WEBVTT - Apollo Says Lean In to Private Debt; Pensions Boost 0:00:18.200 --> 0:00:21.040 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:21.320 --> 0:00:23.960 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:24.480 --> 0:00:27.360 This week, we're very pleased to welcome Tristram Leech, co 0:00:27.440 --> 0:00:29.160 head of European Credit at Apollo. 0:00:29.440 --> 0:00:31.840 How are you, Tristram, I'm great, Thank you, Thanks very 0:00:31.920 --> 0:00:32.559 much for having me. 0:00:33.080 --> 0:00:34.960 Thank you very much for joining us today. We're also 0:00:35.080 --> 0:00:37.600 delighted to welcome back Lisa Lee, who covers credit markets 0:00:37.600 --> 0:00:39.200 from London. Great to see Lisa. 0:00:40.120 --> 0:00:41.600 Great to talk to you too, James. 0:00:42.720 --> 0:00:44.040 Also on the show, we're going to be talking to 0:00:44.120 --> 0:00:47.080 Matt Goyner at Bloomberg Intelligence about high rates are actually 0:00:47.080 --> 0:00:50.360 good for some companies, so do stay with us. But first, 0:00:50.760 --> 0:00:53.120 Christram Leach with Apollo, it's great to have you on 0:00:53.159 --> 0:00:56.040 the Credit Edge. You're based in London, you cover global credit, 0:00:56.160 --> 0:00:58.920 and then since you're there in Europe, I just thought 0:00:58.920 --> 0:01:00.960 we'd start there. So I'm going to start with a 0:01:01.000 --> 0:01:03.800 question about European credit. When we look at the years 0:01:03.840 --> 0:01:07.280 so far, it has been pretty dire for the most 0:01:07.280 --> 0:01:10.800 of the world's investment grade bonds. The US is headed 0:01:10.800 --> 0:01:13.360 for its third straight year of losses, which has never 0:01:13.360 --> 0:01:15.560 happened before. When we look at our fifty year history 0:01:15.560 --> 0:01:19.360 on our index, and that's mostly your rates issue. Obviously, 0:01:19.520 --> 0:01:22.000 you know, we don't expect Amazon to default on their debt, 0:01:22.040 --> 0:01:24.039 although some of their bonds are trading in the fifties 0:01:24.080 --> 0:01:27.760 so they look pretty stressed. Junk bonds have done better, 0:01:27.880 --> 0:01:30.160 especially the riskiest ones, unless you're in China, when you 0:01:30.720 --> 0:01:32.640 would have lost a lot of money this year. But 0:01:32.720 --> 0:01:35.560 when we look at Europe, it's really surprising to me 0:01:35.560 --> 0:01:37.960 that it's done so well across the board. If you'd 0:01:38.000 --> 0:01:41.320 invested in corporate bonds there and not in the US, 0:01:41.840 --> 0:01:44.839 you would have made much more money this year than 0:01:44.880 --> 0:01:47.800 anywhere else, even though the economies over there seem to 0:01:47.800 --> 0:01:50.640 be in poor shape generally speaking, and although you do 0:01:50.680 --> 0:01:54.560 seem to be doing a bit better on inflation. And 0:01:54.640 --> 0:01:57.200 I know that index is higher quality, but how has 0:01:57.240 --> 0:01:59.640 it done so much better Tristram than other parts of 0:01:59.680 --> 0:01:59.920 the world. 0:02:00.800 --> 0:02:02.880 Yeah, I guess there's a couple of things going on here. 0:02:03.800 --> 0:02:04.000 Look. 0:02:04.040 --> 0:02:06.440 Firstly, risk assets had that big rally in the early 0:02:06.480 --> 0:02:10.359 part of the year. Some of it's been given back, 0:02:10.440 --> 0:02:13.959 but spreads have been pretty contained in their moves all year, 0:02:14.720 --> 0:02:18.040 and rates have outperformed their US counterparts. Even though we've 0:02:18.040 --> 0:02:22.840 seen obviously weakening in rates globally, you know, the European 0:02:22.840 --> 0:02:25.960 picture is one that's been better, partly because we have 0:02:26.080 --> 0:02:30.040 seen some more softening and inflation data here in Europe. 0:02:30.280 --> 0:02:34.960 So when you look at europe credit generally, does this 0:02:35.240 --> 0:02:36.639 kind of out performance continue. 0:02:37.600 --> 0:02:40.160 Look, I think we think all in returns to credit 0:02:40.639 --> 0:02:46.079 are pretty great. Break evens are very very high, so 0:02:46.280 --> 0:02:49.320 it's relatively hard to visit yourself losing money in the 0:02:49.360 --> 0:02:53.080 medium term in credit. We like many other market participants, 0:02:53.120 --> 0:02:55.280 have been really forthcoming. I think that we think this 0:02:55.360 --> 0:02:57.680 is a great time to be engaged in the credit market, 0:02:57.720 --> 0:03:00.440 and we're hearing that from a lot of our ourps, 0:03:00.480 --> 0:03:03.640 our customers, you know, who are seeking to allocate money 0:03:03.639 --> 0:03:06.440 into credit. That being said, I don't think we think 0:03:06.480 --> 0:03:10.680 spreads are screaming by here. You've seen a little bit 0:03:10.720 --> 0:03:13.760 more weakness in kind of single bees, etc. In Europe 0:03:13.840 --> 0:03:17.440 versus the US, but economic data is slowing pretty fast, 0:03:17.520 --> 0:03:21.079 especially in Europe, so I think there's the scope for 0:03:21.280 --> 0:03:26.760 a little bit of spread weakness, possibly counterbalanced by more 0:03:26.800 --> 0:03:27.840 performance and rates. 