1
00:00:18,200 --> 00:00:21,040
Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

2
00:00:21,320 --> 00:00:23,960
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

3
00:00:24,480 --> 00:00:27,360
Speaker 1: This week, we're very pleased to welcome Tristram Leech, co

4
00:00:27,440 --> 00:00:29,160
Speaker 1: head of European Credit at Apollo.

5
00:00:29,440 --> 00:00:31,840
Speaker 2: How are you, Tristram, I'm great, Thank you, Thanks very

6
00:00:31,920 --> 00:00:32,559
Speaker 2: much for having me.

7
00:00:33,080 --> 00:00:34,960
Speaker 1: Thank you very much for joining us today. We're also

8
00:00:35,080 --> 00:00:37,600
Speaker 1: delighted to welcome back Lisa Lee, who covers credit markets

9
00:00:37,600 --> 00:00:39,200
Speaker 1: from London. Great to see Lisa.

10
00:00:40,120 --> 00:00:41,600
Speaker 3: Great to talk to you too, James.

11
00:00:42,720 --> 00:00:44,040
Speaker 1: Also on the show, we're going to be talking to

12
00:00:44,120 --> 00:00:47,080
Speaker 1: Matt Goyner at Bloomberg Intelligence about high rates are actually

13
00:00:47,080 --> 00:00:50,360
Speaker 1: good for some companies, so do stay with us. But first,

14
00:00:50,760 --> 00:00:53,120
Speaker 1: Christram Leach with Apollo, it's great to have you on

15
00:00:53,159 --> 00:00:56,040
Speaker 1: the Credit Edge. You're based in London, you cover global credit,

16
00:00:56,160 --> 00:00:58,920
Speaker 1: and then since you're there in Europe, I just thought

17
00:00:58,920 --> 00:01:00,960
Speaker 1: we'd start there. So I'm going to start with a

18
00:01:01,000 --> 00:01:03,800
Speaker 1: question about European credit. When we look at the years

19
00:01:03,840 --> 00:01:07,280
Speaker 1: so far, it has been pretty dire for the most

20
00:01:07,280 --> 00:01:10,800
Speaker 1: of the world's investment grade bonds. The US is headed

21
00:01:10,800 --> 00:01:13,360
Speaker 1: for its third straight year of losses, which has never

22
00:01:13,360 --> 00:01:15,560
Speaker 1: happened before. When we look at our fifty year history

23
00:01:15,560 --> 00:01:19,360
Speaker 1: on our index, and that's mostly your rates issue. Obviously,

24
00:01:19,520 --> 00:01:22,000
Speaker 1: you know, we don't expect Amazon to default on their debt,

25
00:01:22,040 --> 00:01:24,039
Speaker 1: although some of their bonds are trading in the fifties

26
00:01:24,080 --> 00:01:27,760
Speaker 1: so they look pretty stressed. Junk bonds have done better,

27
00:01:27,880 --> 00:01:30,160
Speaker 1: especially the riskiest ones, unless you're in China, when you

28
00:01:30,720 --> 00:01:32,640
Speaker 1: would have lost a lot of money this year. But

29
00:01:32,720 --> 00:01:35,560
Speaker 1: when we look at Europe, it's really surprising to me

30
00:01:35,560 --> 00:01:37,960
Speaker 1: that it's done so well across the board. If you'd

31
00:01:38,000 --> 00:01:41,320
Speaker 1: invested in corporate bonds there and not in the US,

32
00:01:41,840 --> 00:01:44,839
Speaker 1: you would have made much more money this year than

33
00:01:44,880 --> 00:01:47,800
Speaker 1: anywhere else, even though the economies over there seem to

34
00:01:47,800 --> 00:01:50,640
Speaker 1: be in poor shape generally speaking, and although you do

35
00:01:50,680 --> 00:01:54,560
Speaker 1: seem to be doing a bit better on inflation. And

36
00:01:54,640 --> 00:01:57,200
Speaker 1: I know that index is higher quality, but how has

37
00:01:57,240 --> 00:01:59,640
Speaker 1: it done so much better Tristram than other parts of

38
00:01:59,680 --> 00:01:59,920
Speaker 1: the world.

39
00:02:00,800 --> 00:02:02,880
Speaker 2: Yeah, I guess there's a couple of things going on here.

40
00:02:03,800 --> 00:02:04,000
Speaker 3: Look.

41
00:02:04,040 --> 00:02:06,440
Speaker 2: Firstly, risk assets had that big rally in the early

42
00:02:06,480 --> 00:02:10,359
Speaker 2: part of the year. Some of it's been given back,

43
00:02:10,440 --> 00:02:13,959
Speaker 2: but spreads have been pretty contained in their moves all year,

44
00:02:14,720 --> 00:02:18,040
Speaker 2: and rates have outperformed their US counterparts. Even though we've

45
00:02:18,040 --> 00:02:22,840
Speaker 2: seen obviously weakening in rates globally, you know, the European

46
00:02:22,840 --> 00:02:25,960
Speaker 2: picture is one that's been better, partly because we have

47
00:02:26,080 --> 00:02:30,040
Speaker 2: seen some more softening and inflation data here in Europe.

48
00:02:30,280 --> 00:02:34,960
Speaker 1: So when you look at europe credit generally, does this

49
00:02:35,240 --> 00:02:36,639
Speaker 1: kind of out performance continue.

50
00:02:37,600 --> 00:02:40,160
Speaker 2: Look, I think we think all in returns to credit

51
00:02:40,639 --> 00:02:46,079
Speaker 2: are pretty great. Break evens are very very high, so

52
00:02:46,280 --> 00:02:49,320
Speaker 2: it's relatively hard to visit yourself losing money in the

53
00:02:49,360 --> 00:02:53,080
Speaker 2: medium term in credit. We like many other market participants,

54
00:02:53,120 --> 00:02:55,280
Speaker 2: have been really forthcoming. I think that we think this

55
00:02:55,360 --> 00:02:57,680
Speaker 2: is a great time to be engaged in the credit market,

56
00:02:57,720 --> 00:03:00,440
Speaker 2: and we're hearing that from a lot of our ourps,

57
00:03:00,480 --> 00:03:03,640
Speaker 2: our customers, you know, who are seeking to allocate money

58
00:03:03,639 --> 00:03:06,440
Speaker 2: into credit. That being said, I don't think we think

59
00:03:06,480 --> 00:03:10,680
Speaker 2: spreads are screaming by here. You've seen a little bit

60
00:03:10,720 --> 00:03:13,760
Speaker 2: more weakness in kind of single bees, etc. In Europe

61
00:03:13,840 --> 00:03:17,440
Speaker 2: versus the US, but economic data is slowing pretty fast,

62
00:03:17,520 --> 00:03:21,079
Speaker 2: especially in Europe, so I think there's the scope for

63
00:03:21,280 --> 00:03:26,760
Speaker 2: a little bit of spread weakness, possibly counterbalanced by more

64
00:03:26,800 --> 00:03:27,840
Speaker 2: performance and rates.

65
00:03:28,560 --> 00:03:31,519
Speaker 3: So you overseee a whole swath of different kinds of

66
00:03:31,600 --> 00:03:34,360
Speaker 3: credit when you look at the relative value, where do

67
00:03:34,400 --> 00:03:39,080
Speaker 3: you see the best buy in Europe versus US IG

68
00:03:39,440 --> 00:03:43,120
Speaker 3: junk private clos One of the.

