00:25:03,000
Speaker 4: see how management teams deal with this challenging operating environment.

453
00:25:03,520 --> 00:25:07,240
Speaker 3: It's also a question of how long lived will it be? Right?

454
00:25:07,320 --> 00:25:09,240
Speaker 4: Are we looking at something that's going to be three

455
00:25:09,240 --> 00:25:11,199
Speaker 4: to six months is going to be materially lower than that.

456
00:25:11,440 --> 00:25:13,560
Speaker 3: Are there going to be trade deals that are negotiated.

457
00:25:14,119 --> 00:25:16,520
Speaker 4: One thing that I do know is that if you

458
00:25:16,640 --> 00:25:22,000
Speaker 4: are a CEO or a CFO making important management decisions

459
00:25:22,280 --> 00:25:24,800
Speaker 4: as to how you're going to operate your business. Given

460
00:25:24,840 --> 00:25:27,920
Speaker 4: the economic backdrop right now, you are you're pulling back,

461
00:25:28,000 --> 00:25:31,439
Speaker 4: you're slowing down. You're not moving forward without CAPEX program

462
00:25:31,480 --> 00:25:33,879
Speaker 4: without knowing what the backdrop is going to look like.

463
00:25:34,119 --> 00:25:35,920
Speaker 4: So that has led us to be underweight many of

464
00:25:35,960 --> 00:25:41,119
Speaker 4: those sectors. Additionally, the energy sector that you know that

465
00:25:41,280 --> 00:25:44,560
Speaker 4: is you know going to be We've seen signs of it.

466
00:25:44,560 --> 00:25:46,760
Speaker 4: It's going to be a bit more challenge than we've

467
00:25:46,800 --> 00:25:52,800
Speaker 4: seen in the recent past. We've seen commodity prices come down,

468
00:25:53,240 --> 00:25:56,480
Speaker 4: which is going to be a challenge for independent exploration

469
00:25:56,600 --> 00:26:00,200
Speaker 4: and production companies. But the knock on effects are are

470
00:26:00,200 --> 00:26:05,800
Speaker 4: significant for oil field servicers and drillers. Right as CAPEX programs,

471
00:26:06,320 --> 00:26:10,240
Speaker 4: as development programs are pulled back, that's going to have

472
00:26:10,440 --> 00:26:14,800
Speaker 4: a significant impact on services and drillers. We also have

473
00:26:15,040 --> 00:26:18,760
Speaker 4: a slight underweight to midstream companies, so think pipeline and

474
00:26:18,800 --> 00:26:22,479
Speaker 4: storage here it's greater stability of cash flow, but they

475
00:26:22,520 --> 00:26:25,119
Speaker 4: will not be immune to some of the challenges that

476
00:26:25,320 --> 00:26:28,280
Speaker 4: I'm highlighting within the the oil sector.

477
00:26:28,880 --> 00:26:32,840
Speaker 2: What would change your mind on just market direction what

478
00:26:32,880 --> 00:26:37,520
Speaker 2: would make the market get meaningfully worse or what could

479
00:26:37,560 --> 00:26:39,560
Speaker 2: all of a sudden solve all these problems. And we

480
00:26:39,640 --> 00:26:42,960
Speaker 2: go back to the day after the election, and that

481
00:26:43,520 --> 00:26:45,800
Speaker 2: you know, everyone thinks IG spreads are going to zero

482
00:26:46,320 --> 00:26:48,880
Speaker 2: and highyield spreads are only going to be you know

483
00:26:49,000 --> 00:26:49,679
Speaker 2: nothing behind.

484
00:26:50,200 --> 00:26:54,520
Speaker 4: Well, I don't think anything today or tomorrow is going

485
00:26:54,560 --> 00:26:56,320
Speaker 4: to meaningfully change what.

486
00:26:56,200 --> 00:27:00,480
Speaker 3: That what that outlook looks like, right because to some extent,

487
00:27:01,560 --> 00:27:05,800
Speaker 3: the seeds are in place for this slowdown. Right, think

488
00:27:05,840 --> 00:27:08,120
Speaker 3: about what I was just highlighting with the consumer.

489
00:27:08,480 --> 00:27:15,000
Speaker 4: With CEO CFOs, they've been making decisions that are consequential

490
00:27:15,240 --> 00:27:18,760
Speaker 4: over the next month, quarter, and maybe even longer than that.

491
00:27:18,880 --> 00:27:21,800
Speaker 4: So yes, they can change as the backdrop changes, but

492
00:27:22,480 --> 00:27:27,720
Speaker 4: these are decisions that have consequences out a quarter or

493
00:27:27,720 --> 00:27:31,879
Speaker 4: two in all likelihood. But if we had greater clarity

494
00:27:32,520 --> 00:27:39,240
Speaker 4: around the tariff environment, if management teams understood specifically what

495
00:27:39,320 --> 00:27:43,480
Speaker 4: that looked like and there was certainty around it. Right,

496
00:27:43,800 --> 00:27:46,760
Speaker 4: The certainty part is really important here because you may

497
00:27:46,880 --> 00:27:50,440
Speaker 4: get a decision, but how do we know that decision

498
00:27:50,480 --> 00:27:53,000
Speaker 4: is not going to change tomorrow or the next day

499
00:27:53,080 --> 00:27:54,960
Speaker 4: or a month or a quarter out right, So we

500
00:27:55,000 --> 00:27:58,760
Speaker 4: need greater clarity around that, and I think you know

501
00:27:58,760 --> 00:28:03,960
Speaker 4: that the big point here is clarity and stability around

502
00:28:04,040 --> 00:28:08,240
Speaker 4: the economic backdrop is critically important. I think the FED,

503
00:28:10,000 --> 00:28:11,959
Speaker 4: you know, I think it was alluded to earlier that

504
00:28:12,359 --> 00:28:18,640
Speaker 4: there's there's no backstop, whether that's monetarily or fiscally, I'm

505
00:28:18,680 --> 00:28:22,280
Speaker 4: not sure I necessarily agree with that. I think there

506
00:28:22,320 --> 00:28:26,199
Speaker 4: are levers that can be pulled, both monetary policy and

507
00:28:26,240 --> 00:28:30,440
Speaker 4: friscal policy that can alleviate some of the concerns that

508
00:28:30,200 --> 00:28:36,440
Speaker 4: that we're talking about today. I think from the FED standpoint,

509
00:28:37,400 --> 00:28:41,520
Speaker 4: they are there. You know, they're in a difficult spot, right.