69
00:03:43,040 --> 00:03:46,640
Speaker 2: Things we've been I think pretty forthcoming about is that

70
00:03:47,720 --> 00:03:51,040
Speaker 2: private credit is generally offering a really attractive pickup to

71
00:03:51,520 --> 00:03:54,040
Speaker 2: syndicate it in public markets at the moment. If you

72
00:03:54,120 --> 00:03:59,160
Speaker 2: look at where the European syndicated loan market is currently trading,

73
00:03:59,800 --> 00:04:02,680
Speaker 2: and you look at where similar quality credit is pricing

74
00:04:02,800 --> 00:04:06,520
Speaker 2: in the unitranch, you know, private debt market, that pickup

75
00:04:06,600 --> 00:04:10,240
Speaker 2: is really striking. For very similar quality companies. You're getting

76
00:04:10,240 --> 00:04:12,880
Speaker 2: a material spread pickup, and obviously the all in returns

77
00:04:13,400 --> 00:04:16,160
Speaker 2: is very very attractive. So that's certainly something we'd call

78
00:04:16,200 --> 00:04:20,279
Speaker 2: out as a very attractive relative value. I think the

79
00:04:20,320 --> 00:04:22,800
Speaker 2: relative value piece of cross geographies is a little bit

80
00:04:22,960 --> 00:04:26,840
Speaker 2: more nuanced. You know, there's a little bit more spread

81
00:04:27,200 --> 00:04:31,320
Speaker 2: at a given level of credit quality in Europe versus

82
00:04:31,360 --> 00:04:36,280
Speaker 2: the US. However, the European growth data has been you know,

83
00:04:36,720 --> 00:04:40,440
Speaker 2: really slowing very fast. It's pretty eye catching how rapidly

84
00:04:40,480 --> 00:04:42,960
Speaker 2: we're seeing Europe slow down, and so I think that

85
00:04:43,040 --> 00:04:45,080
Speaker 2: probably does argue that you need a little bit more

86
00:04:45,080 --> 00:04:48,640
Speaker 2: spread to compensate you for a more challenged economy.

87
00:04:49,520 --> 00:04:52,039
Speaker 3: Do you think there kindly does to be slowing down,

88
00:04:52,240 --> 00:04:55,200
Speaker 3: which suggests to me that there might be more defaults

89
00:04:55,200 --> 00:04:59,800
Speaker 3: coming up. Do you feel like that's correctly priced in

90
00:04:59,800 --> 00:05:02,400
Speaker 3: in especially in the high yield and leavised loan markets.

91
00:05:02,880 --> 00:05:05,720
Speaker 3: And also what do you think about recoveries, because they've

92
00:05:05,720 --> 00:05:08,800
Speaker 3: been pretty drastically low in the US but a bit

93
00:05:08,880 --> 00:05:09,919
Speaker 3: higher in Europe.

94
00:05:10,560 --> 00:05:14,840
Speaker 2: So as to whether the future default environment is appropriately priced,

95
00:05:14,839 --> 00:05:19,080
Speaker 2: I think, you know, it's implied by the fact that

96
00:05:19,120 --> 00:05:20,680
Speaker 2: you know, we think there's probably room for spreads to

97
00:05:20,720 --> 00:05:23,000
Speaker 2: widen a little bit here, that it's it's possibly not

98
00:05:23,040 --> 00:05:28,400
Speaker 2: as fully priced as it might be. You know, you

99
00:05:28,480 --> 00:05:30,839
Speaker 2: look around the cell side and strategists, I think most

100
00:05:30,839 --> 00:05:33,520
Speaker 2: people are calling for a pickup in in defaults given

101
00:05:33,560 --> 00:05:36,039
Speaker 2: the higher rate environment, and given the slowing we're seeing

102
00:05:36,080 --> 00:05:38,880
Speaker 2: in macro, it would be somewhat surprising with that not

103
00:05:39,040 --> 00:05:41,680
Speaker 2: to eventuate. I think we've certainly been calling for and

104
00:05:41,720 --> 00:05:45,400
Speaker 2: seeing more dispersion in credit outcomes. You know, you've now

105
00:05:45,480 --> 00:05:47,719
Speaker 2: got a market where you know, there's really a real

106
00:05:47,760 --> 00:05:50,440
Speaker 2: sense of winners and losers, and obviously some of those

107
00:05:50,480 --> 00:05:53,039
Speaker 2: losers are gonna gonna tip over the edge into defaults,

108
00:05:53,080 --> 00:05:55,560
Speaker 2: So it makes sense to me that directionally you're probably

109
00:05:55,600 --> 00:05:58,279
Speaker 2: going to see a little bit more in terms of

110
00:05:58,600 --> 00:06:02,560
Speaker 2: in terms of recoveries. Yes, we've seen lower recoveries at

111
00:06:02,560 --> 00:06:04,440
Speaker 2: the moment, the sample size we're dealing with is still

112
00:06:04,480 --> 00:06:07,080
Speaker 2: pretty small, right, We're still in the early stages, so

113
00:06:07,160 --> 00:06:11,039
Speaker 2: it's relatively hard to draw super firm conclusions about why

114
00:06:11,040 --> 00:06:13,400
Speaker 2: those recoveries are lower and how durable that's likely to be.

115
00:06:13,880 --> 00:06:16,800
Speaker 2: Look across the Atlantic, we've definitely seen more of these

116
00:06:16,800 --> 00:06:20,240
Speaker 2: aggressive liability management exercises going on, which are going to

117
00:06:20,360 --> 00:06:24,880
Speaker 2: tend to depress recoveries. In Europe that hasn't as yet

118
00:06:24,960 --> 00:06:28,200
Speaker 2: been a material feature of the market, and all things equal,

119
00:06:28,279 --> 00:06:30,920
Speaker 2: can can militate for recoveries being a little bit better

120
00:06:30,920 --> 00:06:31,799
Speaker 2: on the side of the Atlantic.

121
00:06:32,960 --> 00:06:35,640
Speaker 1: On the private credit side, though, Tristan, you mentioned the

122
00:06:35,640 --> 00:06:38,200
Speaker 1: big yield pick up there, We've had people tell us

123
00:06:38,240 --> 00:06:40,360
Speaker 1: that it's not enough to compensate for the lack of

124
00:06:40,440 --> 00:06:43,839
Speaker 1: transparency and the potential increase to fault risk, and you know,

125
00:06:43,839 --> 00:06:45,839
Speaker 1: you just don't know what's going on there. Can you

126
00:06:45,920 --> 00:06:47,800
Speaker 1: kind of put some numbers on it? Can you quantify

127
00:06:47,920 --> 00:06:51,000
Speaker 1: like how much more of a pickup, how much more

128
00:06:51,040 --> 00:06:53,320
Speaker 1: compensation are you getting for that extra risk.

129
00:06:54,560 --> 00:06:58,240
Speaker 2: Yeah, Look, i'd say the way i'd i'd look at

130
00:06:58,240 --> 00:07:00,480
Speaker 2: at the moment as follows. I think your proper looking

131
00:07:00,480 --> 00:07:05,240
Speaker 2: at a four fifty market for a for a standard

132
00:07:05,279 --> 00:07:08,640
Speaker 2: syndicated single B so four to fifty in spread, and

133
00:07:08,680 --> 00:07:12,200
Speaker 2: you're looking at six twenty five six fifty maybe for

134
00:07:12,280 --> 00:07:16,600
Speaker 2: similar quality corporates in the in the private debt market.

135
00:07:16,840 --> 00:07:19,200
Speaker 2: So to the extent you can perform like for like,

136
00:07:19,280 --> 00:07:23,080
Speaker 2: and it's challenging because there are reasons companies are going

137
00:07:23,080 --> 00:07:24,920
Speaker 2: one route or the other. But to the extent you

138
00:07:24,920 --> 00:07:26,680
Speaker 2: can do like for like, I think you're probably getting

139
00:07:26,680 --> 00:07:29,400
Speaker 2: almost two hundred basis points of pickup for being on

140
00:07:29,440 --> 00:07:31,200
Speaker 2: the on the private side of things, which for us

141
00:07:31,200 --> 00:07:36,600
Speaker 2: feels ample compensation when additionally you're generally getting slightly better documentation,

142
00:07:36,840 --> 00:07:40,240
Speaker 2: you're close to it, you have a real bilateral dialogue

143
00:07:40,240 --> 00:07:42,760
Speaker 2: with the issuer and the sponsor. You know, that's a

144
00:07:42,800 --> 00:07:45,800
Speaker 2: pretty compelling setup for US versus being in a super

145
00:07:45,840 --> 00:07:48,080
Speaker 2: loosely documented syndicated loan, and.

146
00:07:48,000 --> 00:07:49,920
Speaker 1: The relative liquidity doesn't bother you.

147
00:07:52,320 --> 00:07:54,000
Speaker 2: Look, obviously, that's part of what you're getting paid for.

148
00:07:54,920 --> 00:07:57,600
Speaker 2: It's a much less liquid product or even a wholey

149
00:07:57,680 --> 00:08:02,160
Speaker 2: liquid product. But when you put your credit underwriting at

150
00:08:02,160 --> 00:08:03,960
Speaker 2: the center of your process in the way we do,

151
00:08:04,520 --> 00:08:06,640
Speaker 2: you know we have the confidence in our credit views

152
00:08:06,680 --> 00:08:08,680
Speaker 2: and to lean into them. And when we're getting two

153
00:08:08,800 --> 00:08:10,840
Speaker 2: hundred basis points that a pick up to give up

154
00:08:10,880 --> 00:08:14,600
Speaker 2: liquidity in something which we've underwritten and we're super confident in,

155
00:08:14,680 --> 00:08:17,440
Speaker 2: then you know that's something that is a trade that

156
00:08:17,480 --> 00:08:18,680
Speaker 2: I think you're meant to do.

157
00:08:20,000 --> 00:08:23,040
Speaker 3: These private credit deals are getting larger and larger in Europe.

158
00:08:23,040 --> 00:08:25,640
Speaker 3: We have one that could possibly be the biggest ever

159
00:08:25,720 --> 00:08:29,040
Speaker 3: in this market. As these loans get bigger, do you

160
00:08:29,080 --> 00:08:33,880
Speaker 3: worry that there'll be a confluence between leverage loans and

161
00:08:33,920 --> 00:08:37,360
Speaker 3: some of the documentations will weaken, some of the terms

162
00:08:37,400 --> 00:08:42,120
Speaker 3: will weaken, or do you think there's still a differentiation.

163
00:08:43,160 --> 00:08:45,920
Speaker 2: There's still a delta for sure at the moment between

164
00:08:45,960 --> 00:08:49,840
Speaker 2: the terms you're getting in even the large UNITRNE and

165
00:08:50,080 --> 00:08:53,800
Speaker 2: direct lending deals versus where the syndicated market is. So

166
00:08:54,679 --> 00:08:59,040
Speaker 2: that convergence hasn't happened yet. I think it's true that

167
00:08:59,160 --> 00:09:02,480
Speaker 2: the two markets are coming closer together. You know, you're

168
00:09:02,520 --> 00:09:05,520
Speaker 2: seeing a direct lending market that's able to speak for

169
00:09:05,559 --> 00:09:09,840
Speaker 2: bigger and bigger deals is able to you know, price

170
00:09:10,040 --> 00:09:14,440
Speaker 2: really material slugs of debt, and you know, is another

171
00:09:14,520 --> 00:09:18,319
Speaker 2: option for all but the very very largest companies. So

172
00:09:18,640 --> 00:09:21,240
Speaker 2: I think we're seeing the syndicated and direct lending markets

173
00:09:21,360 --> 00:09:24,040
Speaker 2: coming closer together. The way we've set up our credit

174
00:09:24,040 --> 00:09:26,800
Speaker 2: business in Europe is really allowing us to pivot with

175
00:09:26,840 --> 00:09:29,760
Speaker 2: issuers between the two. So if you look at some

176
00:09:29,920 --> 00:09:32,439
Speaker 2: of the biggest financings we've done on both sides of

177
00:09:32,440 --> 00:09:34,760
Speaker 2: the Atlantic this year, they've been in kind of public

178
00:09:34,800 --> 00:09:38,679
Speaker 2: private structures, So deals like the as the deal that

179
00:09:39,040 --> 00:09:41,520
Speaker 2: we did here in Europe that was a direct piece

180
00:09:41,559 --> 00:09:44,120
Speaker 2: of financing. But for a company with a high your

181
00:09:44,160 --> 00:09:45,800
Speaker 2: bond curve, I think you're going to see more and

182
00:09:45,800 --> 00:09:47,640
Speaker 2: more of that, and I think setting up your business

183
00:09:47,640 --> 00:09:50,400
Speaker 2: to be able to pivot with issuers between the multiple

184
00:09:50,440 --> 00:09:54,319
Speaker 2: sources of funding is a really compelling offering to partner

185
00:09:54,400 --> 00:09:55,760
Speaker 2: with them.

186
00:09:55,960 --> 00:09:59,400
Speaker 1: Private credit really is the hot thing this year. People

187
00:09:59,440 --> 00:10:01,880
Speaker 1: are talking about the Golden Age and we just tell

188
00:10:01,920 --> 00:10:04,160
Speaker 1: a story. We're showing showing that, you know, there's five

189
00:10:04,240 --> 00:10:06,679
Speaker 1: hundred billion dollars of new money raised for it and

190
00:10:07,080 --> 00:10:09,560
Speaker 1: not a lot to buy. How do you kind of

191
00:10:09,840 --> 00:10:12,439
Speaker 1: find opportunities and do you have a kind of sector focus.

192
00:10:12,520 --> 00:10:14,040
Speaker 1: I mean, do you have anything you particularly like at

193
00:10:14,040 --> 00:10:15,400
Speaker 1: the moment in terms of sector.

194
00:10:17,640 --> 00:10:20,160
Speaker 2: So, look, we definitely agree it's a golden age. I

195
00:10:20,200 --> 00:10:22,640
Speaker 2: think there's a few nuances in terms of the way

196
00:10:22,679 --> 00:10:24,320
Speaker 2: we look at private credit versus a lot.

197
00:10:24,240 --> 00:10:24,840
Speaker 3: Of our peers.

198
00:10:25,679 --> 00:10:28,360
Speaker 2: You know, you'll have heard our CEO, Mark Rowan talking

199
00:10:28,400 --> 00:10:31,040
Speaker 2: about the way we think of private credit not just

200
00:10:31,080 --> 00:10:34,840
Speaker 2: in terms of financing LBOs, but but really a much

201
00:10:34,880 --> 00:10:38,800
Speaker 2: broader opportunity set, so including lots and lots of investment

202
00:10:38,840 --> 00:10:42,199
Speaker 2: grade opportunities. If you look at investment grade issuers in Europe,

203
00:10:42,200 --> 00:10:44,640
Speaker 2: a lot of them are looking to diversify their funding

204
00:10:44,679 --> 00:10:48,800
Speaker 2: sources away from the bond market. You look at it

205
00:10:48,880 --> 00:10:52,640
Speaker 2: deals like the deal we did with Venovia in the

206
00:10:52,800 --> 00:10:55,720
Speaker 2: in the spring of this year, where you know, the

207
00:10:55,760 --> 00:10:59,600
Speaker 2: company had really good assets but was seeking to protect

208
00:10:59,600 --> 00:11:03,400
Speaker 2: its rate and by speaking you know, in scale and

209
00:11:03,440 --> 00:11:06,559
Speaker 2: being thoughtful around structure, we were able to do something

210
00:11:06,559 --> 00:11:09,280
Speaker 2: which was protective to their rating and you know, very

211
00:11:09,360 --> 00:11:11,880
Speaker 2: very attractive for us. So I think that's really an

212
00:11:11,880 --> 00:11:14,559
Speaker 2: important angle for us in terms of what we look

213
00:11:14,600 --> 00:11:17,720
Speaker 2: to do in private credit rather than exclusively in the

214
00:11:18,360 --> 00:11:22,920
Speaker 2: in the kind of traditional unit change space in terms

215
00:11:22,920 --> 00:11:26,240
Speaker 2: of sectors. Look, it's it's probably a bit a bit

216
00:11:26,240 --> 00:11:28,839
Speaker 2: glib and interesting to say that with macro data slowing

217
00:11:28,880 --> 00:11:31,600
Speaker 2: the way it is, we're steering clear of anything that's

218
00:11:31,600 --> 00:11:34,760
Speaker 2: going to cycle super hard. For example, a lot of

219
00:11:34,800 --> 00:11:38,440
Speaker 2: the post COVID winners, you know, the travel, the revenge

220
00:11:38,480 --> 00:11:41,080
Speaker 2: travel dynamic, you saw, a lot of that stuff has

221
00:11:41,360 --> 00:11:44,679
Speaker 2: done super well. Pricing has been pushed enormously in a

222
00:11:44,720 --> 00:11:47,560
Speaker 2: lot of those issuers, and I think it's something we'd

223
00:11:47,559 --> 00:11:50,720
Speaker 2: probably seek to to steer clear of. You know, there's

224
00:11:50,760 --> 00:11:52,920
Speaker 2: there's plenty of returns to be made top of capital

225
00:11:52,920 --> 00:11:55,960
Speaker 2: structure in non sectical businesses where your ability to be

226
00:11:56,520 --> 00:12:01,280
Speaker 2: speaking in size, quick to execute, and sophisticated in your

227
00:12:01,360 --> 00:12:02,920
Speaker 2: underwright really is enough of an edge.