510
00:28:41,560 --> 00:28:44,520
Speaker 4: You have inflation that has not come back down to

511
00:28:44,640 --> 00:28:50,000
Speaker 4: the targeted level from the COVID spike. You have a

512
00:28:50,040 --> 00:28:54,000
Speaker 4: backdrop that is, you know there's likely going to lead

513
00:28:54,080 --> 00:28:59,200
Speaker 4: to greater inflation over the coming quarters. You have a

514
00:28:59,360 --> 00:29:04,040
Speaker 4: likely environment where growth slows, right, so that you know that,

515
00:29:04,520 --> 00:29:08,440
Speaker 4: you know, in theory, should provide a an opportunity for

516
00:29:08,480 --> 00:29:11,080
Speaker 4: the FED to ease, but they need to be really

517
00:29:11,120 --> 00:29:15,120
Speaker 4: focused on the inflation dynamic as well. So it's it's

518
00:29:15,280 --> 00:29:16,240
Speaker 4: it's a really tough.

519
00:29:16,000 --> 00:29:16,640
Speaker 3: Spot to be in.

520
00:29:16,720 --> 00:29:21,680
Speaker 4: I think they'll be really focused on the employment picture,

521
00:29:22,360 --> 00:29:24,640
Speaker 4: what the job's environment looks like and to the extent

522
00:29:24,720 --> 00:29:29,400
Speaker 4: you see that starting to come off right, some some

523
00:29:29,480 --> 00:29:33,640
Speaker 4: weakness coming through where not only do you see a

524
00:29:33,760 --> 00:29:37,400
Speaker 4: lack of hiring, but you start to see more job cuts.

525
00:29:37,440 --> 00:29:41,920
Speaker 4: I think the FED UH may may think a little

526
00:29:41,920 --> 00:29:46,720
Speaker 4: bit more aggressively about an easy backdrop UH, to the

527
00:29:46,760 --> 00:29:48,920
Speaker 4: extent they have weakness in the in the in the

528
00:29:48,960 --> 00:29:49,880
Speaker 4: employment dynamic.

529
00:29:50,200 --> 00:29:53,200
Speaker 2: But so it's it's pretty clear like you moved up

530
00:29:53,360 --> 00:29:59,920
Speaker 2: in quality sectors, high, better cash flows, the risk profiles

531
00:30:00,000 --> 00:30:01,960
Speaker 2: for a lot of these names or somewhat limited. But

532
00:30:02,320 --> 00:30:05,360
Speaker 2: what like what gets us to we wake up tomorrow

533
00:30:05,440 --> 00:30:08,280
Speaker 2: morning and it's like a uh oh, I couldn't see

534
00:30:08,280 --> 00:30:12,760
Speaker 2: that one coming. What is that next? Like? Where where

535
00:30:12,800 --> 00:30:16,000
Speaker 2: does this market all of a sudden get crushed? And

536
00:30:16,640 --> 00:30:19,240
Speaker 2: are you just saying that you just can't the probability

537
00:30:19,280 --> 00:30:21,840
Speaker 2: that is so low or just so uncertain, you just

538
00:30:21,960 --> 00:30:24,320
Speaker 2: can't see that for all the data that you've got

539
00:30:24,320 --> 00:30:24,720
Speaker 2: in front of you.

540
00:30:24,800 --> 00:30:29,200
Speaker 4: Now, No, there is some probability of that existing, of course,

541
00:30:29,240 --> 00:30:32,520
Speaker 4: so I can't say that I can't see that. I

542
00:30:32,560 --> 00:30:36,760
Speaker 4: think at the moment the probability is low. But you

543
00:30:36,760 --> 00:30:40,360
Speaker 4: know there's to what has been highlighted here a few times,

544
00:30:40,360 --> 00:30:45,040
Speaker 4: both myself you James, like, there's uncertainty out there, and

545
00:30:45,120 --> 00:30:51,880
Speaker 4: if this uncertainty continues for another quarter two cores, three cores,

546
00:30:52,440 --> 00:30:55,400
Speaker 4: that could lead to a more significant downturn than what

547
00:30:55,440 --> 00:31:00,120
Speaker 4: we're expecting. So there is some probability of that. I

548
00:31:00,120 --> 00:31:03,840
Speaker 4: would say the probability of that is fairly low at

549
00:31:03,880 --> 00:31:07,960
Speaker 4: the moment. I think you will see monetary and fiscal

550
00:31:09,000 --> 00:31:12,520
Speaker 4: stimulus to offset that to the extent we get to

551
00:31:12,560 --> 00:31:17,600
Speaker 4: those more draconian economic environments, but there is a non

552
00:31:17,760 --> 00:31:20,040
Speaker 4: zero probability of that playing out.