228
00:12:03,640 --> 00:12:05,760
Speaker 1: And when you look across the board at everything, I

229
00:12:05,760 --> 00:12:09,360
Speaker 1: mean you cover quite a broad sworth of credit globally.

230
00:12:10,160 --> 00:12:13,160
Speaker 1: Is private credit the best opportunity let's take it on

231
00:12:13,160 --> 00:12:15,960
Speaker 1: a twelve month horizon. Is that the best thing to

232
00:12:16,000 --> 00:12:16,800
Speaker 1: look at right now?

233
00:12:18,200 --> 00:12:22,079
Speaker 2: Yes, Look, there's a ton of opportunity across the credit market.

234
00:12:23,120 --> 00:12:25,240
Speaker 2: You know, there's some very interesting features to the high

235
00:12:25,280 --> 00:12:27,520
Speaker 2: your bond market in Europe, given how short dated that

236
00:12:27,559 --> 00:12:32,079
Speaker 2: market's got, So we're super engaged in looking at you know,

237
00:12:32,320 --> 00:12:34,959
Speaker 2: the names that need to refine will and won't be

238
00:12:35,000 --> 00:12:37,160
Speaker 2: able to et cetera. But if I had to pick

239
00:12:37,240 --> 00:12:40,079
Speaker 2: a single area that I think you're mental lean into

240
00:12:40,400 --> 00:12:43,360
Speaker 2: and frankly where we're seeing, where we're seeing clients lean

241
00:12:43,400 --> 00:12:45,360
Speaker 2: into as well, it is private credit.

242
00:12:45,880 --> 00:12:48,320
Speaker 1: And is it mostly in the Europe or mostly in

243
00:12:48,400 --> 00:12:51,000
Speaker 1: the US or any particular geographic focus.

244
00:12:52,720 --> 00:12:56,000
Speaker 2: No, Look, I think I think you're seeing attractive opportunities

245
00:12:56,000 --> 00:13:00,360
Speaker 2: on both sides of the Atlantic. You know, I struggle

246
00:13:00,440 --> 00:13:02,760
Speaker 2: really to differentiate in terms of there being one market

247
00:13:02,760 --> 00:13:06,559
Speaker 2: that's outright compelling versus the others. There's probably a little

248
00:13:06,559 --> 00:13:09,120
Speaker 2: bit more spread still in Europe in a lot of

249
00:13:09,160 --> 00:13:12,640
Speaker 2: private credit, but as we touched it at the beginning, that's,

250
00:13:13,080 --> 00:13:15,640
Speaker 2: you know, possibly for good reason, given slightly softer macro here.

251
00:13:15,920 --> 00:13:18,560
Speaker 2: So I don't think there's like a standout relative value

252
00:13:18,559 --> 00:13:21,000
Speaker 2: in terms of private credit product on either side of

253
00:13:21,000 --> 00:13:21,480
Speaker 2: the Atlantic.

254
00:13:22,559 --> 00:13:27,200
Speaker 3: You mentioned refinancings. So far, within this higher rate environment,

255
00:13:27,240 --> 00:13:29,160
Speaker 3: there hasn't been that much of a need because a

256
00:13:29,200 --> 00:13:33,080
Speaker 3: lot of companies pushed out maturities doing COVID and right afterwards.

257
00:13:33,440 --> 00:13:35,680
Speaker 3: But now the matuary wall is starting to build and

258
00:13:35,720 --> 00:13:37,840
Speaker 3: people are companies that are going to have to deal

259
00:13:37,880 --> 00:13:39,959
Speaker 3: with it next year and the year after. Do you

260
00:13:40,000 --> 00:13:44,160
Speaker 3: think there's enough capital and appetite to refinance all these firms?

261
00:13:44,440 --> 00:13:46,760
Speaker 3: Given the higher interest rate which seems to be staying

262
00:13:46,840 --> 00:13:50,520
Speaker 3: higher for longer, they might not be able. Many companies

263
00:13:50,559 --> 00:13:52,520
Speaker 3: might not be able to hold the debt burdens that

264
00:13:52,559 --> 00:13:54,720
Speaker 3: they have now. So can you address that a bit?

265
00:13:55,240 --> 00:13:57,400
Speaker 2: Yeah, that's what's so interesting. So if you look at

266
00:13:57,440 --> 00:13:59,760
Speaker 2: the European high yield market at the moment, it's the

267
00:13:59,760 --> 00:14:02,320
Speaker 2: short to status that's ever been. The waighted average life

268
00:14:02,480 --> 00:14:04,160
Speaker 2: of the European h how your market is about three and

269
00:14:04,200 --> 00:14:07,320
Speaker 2: a half years, So for these companies, the time really

270
00:14:07,400 --> 00:14:11,240
Speaker 2: is now. It made sense that they weren't refinancing all

271
00:14:11,280 --> 00:14:14,680
Speaker 2: that proactively, given both credit spreads and rates were higher.

272
00:14:15,120 --> 00:14:18,480
Speaker 2: But over the next couple of years, in the next

273
00:14:18,480 --> 00:14:20,560
Speaker 2: three years, fifty percent of the European high your market

274
00:14:20,560 --> 00:14:22,680
Speaker 2: has got to refinance, and they're going to refinance that

275
00:14:22,800 --> 00:14:26,400
Speaker 2: higher all in cost of funding. That's a super interesting

276
00:14:26,520 --> 00:14:30,240
Speaker 2: dynamic for us because if you're buying bonds materially below

277
00:14:30,280 --> 00:14:34,440
Speaker 2: par on average, they're taking out sixteen months ahead of maturity,

278
00:14:34,720 --> 00:14:37,480
Speaker 2: So you've got a real pull to part story there.

279
00:14:37,960 --> 00:14:40,480
Speaker 2: But you've got to get it right because some of

280
00:14:40,480 --> 00:14:42,800
Speaker 2: these companies aren't going to be able to and you

281
00:14:42,840 --> 00:14:45,680
Speaker 2: haven't got very much time, you know, if something goes wrong,

282
00:14:45,720 --> 00:14:48,080
Speaker 2: you haven't got very much time to correct your mistake

283
00:14:48,120 --> 00:14:50,640
Speaker 2: to get yourself into a refinance of our shape. So

284
00:14:50,880 --> 00:14:52,840
Speaker 2: we think there's this is why you're going to start

285
00:14:52,840 --> 00:14:56,840
Speaker 2: to see even more dispersion because the maturity is the

286
00:14:57,120 --> 00:15:01,080
Speaker 2: best catalyst for establishing whether you know credit is viable

287
00:15:01,160 --> 00:15:04,240
Speaker 2: or not. In terms of whether there's enough capital out there. Yeah,

288
00:15:04,240 --> 00:15:07,880
Speaker 2: I think there is across across private, private debt and

289
00:15:08,120 --> 00:15:11,240
Speaker 2: public markets that there's still a lot of capital. There's

290
00:15:11,240 --> 00:15:14,560
Speaker 2: an enormous amount of appetite for credit generally because of

291
00:15:14,600 --> 00:15:16,800
Speaker 2: the way risk reward has improved at the top of

292
00:15:16,840 --> 00:15:20,040
Speaker 2: the capital structure. But that's going to be pointed at

293
00:15:20,080 --> 00:15:23,560
Speaker 2: the viable businesses, the capital structures that work, and for

294
00:15:23,640 --> 00:15:27,800
Speaker 2: those who are just two levered running into refinancing, you know,

295
00:15:28,000 --> 00:15:30,400
Speaker 2: they're not all going to make it, and that kind

296
00:15:30,400 --> 00:15:33,440
Speaker 2: of catalyst the environment is something that's very invigorating for

297
00:15:33,520 --> 00:15:35,520
Speaker 2: us as a fundamental driven credit house.