553
00:31:20,480 --> 00:31:23,320
Speaker 1: Going back to what you said about bonds and loans, Mitch,

554
00:31:23,520 --> 00:31:27,200
Speaker 1: you reduced leverage loans more than you did high yield bonds,

555
00:31:27,480 --> 00:31:30,680
Speaker 1: suggests that relative value lies in the bonds direction. I'm

556
00:31:30,720 --> 00:31:33,720
Speaker 1: interested in hearing more on that. Definitely, the leverage loan

557
00:31:33,720 --> 00:31:36,240
Speaker 1: markets under more stress, but as an investor, you're getting

558
00:31:36,520 --> 00:31:39,760
Speaker 1: some pretty good floating rate debt must look appealing. So

559
00:31:40,040 --> 00:31:41,640
Speaker 1: what's the rationale there, Well.

560
00:31:41,840 --> 00:31:42,760
Speaker 3: There's a few things.

561
00:31:43,720 --> 00:31:47,640
Speaker 4: When we executed that trade over a few days, the

562
00:31:47,720 --> 00:31:51,560
Speaker 4: low market was holding up much better than the high

563
00:31:51,600 --> 00:31:54,280
Speaker 4: yelled market. So from a relative value standpoint, as we

564
00:31:54,320 --> 00:31:58,160
Speaker 4: saw more weakness being priced into high yield bonds relative

565
00:31:58,200 --> 00:32:01,040
Speaker 4: to loans. We use that as an opportunity to reduce

566
00:32:01,040 --> 00:32:02,120
Speaker 4: our exposure on.

567
00:32:02,040 --> 00:32:02,920
Speaker 3: The loan side.

568
00:32:03,360 --> 00:32:07,120
Speaker 4: That wasn't in isolation, right, So what else is important?

569
00:32:08,520 --> 00:32:12,600
Speaker 4: The loan market is carrying at very attractive levels, or

570
00:32:12,760 --> 00:32:15,640
Speaker 4: was carrying and still is to an extent at very

571
00:32:15,680 --> 00:32:19,320
Speaker 4: attractive levels as compared to the high yield market. Now,

572
00:32:19,400 --> 00:32:22,520
Speaker 4: part of that was with a view towards what the

573
00:32:22,600 --> 00:32:25,440
Speaker 4: rate dynamic and the forward looking rate dynamic looks like.

574
00:32:26,080 --> 00:32:30,840
Speaker 4: To the extent the market is pricing in and or

575
00:32:31,000 --> 00:32:35,200
Speaker 4: the FED begins a more aggressive easing regime, that's going

576
00:32:35,240 --> 00:32:38,880
Speaker 4: to have greater implications for the floating rate acid class

577
00:32:39,120 --> 00:32:43,200
Speaker 4: loans like you just mentioned. So you know, there's a

578
00:32:43,240 --> 00:32:47,040
Speaker 4: few thoughts there that led us on the margin to

579
00:32:47,600 --> 00:32:51,280
Speaker 4: reduce the loan exposure a little bit more aggressively relative

580
00:32:51,360 --> 00:32:55,600
Speaker 4: to high yield bonds. Now, the other point is, and

581
00:32:55,640 --> 00:32:57,880
Speaker 4: I alluded to this in my first few comments, is

582
00:32:57,880 --> 00:33:01,719
Speaker 4: that the overall construction of the leverage loan market is

583
00:33:01,880 --> 00:33:05,120
Speaker 4: a little bit weaker in terms of credit quality than

584
00:33:05,160 --> 00:33:07,760
Speaker 4: the overall high yield market. Right, So, if you think

585
00:33:07,800 --> 00:33:12,360
Speaker 4: about the evolution over time small and medium sized leverage

586
00:33:12,400 --> 00:33:15,760
Speaker 4: buyouts you know, we're generally getting financed in the leverage

587
00:33:15,800 --> 00:33:18,600
Speaker 4: loan market as compared to the high yield market.

588
00:33:18,680 --> 00:33:21,800
Speaker 3: There's there's one, fairly and probably multiple reasons why that's

589
00:33:21,840 --> 00:33:22,200
Speaker 3: the case.

590
00:33:22,240 --> 00:33:25,160
Speaker 4: But as a private equity sponsor, I want to have

591
00:33:25,240 --> 00:33:28,400
Speaker 4: flexibility in my capital structure. If I issue a high

592
00:33:28,480 --> 00:33:31,800
Speaker 4: yield bond that was typical structure eight non call three,

593
00:33:31,880 --> 00:33:35,080
Speaker 4: seven non call three. The important point here at least

594
00:33:35,200 --> 00:33:39,000
Speaker 4: three years of call protection, and the loan market, you know,

595
00:33:39,040 --> 00:33:42,120
Speaker 4: a sponsor has the ability to reprice that loan, you

596
00:33:42,160 --> 00:33:44,400
Speaker 4: know after the first you know called six months of

597
00:33:44,440 --> 00:33:47,040
Speaker 4: soft call protection. So if that issuer went out and

598
00:33:47,360 --> 00:33:50,000
Speaker 4: sold an asset for a billion dollars and wanted to

599
00:33:50,080 --> 00:33:52,960
Speaker 4: either reprice or pay down debt, they have the ability

600
00:33:53,000 --> 00:33:54,560
Speaker 4: to do so in the loan market. They do not

601
00:33:54,640 --> 00:33:57,400
Speaker 4: have the ability to do so in the high yield market.

602
00:33:57,400 --> 00:34:00,640
Speaker 4: So that's a real advantage for an issue or sponsor

603
00:34:00,720 --> 00:34:04,160
Speaker 4: taxes one market relative to another. But the point there

604
00:34:04,280 --> 00:34:07,240
Speaker 4: is that has led to a deterioration and credit quality

605
00:34:07,760 --> 00:34:10,600
Speaker 4: of the low market relative to the high yield market.