298
00:15:35,880 --> 00:15:37,960
Speaker 1: So Christian. Before we talk to Matt Gooynder over at

299
00:15:38,000 --> 00:15:40,320
Speaker 1: Bloomberg Intelligence, I just kind of wanted to push a

300
00:15:40,360 --> 00:15:43,080
Speaker 1: bit on the risks. Obviously, this is a credit show.

301
00:15:43,120 --> 00:15:45,240
Speaker 1: We credit guys. We worry about stuff all the time,

302
00:15:45,280 --> 00:15:49,320
Speaker 1: and there's so much macro stress, there's so much political stress,

303
00:15:49,360 --> 00:15:53,280
Speaker 1: there's so much you know, fundamental stress. Frankly, what really

304
00:15:53,400 --> 00:15:55,840
Speaker 1: keeps you up at night worrying about credit at the moment,

305
00:15:55,880 --> 00:15:57,240
Speaker 1: what are you most concerned about?

306
00:15:58,720 --> 00:16:02,320
Speaker 2: Well, look, the the higher rates environment is part of

307
00:16:02,320 --> 00:16:05,880
Speaker 2: the opportunity here, but as Lisa just touched on it,

308
00:16:05,880 --> 00:16:08,640
Speaker 2: it's also part of the threat. You know, all these

309
00:16:08,720 --> 00:16:11,360
Speaker 2: capital structures that were put in place in a very

310
00:16:11,400 --> 00:16:15,080
Speaker 2: different rates environment and frankly speaking normally a lower spread environment,

311
00:16:15,280 --> 00:16:19,560
Speaker 2: have now got to reset their debtor. Their capital structures

312
00:16:19,760 --> 00:16:22,280
Speaker 2: at are much much higher all in interest cost. If

313
00:16:22,280 --> 00:16:25,640
Speaker 2: that's happening at a time when macro is deteriorating fast

314
00:16:25,920 --> 00:16:28,880
Speaker 2: and you're unable to improve your earnings, that obviously can

315
00:16:28,920 --> 00:16:31,560
Speaker 2: be a very uncomfortable vice that these companies are put in.

316
00:16:31,880 --> 00:16:35,160
Speaker 2: So the macro slowdown, combined with the fact that at

317
00:16:35,280 --> 00:16:38,840
Speaker 2: least so far in Europe, you haven't seen rates collapse.

318
00:16:39,720 --> 00:16:41,760
Speaker 2: Is an uncomfortable place for the market to be in.

319
00:16:41,920 --> 00:16:45,240
Speaker 2: It's providing a huge array of opportunities, it's providing great

320
00:16:45,280 --> 00:16:47,160
Speaker 2: all in returns to credit, which they say, on the

321
00:16:47,160 --> 00:16:49,960
Speaker 2: medium term we think are ultra attractive and you're meant

322
00:16:50,000 --> 00:16:52,520
Speaker 2: to be in. But you've got to be relying on

323
00:16:52,520 --> 00:16:55,200
Speaker 2: your credit selection making sure you're not going to find

324
00:16:55,200 --> 00:16:58,160
Speaker 2: yourself in one of these capital structures where with this

325
00:16:58,240 --> 00:17:00,120
Speaker 2: confluence of factors it just doesn't work inn.

326
00:17:01,000 --> 00:17:03,080
Speaker 1: So the best head is just to avoid what could

327
00:17:03,080 --> 00:17:03,520
Speaker 1: blow up.

328
00:17:04,560 --> 00:17:07,800
Speaker 2: Yeah, look, it's a glib thing to say, and you'll

329
00:17:07,840 --> 00:17:11,399
Speaker 2: always find fundamentals driven credit managers like us saying that

330
00:17:12,119 --> 00:17:15,200
Speaker 2: it's the most important thing. But it's more the most

331
00:17:15,200 --> 00:17:17,199
Speaker 2: important thing now than it has been for most of

332
00:17:17,200 --> 00:17:19,280
Speaker 2: the ten years, the last ten years. Rather because the

333
00:17:19,320 --> 00:17:22,359
Speaker 2: last ten years have seen you know, endlessly falling rates,

334
00:17:23,240 --> 00:17:27,280
Speaker 2: easy refinancing conditions, generally speaking, very tight spreads. That period

335
00:17:27,320 --> 00:17:30,520
Speaker 2: is over, so it really really matters now. And as

336
00:17:30,520 --> 00:17:32,720
Speaker 2: I said, because of the relatively short dated nature of

337
00:17:32,760 --> 00:17:35,399
Speaker 2: the market, and that's in both high yield and leverage loans.

338
00:17:36,280 --> 00:17:39,080
Speaker 2: The you know that the test of all these capital

339
00:17:39,080 --> 00:17:41,000
Speaker 2: structures is coming sooner rather than later.

340
00:17:41,960 --> 00:17:44,959
Speaker 1: Great stuff. Christram Leach, co head of European Credit at Apollo,

341
00:17:45,119 --> 00:17:46,439
Speaker 1: thank you so much for joining us.

342
00:17:46,880 --> 00:17:49,280
Speaker 2: Thank you very much, indeed, and Lisa lu.

343
00:17:49,240 --> 00:17:51,120
Speaker 1: Bloomberg News in London. Brilliant to see you again.

344
00:17:51,240 --> 00:17:53,199
Speaker 3: Cheers, thanks, bye bye.

345
00:17:54,920 --> 00:17:56,680
Speaker 1: So, as I mentioned earlier, we were joined by Matt

346
00:17:56,720 --> 00:17:59,640
Speaker 1: Ginner with Bloomberg Intelligence in New York. How's it going, Matt,

347
00:18:00,000 --> 00:18:02,640
Speaker 1: Everything's going good. Thanks for having me on again, appreciate

348
00:18:02,680 --> 00:18:04,520
Speaker 1: it great. So last time you were on the show,

349
00:18:04,520 --> 00:18:07,600
Speaker 1: we talked about revenge spending. We all did it. Maybe

350
00:18:07,640 --> 00:18:10,199
Speaker 1: it's cooling off a bit now, but today we're going

351
00:18:10,280 --> 00:18:12,639
Speaker 1: to look at pensions. Most of us have one, or

352
00:18:12,640 --> 00:18:15,359
Speaker 1: at least some kind of savings plan. But why do

353
00:18:15,440 --> 00:18:17,960
Speaker 1: we care about pensions in the context of credit Matt?

354
00:18:18,359 --> 00:18:22,000
Speaker 4: Yeah, So our team we recently did some work trying

355
00:18:22,040 --> 00:18:24,320
Speaker 4: to assess the potential impact of the surge and rates

356
00:18:24,359 --> 00:18:26,960
Speaker 4: that we've seen for companies within the S and P

357
00:18:27,040 --> 00:18:31,000
Speaker 4: five hundred, they have some of the largest underfunded pension positions,

358
00:18:31,040 --> 00:18:33,520
Speaker 4: So there's a lot of inputs that sort of get

359
00:18:33,520 --> 00:18:37,320
Speaker 4: distilled down into coming up with total assets within the pension,

360
00:18:38,080 --> 00:18:42,480
Speaker 4: total liabilities, and those assets need to fund into future.

361
00:18:42,920 --> 00:18:44,879
Speaker 4: So despite all that, there's a couple of levers that

362
00:18:44,960 --> 00:18:47,960
Speaker 4: can really get these liabilities moving one way or the other.

363
00:18:48,640 --> 00:18:51,080
Speaker 4: Those being the discount rate used to measure the pension

364
00:18:51,119 --> 00:18:54,960
Speaker 4: liabilities owed and the return on assets within the pension plan,

365
00:18:55,440 --> 00:18:58,479
Speaker 4: the difference, if any, when the liabilities exceed the pension

366
00:18:58,480 --> 00:19:01,080
Speaker 4: plan assets being referred to as the underfunded portion.