606
00:34:11,200 --> 00:34:14,160
Speaker 4: And so as I think about you know, the looming

607
00:34:14,440 --> 00:34:18,160
Speaker 4: credit risks that are ahead or the potential slowdown. Which

608
00:34:18,280 --> 00:34:21,840
Speaker 4: market may be more impacted. It's likely to be the

609
00:34:21,920 --> 00:34:25,000
Speaker 4: leveraged loan market for the aforementioned reasons as compared to

610
00:34:25,080 --> 00:34:25,560
Speaker 4: high yield.

611
00:34:25,760 --> 00:34:28,440
Speaker 1: So you expect to high default rates in loans competitive bonds.

612
00:34:28,640 --> 00:34:32,160
Speaker 4: Yeah, that's a reasonable expectation, right, lower quality, credit risk

613
00:34:32,200 --> 00:34:35,080
Speaker 4: and leverage loans versus high yield bonds likely to see

614
00:34:35,480 --> 00:34:40,399
Speaker 4: more defaults or maybe i'll say more distressed exchanges, more

615
00:34:40,440 --> 00:34:43,440
Speaker 4: liability management exercises that are getting done in the leverage

616
00:34:43,480 --> 00:34:46,759
Speaker 4: loan market as compared to the high yield market, which

617
00:34:46,800 --> 00:34:49,200
Speaker 4: also counts as a default or restructure.

618
00:34:49,440 --> 00:34:51,200
Speaker 1: Yeah, I'm glad you brought that up because it's a

619
00:34:51,280 --> 00:34:55,120
Speaker 1: huge theme for listeners and guests on this show. It

620
00:34:55,239 --> 00:34:56,960
Speaker 1: just seems to get worse. It just seems to get

621
00:34:56,960 --> 00:34:59,840
Speaker 1: more coercive and more violent in terms of the structures

622
00:34:59,840 --> 00:35:03,080
Speaker 1: and what the issuers and the lawyers are trying to do.

623
00:35:03,160 --> 00:35:05,040
Speaker 1: How do you protect yourself as an investor? How do

624
00:35:05,080 --> 00:35:08,040
Speaker 1: you think about that? Do you have to expand your

625
00:35:08,040 --> 00:35:09,560
Speaker 1: team of legal support.

626
00:35:10,000 --> 00:35:13,479
Speaker 4: We have plenty of resources, both on the research side

627
00:35:13,480 --> 00:35:16,400
Speaker 4: of things as well as on the legal side of things,

628
00:35:16,920 --> 00:35:20,680
Speaker 4: so that's generally not an issue. But we as you mentioned,

629
00:35:20,680 --> 00:35:24,480
Speaker 4: we're a large player within the space on the active side.

630
00:35:24,840 --> 00:35:27,920
Speaker 4: We're large in and of itself, but we also benefit

631
00:35:28,000 --> 00:35:33,280
Speaker 4: from Blackrock having tremendous au M assets under management across

632
00:35:33,320 --> 00:35:36,640
Speaker 4: a range of different products within high yield bonds or

633
00:35:36,719 --> 00:35:39,760
Speaker 4: leverage loans, and so that generally gets us a seat

634
00:35:39,760 --> 00:35:43,440
Speaker 4: at the table, very involved in conversations that are happening

635
00:35:43,680 --> 00:35:47,520
Speaker 4: that will lead to potential outcomes on the distressed exchange

636
00:35:47,560 --> 00:35:49,160
Speaker 4: or liability management side of the things.

637
00:35:49,160 --> 00:35:50,080
Speaker 3: So we are.

638
00:35:50,000 --> 00:35:55,440
Speaker 4: Active participants and very engaged with sponsors with issuers to

639
00:35:55,480 --> 00:35:56,680
Speaker 4: try to achieve the best.

640
00:35:56,440 --> 00:35:58,040
Speaker 3: Outcomes for our clients.

641
00:35:58,280 --> 00:36:00,759
Speaker 4: Now, one thing I would say here is well, in

642
00:36:00,800 --> 00:36:04,560
Speaker 4: the short term, some of these distressed exchanges, you know,

643
00:36:04,960 --> 00:36:08,040
Speaker 4: can work out well depending on what part of the

644
00:36:08,040 --> 00:36:11,080
Speaker 4: capital structure you're in. You know, I believe we believe

645
00:36:11,120 --> 00:36:15,239
Speaker 4: that's a near term fix. It doesn't necessarily solve the.

646
00:36:15,200 --> 00:36:16,320
Speaker 3: Longer term problem.

647
00:36:16,560 --> 00:36:20,920
Speaker 4: The real problem is what are the reasons why we

648
00:36:21,000 --> 00:36:23,680
Speaker 4: have gotten to this point in the first place. What

649
00:36:23,920 --> 00:36:26,759
Speaker 4: fundamentally is going on within that issue or within that

650
00:36:26,840 --> 00:36:30,080
Speaker 4: sector that has led to these challenges, that has led

651
00:36:30,120 --> 00:36:34,120
Speaker 4: to leverage metrics that are six seven, eight plus times,

652
00:36:34,160 --> 00:36:37,520
Speaker 4: if not more that has led to bond or loan

653
00:36:37,600 --> 00:36:41,520
Speaker 4: prices trading in the fifties, sixties, seventies. You know what

654
00:36:41,680 --> 00:36:44,120
Speaker 4: is bringing that sponsor or, that issuer to the table

655
00:36:44,200 --> 00:36:45,760
Speaker 4: to engage in these conversations.

656
00:36:46,040 --> 00:36:48,080
Speaker 3: You may have a near term.

657
00:36:48,760 --> 00:36:52,120
Speaker 4: Uh, you know, positive credit development by cutting twenty to

658
00:36:52,160 --> 00:36:54,960
Speaker 4: thirty percent of the debt in a particular trunch, But

659
00:36:55,080 --> 00:36:58,120
Speaker 4: longer term, have you really fixed anything within that business?

660
00:36:58,680 --> 00:37:01,320
Speaker 4: If you haven't changed anything on the fundamental side of things.

661
00:37:01,320 --> 00:37:02,800
Speaker 1: Is there any chance so that it might lead to

662
00:37:02,880 --> 00:37:05,520
Speaker 1: better covenants though for investors, and you must be sort

663
00:37:05,560 --> 00:37:08,360
Speaker 1: of demanding more protections because this is becoming such a

664
00:37:08,360 --> 00:37:08,799
Speaker 1: big risk.

665
00:37:09,040 --> 00:37:12,279
Speaker 4: Of course it does, especially in those in those transactions.

666
00:37:12,320 --> 00:37:15,040
Speaker 3: Of course it does. The dynamic that exists in.

667
00:37:15,000 --> 00:37:17,600
Speaker 4: The in the high market, in the low market continues

668
00:37:17,640 --> 00:37:20,040
Speaker 4: to be challenging from an investors standpoint in terms of

669
00:37:20,080 --> 00:37:23,480
Speaker 4: our ability to get sort of our wish list in

670
00:37:23,560 --> 00:37:28,840
Speaker 4: terms of covenant packages across many of these issuers.

671
00:37:29,280 --> 00:37:30,560
Speaker 3: Well, I would say it's.

672
00:37:30,520 --> 00:37:33,360
Speaker 4: Very relevant for the mid to lower quality issuers that

673
00:37:33,400 --> 00:37:37,520
Speaker 4: are coming to market, especially in the current environment. It's

674
00:37:37,560 --> 00:37:40,160
Speaker 4: a little bit different for the very high quality issuers.

675
00:37:40,280 --> 00:37:43,319
Speaker 4: Think that will be high sing will be where we

676
00:37:43,360 --> 00:37:46,279
Speaker 4: think there's a very low probability of significant challenges in

677
00:37:46,320 --> 00:37:47,520
Speaker 4: the near to intermediate term.

678
00:37:47,880 --> 00:37:48,839
Speaker 3: The demand for.

679
00:37:50,280 --> 00:37:53,120
Speaker 4: Allocations in many of those deals leads to a very

680
00:37:53,360 --> 00:37:59,000
Speaker 4: strong investor appetite and significant over.

681
00:37:58,840 --> 00:38:00,560
Speaker 3: Subscription levels and deal dot com.

682
00:38:00,719 --> 00:38:04,239
Speaker 4: And as a result, you know, sponsors and issuers have

683
00:38:04,320 --> 00:38:06,439
Speaker 4: the ability to push back and sort of the wish

684
00:38:06,480 --> 00:38:09,680
Speaker 4: list of asks. But for more challenging deals for sure,

685
00:38:10,600 --> 00:38:13,480
Speaker 4: the deals that are struggling to get done, we are

686
00:38:13,640 --> 00:38:17,080
Speaker 4: very vocal with the counterparties that I mentioned to get

687
00:38:17,200 --> 00:38:20,480
Speaker 4: the types of covenant, types of structures in place to

688
00:38:20,480 --> 00:38:22,759
Speaker 4: protect us in our clients over time.

689
00:38:23,360 --> 00:38:26,440
Speaker 1: And how important does private credit become in all of this.

690
00:38:26,680 --> 00:38:28,440
Speaker 1: Does it step in to do some of these deals?

691
00:38:28,840 --> 00:38:29,480
Speaker 3: Very important?

692
00:38:29,680 --> 00:38:33,760
Speaker 4: As you know, over time there has been convergence between

693
00:38:33,840 --> 00:38:39,520
Speaker 4: public markets and private markets. There there has been a

694
00:38:39,600 --> 00:38:42,799
Speaker 4: liquidity premium or an ill liquidity premium i should say,

695
00:38:43,360 --> 00:38:47,520
Speaker 4: in private markets, and obviously the types of issuers that

696
00:38:47,560 --> 00:38:50,640
Speaker 4: go to one market versus another over the last you know,

697
00:38:50,760 --> 00:38:54,720
Speaker 4: three five, seven years has been quite a bit different.

698
00:38:55,600 --> 00:38:58,840
Speaker 4: What's notable in the current environment with high yield bonds

699
00:38:58,840 --> 00:39:03,520
Speaker 4: and leverage loans and spreads widening the relative value, in

700
00:39:03,560 --> 00:39:06,840
Speaker 4: our opinion, is a bit more attractive in high bonds

701
00:39:06,880 --> 00:39:10,920
Speaker 4: or leverage loans relative to private markets, as private markets

702
00:39:10,920 --> 00:39:14,680
Speaker 4: take a little bit longer to reprice to some of

703
00:39:14,719 --> 00:39:17,480
Speaker 4: the volatility and market weakness that we're seeing. And so

704
00:39:18,560 --> 00:39:22,080
Speaker 4: if you think about what that that that spread pickup was,

705
00:39:22,800 --> 00:39:25,560
Speaker 4: if you assume private markets are largely unchanged or somewhere

706
00:39:25,560 --> 00:39:29,200
Speaker 4: in that five fifty five seventy five context, and you've

707
00:39:29,200 --> 00:39:33,759
Speaker 4: seen highal bonds and leverage loans back up, that that

708
00:39:33,840 --> 00:39:37,799
Speaker 4: premium has decreased, thus making public market transactions a little

709
00:39:37,800 --> 00:39:40,960
Speaker 4: bit more attractive. But to your to your point, to