367
00:19:01,560 --> 00:19:02,960
Speaker 1: Let me just start you that because it's getting very

368
00:19:03,040 --> 00:19:05,879
Speaker 1: very technical, very very quickly break it down for us,

369
00:19:06,160 --> 00:19:09,040
Speaker 1: for those who don't know how this stuff works. How

370
00:19:09,080 --> 00:19:12,120
Speaker 1: does it work in practice? I mean, you mentioned underfunded,

371
00:19:12,480 --> 00:19:15,359
Speaker 1: You mentioned discount rate. Break it down in really basic

372
00:19:15,400 --> 00:19:15,920
Speaker 1: terms for us.

373
00:19:16,240 --> 00:19:19,320
Speaker 4: Yeah, So the mechanics of the discount rate is pretty straightforward.

374
00:19:19,359 --> 00:19:22,440
Speaker 4: So the higher the potential rate you can theoretically earn,

375
00:19:22,840 --> 00:19:26,920
Speaker 4: the lower the future payments would be, and vice versa.

376
00:19:27,080 --> 00:19:30,800
Speaker 4: So the yield on the Moody's Double A index is

377
00:19:30,840 --> 00:19:33,880
Speaker 4: what's typically used as a proxy for where discount rates

378
00:19:33,880 --> 00:19:36,800
Speaker 4: could end up when these companies snap the line or

379
00:19:36,840 --> 00:19:39,880
Speaker 4: take their measurement, which happens at year end. So we've

380
00:19:39,880 --> 00:19:44,120
Speaker 4: seen yields on the double A index continue to climb,

381
00:19:44,840 --> 00:19:46,879
Speaker 4: which started in twenty twenty one, as the FED has

382
00:19:46,920 --> 00:19:49,920
Speaker 4: aggressively raised so for contacts last year, the surgeon rates

383
00:19:50,000 --> 00:19:55,399
Speaker 4: helps drive down total underfunding by about forty percent. So

384
00:19:55,520 --> 00:19:58,199
Speaker 4: using the EQS function that we have available on the terminal,

385
00:19:58,200 --> 00:20:02,800
Speaker 4: were identified the top fIF teen most underfunded pension plans

386
00:20:02,800 --> 00:20:06,360
Speaker 4: that could stand a benefit by revising upward their discount

387
00:20:06,480 --> 00:20:09,400
Speaker 4: rate that they use to measure those liabilities. The guys

388
00:20:09,400 --> 00:20:13,920
Speaker 4: at surface to the top were ge Lockheed, Boeing, Exxon,

389
00:20:14,040 --> 00:20:17,840
Speaker 4: and AT and T. With the entirety of those underfunded

390
00:20:17,880 --> 00:20:21,280
Speaker 4: pension obligations totally about eighty five billion, and those top

391
00:20:21,320 --> 00:20:23,720
Speaker 4: fifteen comprising a little over half of that figure.

392
00:20:24,200 --> 00:20:26,320
Speaker 1: But in really basic terms of these are large companies

393
00:20:26,359 --> 00:20:28,840
Speaker 1: in the US that are basically saying to their employees

394
00:20:29,200 --> 00:20:32,120
Speaker 1: paying to some plan, and when you retire, will give

395
00:20:32,119 --> 00:20:35,360
Speaker 1: you x amount as a recurring payment over time.

396
00:20:35,520 --> 00:20:36,359
Speaker 4: That's exactly correct.

397
00:20:36,359 --> 00:20:38,600
Speaker 1: And what we're talking about is how the funds that

398
00:20:38,600 --> 00:20:42,360
Speaker 1: the companies have available in those funds in the pension pools.

399
00:20:42,480 --> 00:20:45,040
Speaker 1: I'm not going to use funds because it's confusing, is

400
00:20:45,680 --> 00:20:47,760
Speaker 1: not sufficient to cover what they need to pay in

401
00:20:47,760 --> 00:20:49,760
Speaker 1: the future, or it has not been sufficient in the past,

402
00:20:49,920 --> 00:20:51,919
Speaker 1: but now because of higher rates, they're catching.

403
00:20:51,680 --> 00:20:54,200
Speaker 4: Up, that's correct, So there would be the underfunded portion

404
00:20:54,400 --> 00:20:57,360
Speaker 4: or the shortfall, so the rise in rates would help

405
00:20:57,480 --> 00:20:59,879
Speaker 4: effectively shrink that gap.

406
00:21:00,240 --> 00:21:03,479
Speaker 1: And when rates were effectively zero for such a long time,

407
00:21:04,320 --> 00:21:06,240
Speaker 1: companies were running short by how much.

408
00:21:06,280 --> 00:21:08,160
Speaker 4: Yeah they were they were getting, they were getting pretty big.

409
00:21:08,280 --> 00:21:10,800
Speaker 4: So for that forty percent figure, that was over one

410
00:21:10,840 --> 00:21:13,879
Speaker 4: hundred and forty billion just last year. So the yield

411
00:21:13,920 --> 00:21:17,160
Speaker 4: on the double A index is hovering around six percent

412
00:21:17,240 --> 00:21:20,160
Speaker 4: right now, and that's relative to five percent to start

413
00:21:20,200 --> 00:21:23,560
Speaker 4: the year, which will provide a potential tailwind for financial

414
00:21:23,640 --> 00:21:27,199
Speaker 4: risk profiles and adjusted leverage all us being equal, And

415
00:21:27,240 --> 00:21:30,680
Speaker 4: that's important because raiders include those obligations in their deck

416
00:21:30,680 --> 00:21:33,960
Speaker 4: calculations as these are a liabilities or obligations that are owed.

417
00:21:34,800 --> 00:21:38,359
Speaker 4: So each company's sensitivity is different, so the potential upside

418
00:21:38,359 --> 00:21:41,280
Speaker 4: can vary by company. So for example, a company I

419
00:21:41,320 --> 00:21:43,640
Speaker 4: cover is Boeing, so their discount rate is about five

420
00:21:43,640 --> 00:21:46,800
Speaker 4: point four percent, so that's a little over fifty basis

421
00:21:46,840 --> 00:21:50,480
Speaker 4: points below where yields currently are with their sensitivity to

422
00:21:50,720 --> 00:21:53,240
Speaker 4: just a twenty five basis point increase in that discount

423
00:21:53,320 --> 00:21:55,640
Speaker 4: rate equivalent to an almost one point three billion dollar

424
00:21:55,720 --> 00:21:58,960
Speaker 4: improvement in underfunding. So you know, with all the puts

425
00:21:58,960 --> 00:22:01,560
Speaker 4: in takes, we calculated more and having of these liabilities

426
00:22:01,600 --> 00:22:03,960
Speaker 4: for the OEM, which given some of the issues they're

427
00:22:03,960 --> 00:22:06,520
Speaker 4: contending with now related to the max and pressure on

428
00:22:07,240 --> 00:22:09,400
Speaker 4: delivers here in near term related to the app bole

429
00:22:09,480 --> 00:22:13,040
Speaker 4: cet issue, the improvement can help drive some financial flexibility

430
00:22:13,080 --> 00:22:17,000
Speaker 4: as they look to complete rework without incurring the potential

431
00:22:17,040 --> 00:22:19,400
Speaker 4: for more negative rating activity.

432
00:22:19,680 --> 00:22:23,080
Speaker 1: Okay, so again you're throwing out indexes and double as

433
00:22:23,119 --> 00:22:24,680
Speaker 1: and that sort of thing. I'm just going to ask

434
00:22:24,720 --> 00:22:26,800
Speaker 1: the dumb question again, So why do we look at

435
00:22:26,840 --> 00:22:29,680
Speaker 1: that index particularly? Is that what the companies in their

436
00:22:29,680 --> 00:22:31,560
Speaker 1: pension plans are invested in or is that what the

437
00:22:31,600 --> 00:22:32,280
Speaker 1: companies are raising.