710
00:39:41,000 --> 00:39:45,080
Speaker 4: the extent capital market activity has dried up on the

711
00:39:45,360 --> 00:39:48,480
Speaker 4: private side of things, you can and will and potentially

712
00:39:48,480 --> 00:39:52,360
Speaker 4: have seen more issuers going to private markets getting deals

713
00:39:52,400 --> 00:39:57,080
Speaker 4: done now when they need to or have to. For me,

714
00:39:57,160 --> 00:40:00,360
Speaker 4: it's it's not just about today, right, It's a about

715
00:40:00,560 --> 00:40:04,440
Speaker 4: the forward environment, right. So you're going to see issuers

716
00:40:04,480 --> 00:40:07,680
Speaker 4: that access the private markets over time that are different

717
00:40:07,719 --> 00:40:10,719
Speaker 4: points in their life cycle that may be interested in

718
00:40:10,760 --> 00:40:15,040
Speaker 4: going public over the next year. And so maybe it

719
00:40:15,080 --> 00:40:18,440
Speaker 4: makes more sense to come back to the public markets,

720
00:40:18,800 --> 00:40:22,560
Speaker 4: start thinking about, you know, more, being more engaged with

721
00:40:22,680 --> 00:40:28,400
Speaker 4: public market participants providing quarterly earnings right, readying yourself for

722
00:40:28,520 --> 00:40:32,560
Speaker 4: that public market. I po that that many of these

723
00:40:33,120 --> 00:40:35,200
Speaker 4: issuers may be focused on down the road.

724
00:40:35,239 --> 00:40:36,440
Speaker 3: So I think it just depends.

725
00:40:36,920 --> 00:40:41,080
Speaker 1: So, as you mentioned, Mitch, the fundamentals of the market seem,

726
00:40:41,280 --> 00:40:43,160
Speaker 1: you know, certainly strong a bit, but we are seeing

727
00:40:43,160 --> 00:40:49,040
Speaker 1: some technical weakness among those foreign demand for US credit.

728
00:40:49,520 --> 00:40:52,840
Speaker 1: When you've got high Japanese government bond yields, for example,

729
00:40:53,040 --> 00:40:56,440
Speaker 1: that's going to affect the interest from from Asia for example.

730
00:40:56,760 --> 00:40:59,239
Speaker 1: And another thing seem to be weakening. We've seen outflows.

731
00:40:59,480 --> 00:41:01,520
Speaker 1: What do you make the technical pressures right now?

732
00:41:01,920 --> 00:41:06,520
Speaker 4: Yeah, I think the technical backdrop is waning. To your point,

733
00:41:06,640 --> 00:41:12,160
Speaker 4: it has been maybe somewhat negative. We've seen fairly significant

734
00:41:12,160 --> 00:41:14,320
Speaker 4: outflows from the asset class.

735
00:41:15,640 --> 00:41:18,600
Speaker 3: You know, over the last week we saw two billion

736
00:41:18,640 --> 00:41:19,000
Speaker 3: come out.

737
00:41:19,040 --> 00:41:21,800
Speaker 4: Prior to that, we saw the largest outflow on record

738
00:41:22,000 --> 00:41:26,120
Speaker 4: at nearly ten billion, uh, sort of wiping out all

739
00:41:26,200 --> 00:41:27,520
Speaker 4: the inflows that we had.

740
00:41:27,480 --> 00:41:28,040
Speaker 3: Here to date.

741
00:41:28,200 --> 00:41:31,880
Speaker 4: Now at slight outflows for for the asset class, a

742
00:41:31,880 --> 00:41:36,440
Speaker 4: lot of model based or momentum type investors have largely

743
00:41:36,520 --> 00:41:41,600
Speaker 4: exited the asset class. What we're seeing at Blackrock both

744
00:41:41,600 --> 00:41:46,120
Speaker 4: internally and externally as more and more investors looking to

745
00:41:46,120 --> 00:41:49,879
Speaker 4: allocate capital to too high yield. So if you think

746
00:41:49,880 --> 00:41:53,400
Speaker 4: about some of the internal pools of capital that you

747
00:41:53,440 --> 00:41:55,919
Speaker 4: know that we manage on the multi asset credit side

748
00:41:55,960 --> 00:41:59,600
Speaker 4: of things, you know, or broad fixed income side of things,

749
00:42:00,160 --> 00:42:03,600
Speaker 4: We've seen a few different types of investors, both on

750
00:42:04,080 --> 00:42:06,800
Speaker 4: the short duration side of things and more core fixed

751
00:42:06,800 --> 00:42:11,560
Speaker 4: income allocate more capital to too high yield, particularly in the.

752
00:42:11,600 --> 00:42:13,160
Speaker 3: Higher quality part of the market.

753
00:42:13,640 --> 00:42:18,720
Speaker 4: We've also seen insurance companies allocate a substantial amount of capital.

754
00:42:19,480 --> 00:42:21,799
Speaker 4: Really almost every day for the last week or two,

755
00:42:22,440 --> 00:42:26,360
Speaker 4: they've been buying significant chunks of high quality credit just

756
00:42:26,400 --> 00:42:29,360
Speaker 4: given the relative weakness that we had seen, and I

757
00:42:29,440 --> 00:42:31,800
Speaker 4: think that makes a tremendous amount of sense. One of

758
00:42:31,840 --> 00:42:34,960
Speaker 4: the points I should make is the relative value between

759
00:42:35,000 --> 00:42:39,759
Speaker 4: double B risk and truty risk has cheapened fairly significantly.