438
00:22:32,520 --> 00:22:34,600
Speaker 4: Yes, so it's used as a proxy for what they

439
00:22:34,600 --> 00:22:38,200
Speaker 4: could potentially earn. It's a high quality basket of bonds.

440
00:22:39,440 --> 00:22:42,360
Speaker 4: So you know, as I mentioned earlier earlier, the big

441
00:22:42,440 --> 00:22:45,440
Speaker 4: lever that they could drive underfunding wire lower also includes

442
00:22:45,480 --> 00:22:49,159
Speaker 4: those returns on pension plan assets. So those moneies are

443
00:22:49,160 --> 00:22:53,000
Speaker 4: invested in different types of assets which generate hopefully positive

444
00:22:53,000 --> 00:22:55,640
Speaker 4: returns for the year, which would in theory increase assets

445
00:22:55,680 --> 00:22:59,080
Speaker 4: and leus reduce your underfunding. So those returns could prove

446
00:22:59,119 --> 00:23:01,439
Speaker 4: more muted this year based on our analysis of a

447
00:23:01,640 --> 00:23:04,720
Speaker 4: sort of broad array of benchmark indicties with mixed performance

448
00:23:04,760 --> 00:23:07,879
Speaker 4: across various asset classes, but that would still be better

449
00:23:08,440 --> 00:23:11,160
Speaker 4: than the significantly negative returns that we saw in twenty

450
00:23:11,200 --> 00:23:13,960
Speaker 4: twenty two. So we saw that sea of red which

451
00:23:14,040 --> 00:23:16,159
Speaker 4: offset some of the benefits that were derived from the

452
00:23:16,200 --> 00:23:19,800
Speaker 4: higher discount rates, which this year may not have such

453
00:23:19,840 --> 00:23:23,920
Speaker 4: a sort of deleterious impact. So i'd highlight that you

454
00:23:24,000 --> 00:23:27,120
Speaker 4: know the discount rates pension returns, they can vary based

455
00:23:27,119 --> 00:23:30,320
Speaker 4: on asset allocations. In the case of Boeing, their investments

456
00:23:30,359 --> 00:23:33,240
Speaker 4: are heavily weighted toward fixed income at a little over

457
00:23:33,480 --> 00:23:36,280
Speaker 4: sixty percent the Moody Double A Index being a fixed

458
00:23:36,280 --> 00:23:40,639
Speaker 4: income INDUSICY and equities near fifteen percent, private equity and

459
00:23:40,680 --> 00:23:43,920
Speaker 4: real estate each under ten percent, and head funds the remainder,

460
00:23:44,000 --> 00:23:46,920
Speaker 4: whereas a guy like AT and T, who was also

461
00:23:46,960 --> 00:23:50,159
Speaker 4: in the list, is weighted forty five percent towards fixed income,

462
00:23:50,560 --> 00:23:53,760
Speaker 4: eleven percent equities, thirty percent between real estate and private equity,

463
00:23:53,760 --> 00:23:56,560
Speaker 4: and the remainder is sort of a hodgepodge of different

464
00:23:57,320 --> 00:23:58,800
Speaker 4: asset holdings and.

465
00:23:58,760 --> 00:24:02,560
Speaker 1: When in the past these pension funds were actually running

466
00:24:03,119 --> 00:24:06,280
Speaker 1: underfunded and there was a big gap. How much was

467
00:24:06,320 --> 00:24:09,520
Speaker 1: the credit market penalizing them for that? Did it matter?

468
00:24:10,640 --> 00:24:13,080
Speaker 4: It does matter for some of the some of the

469
00:24:13,880 --> 00:24:17,000
Speaker 4: bigger guys, because obviously, at least from a credit standpoint,

470
00:24:17,040 --> 00:24:21,399
Speaker 4: you know, if you hypothetically had a bankruptcy, these obligations

471
00:24:21,400 --> 00:24:24,119
Speaker 4: would be sort of perry pursue with senior and scure bondholders,

472
00:24:24,160 --> 00:24:26,400
Speaker 4: which is sort of our bread and butter here at

473
00:24:26,760 --> 00:24:29,280
Speaker 4: BI Credit. So you know, that's definitely something that you

474
00:24:29,320 --> 00:24:31,760
Speaker 4: need to keep an eye on to understand that those

475
00:24:31,800 --> 00:24:35,080
Speaker 4: are also technically creditors of the company outside of just

476
00:24:35,119 --> 00:24:37,119
Speaker 4: what you would traditionally think of as a bondholder or

477
00:24:37,160 --> 00:24:38,160
Speaker 4: somebody who has loans.

478
00:24:38,560 --> 00:24:40,000
Speaker 1: So when you flip it now and you're looking at

479
00:24:40,000 --> 00:24:43,720
Speaker 1: the gap closing, how much are credit markets rewarding these

480
00:24:43,720 --> 00:24:45,080
Speaker 1: companies that are closing that gap.

481
00:24:47,520 --> 00:24:50,399
Speaker 4: That's a good question. It couldn't. I can't pinpoint it

482
00:24:50,440 --> 00:24:53,480
Speaker 4: down to an exact sort of science.

483
00:24:53,880 --> 00:24:56,040
Speaker 1: Is there relative value though in the companies that are

484
00:24:56,040 --> 00:24:59,199
Speaker 1: benefiting most potentially, you know, they have less of a

485
00:24:59,280 --> 00:25:01,840
Speaker 1: risk because they're to funk outs have been closed, Therefore

486
00:25:01,840 --> 00:25:04,000
Speaker 1: they are for better value potentially.

487
00:25:04,560 --> 00:25:08,080
Speaker 4: Well, certainly from a credit standpoint, because you would certainly

488
00:25:08,119 --> 00:25:11,280
Speaker 4: be improving your financial risk profile all else equally, you

489
00:25:11,280 --> 00:25:16,080
Speaker 4: would have lower adjusted leverage, all sort of driving relative

490
00:25:16,160 --> 00:25:18,680
Speaker 4: value views on some of the bonds, as those would

491
00:25:18,720 --> 00:25:21,680
Speaker 4: be obligations that were once larger are now smaller.

492
00:25:22,080 --> 00:25:24,119
Speaker 1: So higher rates are actually good. I mean, they've been

493
00:25:24,119 --> 00:25:26,640
Speaker 1: hammering bonds across the board because of duration, but higher

494
00:25:26,680 --> 00:25:30,479
Speaker 1: rates in this context are actually good for some companies.

495
00:25:30,560 --> 00:25:33,240
Speaker 4: Or the silver lining behind the surgeon rates that we've

496
00:25:33,280 --> 00:25:35,440
Speaker 4: seen ysa shrinking of these liabilities.

497
00:25:35,600 --> 00:25:37,000
Speaker 1: You mentioned a few of them, Are there any other

498
00:25:37,080 --> 00:25:37,920
Speaker 1: names that stand out?

499
00:25:38,960 --> 00:25:41,880
Speaker 4: So Steve Flynn, who's part of our team, our TMT team,

500
00:25:41,880 --> 00:25:45,199
Speaker 4: put together some work looking at relative impacts within the

501
00:25:45,240 --> 00:25:47,520
Speaker 4: TMT space, so AT and T could stand up benefit

502
00:25:47,560 --> 00:25:50,680
Speaker 4: as obligations owed at year end were the highest with

503
00:25:50,760 --> 00:25:52,960
Speaker 4: Intel co and that account for forty five percent of

504
00:25:52,960 --> 00:25:58,080
Speaker 4: the sector itself, with leverage ratios inclusive of pension shortfalls

505
00:25:58,080 --> 00:26:00,600
Speaker 4: having the biggest potential impacts for guys he covers like

506
00:26:00,640 --> 00:26:06,280
Speaker 4: Paramount or Lumen given their relatively lower absolute ebitabase and

507
00:26:06,640 --> 00:26:09,879
Speaker 4: Mike Campalone, who's part of our consumer team, rates to

508
00:26:09,880 --> 00:26:12,520
Speaker 4: guys like Kroger and Albertson's, which have a pending acquisition

509
00:26:12,600 --> 00:26:17,959
Speaker 4: in both maintaining significant multi employer pension plans as well

510
00:26:17,960 --> 00:26:21,280
Speaker 4: as some shelf insurance liabilities and some leases, which altogether

511
00:26:21,400 --> 00:26:24,920
Speaker 4: can increase the adjusted debt that raiders look at by

512
00:26:24,920 --> 00:26:27,320
Speaker 4: over eight billion, So we could see some potential improvement

513
00:26:27,359 --> 00:26:30,960
Speaker 4: there in terms of those adjusted figures. So hopefully that

514
00:26:31,000 --> 00:26:34,359
Speaker 4: gives a little bit of flavor to everyone listening on

515
00:26:34,560 --> 00:26:36,960
Speaker 4: the importance of looking at the ads and rates and

516
00:26:37,320 --> 00:26:39,840
Speaker 4: the potential impact on financial risk profiles.

517
00:26:39,920 --> 00:26:42,440
Speaker 1: Yeah, and this closing of the gap, does it continue

518
00:26:42,520 --> 00:26:43,160
Speaker 1: at this pace?

519
00:26:44,119 --> 00:26:46,160
Speaker 4: If you have higher for longer? That's would certainly mean

520
00:26:46,200 --> 00:26:49,040
Speaker 4: that the rates that you set can sort of be

521
00:26:49,080 --> 00:26:51,480
Speaker 4: a more steady state. But well, I guess we'll have

522
00:26:51,480 --> 00:26:53,840
Speaker 4: to see what the what the future brings through through

523
00:26:53,880 --> 00:26:54,520
Speaker 4: mid decade.

524
00:26:54,760 --> 00:26:56,919
Speaker 1: Okay, So just to wrap things up, Mat, I mean,

525
00:26:56,960 --> 00:26:58,960
Speaker 1: what else are you looking at right now? You cover

526
00:26:59,000 --> 00:27:00,919
Speaker 1: a huge range of industry, But what else should we

527
00:27:00,960 --> 00:27:02,720
Speaker 1: be paying attention to? What's on your radar?

528
00:27:04,240 --> 00:27:05,959
Speaker 4: What else is on my radar right now? I mean,

529
00:27:06,000 --> 00:27:08,840
Speaker 4: we're sort of in the thick of it with earnings.

530
00:27:08,840 --> 00:27:11,520
Speaker 4: So I think one of the more interesting stories is

531
00:27:11,560 --> 00:27:15,120
Speaker 4: the sort of retheon and the large defunded buyback that's

532
00:27:15,400 --> 00:27:16,960
Speaker 4: sort of doing so. I would expect them to be

533
00:27:16,960 --> 00:27:19,480
Speaker 4: coming to market here pretty soon to sort of turn

534
00:27:19,520 --> 00:27:21,920
Speaker 4: out the bridge loan that they took out as part

535
00:27:21,960 --> 00:27:25,160
Speaker 4: of their accelerated cherry purchases. They sort of grind through

536
00:27:25,240 --> 00:27:28,399
Speaker 4: the powdered metal contaminant issue that's sort of grounding some

537
00:27:28,440 --> 00:27:31,280
Speaker 4: of the GTF engines and accelerating some of those infections.

538
00:27:31,359 --> 00:27:34,679
Speaker 4: So it's probably one of the more interesting stories going on.

539
00:27:34,920 --> 00:27:38,199
Speaker 1: But raising debt to payback stockholders. That's not good for

540
00:27:38,240 --> 00:27:38,919
Speaker 1: the bonds, is it.

541
00:27:39,320 --> 00:27:42,480
Speaker 4: No, Generally, that's not a good thing. That's why the

542
00:27:42,840 --> 00:27:46,880
Speaker 4: BAA one tile plus ratings are now moved to negative

543
00:27:46,880 --> 00:27:50,639
Speaker 4: outlook to and to ensure that the GTF issues don't

544
00:27:51,040 --> 00:27:56,440
Speaker 4: materially spread beyond what's already assumed and more importantly that ratheon.

545
00:27:56,520 --> 00:27:58,879
Speaker 4: When they accelerate these cherry purchases, they'll turn around and

546
00:27:58,920 --> 00:28:01,840
Speaker 4: then deleverage the balance sheet through mid decade, in line

547
00:28:01,880 --> 00:28:04,520
Speaker 4: with what is sort of expected by both Moodies and

548
00:28:04,640 --> 00:28:04,960
Speaker 4: S and P.

549
00:28:05,240 --> 00:28:06,919
Speaker 1: Do we worry about a downgrade for them in the

550
00:28:06,920 --> 00:28:07,600
Speaker 1: short term?

551
00:28:08,200 --> 00:28:10,639
Speaker 4: In down grade, they've already gone to negative outlooks, So

552
00:28:10,680 --> 00:28:13,720
Speaker 4: I think right now they're probably okay. I think it

553
00:28:13,800 --> 00:28:18,040
Speaker 4: really becomes a question of funding mix when they turn

554
00:28:18,119 --> 00:28:20,680
Speaker 4: out the bridge one that they have, how much short

555
00:28:20,760 --> 00:28:24,080
Speaker 4: term debt do they expect to have in order to

556
00:28:24,119 --> 00:28:26,960
Speaker 4: pull a lever to be able to deleverage the balance

557
00:28:27,000 --> 00:28:29,680
Speaker 4: sheet and have absolute production. Some moody is expecting somewhere

558
00:28:29,680 --> 00:28:33,399
Speaker 4: around five billion dollars, which would be half of what

559
00:28:33,440 --> 00:28:36,720
Speaker 4: the total ASR is. And then you have some maturities

560
00:28:36,760 --> 00:28:39,840
Speaker 4: which is a little around three billion dollars, but they

561
00:28:39,880 --> 00:28:42,000
Speaker 4: could also pay down. And there also have some pending

562
00:28:42,320 --> 00:28:44,360
Speaker 4: asset sales which could bring in another three billion in

563
00:28:44,360 --> 00:28:47,200
Speaker 4: pro seeds. So they certainly have levers that they could

564
00:28:47,760 --> 00:28:50,280
Speaker 4: put in place and then pull to de leverage of

565
00:28:50,280 --> 00:28:52,959
Speaker 4: balance sheet. It's a matter of the magnitude and how

566
00:28:53,040 --> 00:28:54,840
Speaker 4: quickly they want to want to do it.

567
00:28:55,240 --> 00:28:57,400
Speaker 1: We'll definitely be keeping an eye on raytheon and we'll

568
00:28:57,440 --> 00:28:59,920
Speaker 1: be keeping an eye on your research and analysis. Mac

569
00:29:00,040 --> 00:29:01,840
Speaker 1: pointed with Bloomberg Intlligence in New York. Thank you so

570
00:29:01,920 --> 00:29:04,040
Speaker 1: much for joining us, Thanks for hammer appreciate it. Look

571
00:29:04,040 --> 00:29:05,760
Speaker 1: forward to having you back on the show very soon.

572
00:29:06,480 --> 00:29:08,719
Speaker 1: And thanks again to Tristram Leach with Apollo, as well

573
00:29:08,720 --> 00:29:11,320
Speaker 1: as Lisa Lee from Bloomberg News. Read all of Lisa's

574
00:29:11,360 --> 00:29:15,160
Speaker 1: great credit scoops on the terminal and at Bloomberg dot com,

575
00:29:15,200 --> 00:29:17,680
Speaker 1: and please do subscribe wherever you get your podcasts. We're

576
00:29:17,680 --> 00:29:21,240
Speaker 1: on Apple, Google and Spotify. Give us a review, tell

577
00:29:21,280 --> 00:29:24,000
Speaker 1: your friends, or email me directly at Jcromb eight at

578
00:29:24,040 --> 00:29:27,040
Speaker 1: Bloomberg dot net. That's j c R O M B

579
00:29:27,200 --> 00:29:29,400
Speaker 1: I E as in my surname and the number eight

580
00:29:29,440 --> 00:29:32,920
Speaker 1: at Bloomberg dot net. I'm James Crombie. It's been a

581
00:29:32,920 --> 00:29:35,280
Speaker 1: pleasure having you join us again next week on the

582
00:29:35,320 --> 00:29:36,680
Speaker 1: Credit Edge