760
00:42:40,440 --> 00:42:44,279
Speaker 4: Alebi's look quite attractive. They probably looked more attractive a

761
00:42:44,280 --> 00:42:47,200
Speaker 4: week or two ago. We've seen some outperformance there to

762
00:42:47,520 --> 00:42:49,960
Speaker 4: capture some of that back, but I still think there's

763
00:42:50,000 --> 00:42:52,279
Speaker 4: good value in the higher quality part of the double

764
00:42:52,320 --> 00:42:55,279
Speaker 4: B market relative to trivial BE risk.

765
00:42:55,880 --> 00:42:58,040
Speaker 1: But are you noticing that there is a less of

766
00:42:58,080 --> 00:43:00,400
Speaker 1: a foreign demand for US assets. Generally, that's a big

767
00:43:00,440 --> 00:43:02,000
Speaker 1: thing that everyone seems to be picking up on. Obviously,

768
00:43:02,000 --> 00:43:03,920
Speaker 1: there are constraints to that because the scale of the

769
00:43:04,000 --> 00:43:06,360
Speaker 1: US versus everything else. But but is that something that

770
00:43:06,400 --> 00:43:08,320
Speaker 1: you think is happening as a kind of secular shift.

771
00:43:08,800 --> 00:43:11,400
Speaker 4: I think it it will happen. I haven't seen a

772
00:43:11,440 --> 00:43:14,640
Speaker 4: tremendous amount of that, but you're certainly right. You know,

773
00:43:14,800 --> 00:43:17,680
Speaker 4: we've seen and heard a lot of people talking about that.

774
00:43:18,120 --> 00:43:21,799
Speaker 4: But in terms of our desk, we managed US high

775
00:43:21,880 --> 00:43:24,720
Speaker 4: yeld as well as global high yield. I haven't seen

776
00:43:25,480 --> 00:43:29,760
Speaker 4: very significant flows out of the US into Europe.

777
00:43:29,440 --> 00:43:31,479
Speaker 3: Or or for that matter.

778
00:43:31,520 --> 00:43:34,520
Speaker 4: I have not seen some of our investors out of Asia,

779
00:43:35,280 --> 00:43:40,160
Speaker 4: you know, pull back and avoid the US. So you

780
00:43:40,200 --> 00:43:43,239
Speaker 4: haven't seen that dynamic, but you know, I recognize that

781
00:43:43,239 --> 00:43:45,799
Speaker 4: they are. For that to play out, I would say

782
00:43:46,760 --> 00:43:51,000
Speaker 4: dealer inventories seem to be pretty light, you know. I

783
00:43:51,000 --> 00:43:54,239
Speaker 4: would say dealers last weeks sold six and a half

784
00:43:54,280 --> 00:43:58,279
Speaker 4: seven billion dollars of risk seemingly on their balance sheet.

785
00:43:58,320 --> 00:44:00,320
Speaker 4: And so if I think about inventory level over the

786
00:44:00,400 --> 00:44:03,040
Speaker 4: last three or four months, they're among the lowest.

787
00:44:02,760 --> 00:44:04,680
Speaker 3: Levels that we've seen over time.

788
00:44:05,320 --> 00:44:08,920
Speaker 4: So I think that, combined with what I was suggesting earlier,

789
00:44:09,520 --> 00:44:15,680
Speaker 4: significant OUTFLOWDS that seemingly has subsided more demand from insurance companies,

790
00:44:15,680 --> 00:44:20,080
Speaker 4: more demand from broad fixed income investors or multi asset

791
00:44:20,680 --> 00:44:24,600
Speaker 4: type investors, and some of our external clients, whether it

792
00:44:24,680 --> 00:44:28,600
Speaker 4: be large on balance sheet, corporate cash clients, private banks,

793
00:44:28,640 --> 00:44:31,920
Speaker 4: insurance companies, all of those investors have not allocated capital

794
00:44:31,920 --> 00:44:34,799
Speaker 4: to high yield, but they're all engaged in the conversation

795
00:44:35,239 --> 00:44:37,239
Speaker 4: and very much looking to do that.

796
00:44:37,239 --> 00:44:38,000
Speaker 3: We've seen.

797
00:44:39,480 --> 00:44:42,200
Speaker 4: On the private bank side of things a few small

798
00:44:42,960 --> 00:44:48,560
Speaker 4: to medium size flows come into our funds. Away from

799
00:44:48,600 --> 00:44:51,799
Speaker 4: that hasn't been very substantial, but as a trend that

800
00:44:51,840 --> 00:44:52,320
Speaker 4: I think.

801
00:44:52,120 --> 00:44:55,480
Speaker 3: We'll see as we see further spread widening.

802
00:44:55,840 --> 00:44:58,280
Speaker 1: So you see a lot of stuff all around the world.

803
00:44:58,800 --> 00:45:01,440
Speaker 1: You get to see great detail, and I'm going to

804
00:45:01,440 --> 00:45:05,040
Speaker 1: ask you a tough question, best relative value? Where do

805
00:45:05,080 --> 00:45:07,319
Speaker 1: you think it is right now, let's say for the

806
00:45:07,320 --> 00:45:10,000
Speaker 1: next twelve to eighteen months. I know it's very hard

807
00:45:10,000 --> 00:45:12,520
Speaker 1: to project because things are uncertain, but best relative value?

808
00:45:12,800 --> 00:45:15,640
Speaker 4: Yeah, So what I would say here is that the

809
00:45:15,719 --> 00:45:20,719
Speaker 4: relationship of US, you know, high yield versus European high

810
00:45:20,800 --> 00:45:27,440
Speaker 4: yield Europe has held up significantly better. They've had some challenges.

811
00:45:27,480 --> 00:45:32,600
Speaker 4: They've seen certainly spreads widening, but not nearly to the

812
00:45:32,680 --> 00:45:36,839
Speaker 4: extent we've seen in the US market, and early on

813
00:45:37,080 --> 00:45:41,200
Speaker 4: that has led us to reduce our exposure to European

814
00:45:41,280 --> 00:45:46,799
Speaker 4: credit risk in favor of US credit risk. Now, it's

815
00:45:46,800 --> 00:45:50,000
Speaker 4: not necessarily a super obvious trade, because there are there

816
00:45:50,000 --> 00:45:54,279
Speaker 4: are very important themes in Europe that I think are

817
00:45:54,360 --> 00:45:59,400
Speaker 4: worth noting. Monetary policy is clearly much further ahead of

818
00:45:59,440 --> 00:46:04,440
Speaker 4: where the is. ECB easing fairly aggressively, and that is

819
00:46:04,440 --> 00:46:08,560
Speaker 4: obviously supportive for risk assets. And then the other major

820
00:46:08,640 --> 00:46:12,000
Speaker 4: point is what we've seen out of Germany in terms

821
00:46:12,040 --> 00:46:14,640
Speaker 4: of the substantial increase in infrastructure spending as well as

822
00:46:14,640 --> 00:46:17,400
Speaker 4: defense spending. That's going to be to the benefit of

823
00:46:17,480 --> 00:46:22,839
Speaker 4: many of the issuers within those markets. That said, when

824
00:46:22,840 --> 00:46:26,239
Speaker 4: I look at European valuations relative to high yield not

825
00:46:26,520 --> 00:46:28,640
Speaker 4: just over the last twelve months, but over a three year,

826
00:46:28,719 --> 00:46:32,000
Speaker 4: five year period of time, that relationship continues to be

827
00:46:32,040 --> 00:46:35,719
Speaker 4: in the very low percentile rankings relative to where it's

828
00:46:35,719 --> 00:46:39,080
Speaker 4: been historically, and maybe rightfully so for the reasons that

829
00:46:39,120 --> 00:46:42,719
Speaker 4: I just mentioned, But it doesn't necessarily get me to

830
00:46:42,880 --> 00:46:44,719
Speaker 4: want to invest a lot.

831
00:46:44,520 --> 00:46:46,760
Speaker 3: More capital in the European market today.

832
00:46:47,080 --> 00:46:48,759
Speaker 4: That may be the case if we see a little

833
00:46:48,760 --> 00:46:50,840
Speaker 4: bit of a cheapening relative to the US, but I

834
00:46:50,840 --> 00:46:53,480
Speaker 4: think in the current environment, I still think it makes

835
00:46:53,520 --> 00:46:57,880
Speaker 4: sense to be invested in high quality.

836
00:46:57,560 --> 00:47:01,000
Speaker 3: Double by single B US domiciled issuers.

837
00:47:01,120 --> 00:47:03,759
Speaker 4: And one point on that is, when you think about

838
00:47:03,840 --> 00:47:09,239
Speaker 4: US domiciled issuers, about eighty percent of the revenues for

839
00:47:09,360 --> 00:47:13,240
Speaker 4: companies within the high yield space is coming from the US.

840
00:47:13,600 --> 00:47:15,879
Speaker 4: Only twenty percent is coming over the revenues is coming

841
00:47:15,880 --> 00:47:19,120
Speaker 4: from international. And so the point here is that the

842
00:47:19,200 --> 00:47:23,319
Speaker 4: tariff impact, the direct tariff impact, while maybe substantial for

843
00:47:23,400 --> 00:47:27,200
Speaker 4: certain sectors or for certain issuers, is not necessarily going

844
00:47:27,239 --> 00:47:32,120
Speaker 4: to be pervasive across the entire space. Certainly, the secondary effects,

845
00:47:32,160 --> 00:47:34,720
Speaker 4: the knock on effects to the ones that we highlighted

846
00:47:34,719 --> 00:47:38,040
Speaker 4: throughout this conversation, that kind of will be more substantial.

847
00:47:38,360 --> 00:47:41,120
Speaker 1: So to be clear, it's a sell high yield in

848
00:47:41,160 --> 00:47:43,320
Speaker 1: Europe and by US high yield instead.

849
00:47:43,640 --> 00:47:46,560
Speaker 4: I'm not sure it's just sell one versus by the other.

850
00:47:46,840 --> 00:47:49,879
Speaker 4: But I would say for US in our global fund,

851
00:47:50,000 --> 00:47:53,919
Speaker 4: the marginal dollar is getting invested in US high yield.

852
00:47:54,160 --> 00:47:58,279
Speaker 4: We still remain constructive on the European market. Just valuations

853
00:47:58,320 --> 00:48:00,760
Speaker 4: have held up better there than in the US.

854
00:48:01,040 --> 00:48:03,880
Speaker 1: Okay, god's it. Great stuff. Mitch Garffin, co head of

855
00:48:03,960 --> 00:48:05,960
Speaker 1: US Leverage Finance at black Rock, it's been a pleasure

856
00:48:06,000 --> 00:48:06,799
Speaker 1: having you on the Credit Edge.

857
00:48:06,840 --> 00:48:08,200
Speaker 3: Many thanks thanks for having me.

858
00:48:08,280 --> 00:48:10,480
Speaker 1: And to Robert Schiffman with Bloomberg Intelligence, thank you very

859
00:48:10,520 --> 00:48:13,200
Speaker 1: much for joining us today or even more analysis. Read

860
00:48:13,239 --> 00:48:15,919
Speaker 1: all of Rob's great work on the Bloomberg Terminal. Tech

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00:48:16,120 --> 00:48:18,680
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00:48:28,239 --> 00:48:32,760
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871
00:48:49,520 --> 00:49:07,920
Speaker 1: having you join us again next week on the Credit Edge.