0:03:28.560 --> 0:03:31.519 So you overseee a whole swath of different kinds of 0:03:31.600 --> 0:03:34.360 credit when you look at the relative value, where do 0:03:34.400 --> 0:03:39.080 you see the best buy in Europe versus US IG 0:03:39.440 --> 0:03:43.120 junk private clos One of the. 0:03:43.040 --> 0:03:46.640 Things we've been I think pretty forthcoming about is that 0:03:47.720 --> 0:03:51.040 private credit is generally offering a really attractive pickup to 0:03:51.520 --> 0:03:54.040 syndicate it in public markets at the moment. If you 0:03:54.120 --> 0:03:59.160 look at where the European syndicated loan market is currently trading, 0:03:59.800 --> 0:04:02.680 and you look at where similar quality credit is pricing 0:04:02.800 --> 0:04:06.520 in the unitranch, you know, private debt market, that pickup 0:04:06.600 --> 0:04:10.240 is really striking. For very similar quality companies. You're getting 0:04:10.240 --> 0:04:12.880 a material spread pickup, and obviously the all in returns 0:04:13.400 --> 0:04:16.160 is very very attractive. So that's certainly something we'd call 0:04:16.200 --> 0:04:20.279 out as a very attractive relative value. I think the 0:04:20.320 --> 0:04:22.800 relative value piece of cross geographies is a little bit 0:04:22.960 --> 0:04:26.840 more nuanced. You know, there's a little bit more spread 0:04:27.200 --> 0:04:31.320 at a given level of credit quality in Europe versus 0:04:31.360 --> 0:04:36.280 the US. However, the European growth data has been you know, 0:04:36.720 --> 0:04:40.440 really slowing very fast. It's pretty eye catching how rapidly 0:04:40.480 --> 0:04:42.960 we're seeing Europe slow down, and so I think that 0:04:43.040 --> 0:04:45.080 probably does argue that you need a little bit more 0:04:45.080 --> 0:04:48.640 spread to compensate you for a more challenged economy. 0:04:49.520 --> 0:04:52.039 Do you think there kindly does to be slowing down, 0:04:52.240 --> 0:04:55.200 which suggests to me that there might be more defaults 0:04:55.200 --> 0:04:59.800 coming up. Do you feel like that's correctly priced in 0:04:59.800 --> 0:05:02.400 in especially in the high yield and leavised loan markets. 0:05:02.880 --> 0:05:05.720 And also what do you think about recoveries, because they've 0:05:05.720 --> 0:05:08.800 been pretty drastically low in the US but a bit 0:05:08.880 --> 0:05:09.919 higher in Europe. 0:05:10.560 --> 0:05:14.840 So as to whether the future default environment is appropriately priced, 0:05:14.839 --> 0:05:19.080 I think, you know, it's implied by the fact that 0:05:19.120 --> 0:05:20.680 you know, we think there's probably room for spreads to 0:05:20.720 --> 0:05:23.000 widen a little bit here, that it's it's possibly not 0:05:23.040 --> 0:05:28.400 as fully priced as it might be. You know, you 0:05:28.480 --> 0:05:30.839 look around the cell side and strategists, I think most 0:05:30.839 --> 0:05:33.520 people are calling for a pickup in in defaults given 0:05:33.560 --> 0:05:36.039 the higher rate environment, and given the slowing we're seeing 0:05:36.080 --> 0:05:38.880 in macro, it would be somewhat surprising with that not 0:05:39.040 --> 0:05:41.680 to eventuate. I think we've certainly been calling for and 0:05:41.720 --> 0:05:45.400 seeing more dispersion in credit outcomes. You know, you've now 0:05:45.480 --> 0:05:47.719 got a market where you know, there's really a real 0:05:47.760 --> 0:05:50.440 sense of winners and losers, and obviously some of those 0:05:50.480 --> 0:05:53.039 losers are gonna gonna tip over the edge into defaults, 0:05:53.080 --> 0:05:55.560 So it makes sense to me that directionally you're probably 0:05:55.600 --> 0:05:58.279 going to see a little bit more in terms of 0:05:58.600 --> 0:06:02.560 in terms of recoveries. Yes, we've seen lower recoveries at 0:06:02.560 --> 0:06:04.440 the moment, the sample size we're dealing with is still 0:06:04.480 --> 0:06:07.080 pretty small, right, We're still in the early stages, so 0:06:07.160 --> 0:06:11.039 it's relatively hard to draw super firm conclusions about why 0:06:11.040 --> 0:06:13.400 those recoveries are lower and how durable that's likely to be. 0:06:13.880 --> 0:06:16.800 Look across the Atlantic, we've definitely seen more of these 0:06:16.800 --> 0:06:20.240 aggressive liability management exercises going on, which are going to 0:06:20.360 --> 0:06:24.880 tend to depress recoveries. In Europe that hasn't as yet 0:06:24.960 --> 0:06:28.200 been a material feature of the market, and all things equal, 0:06:28.279 --> 0:06:30.920 can can militate for recoveries being a little bit better 0:06:30.920 --> 0:06:31.799 on the side of the Atlantic. 0:06:32.960 --> 0:06:35.640 On the private credit side, though, Tristan, you mentioned the 0:06:35.640 --> 0:06:38.200 big yield pick up there, We've had people tell us 0:06:38.240 --> 0:06:40.360 that it's not enough to compensate for the lack of 0:06:40.440 --> 0:06:43.839 transparency and the potential increase to fault risk, and you know, 0:06:43.839 --> 0:06:45.839 you just don't know what's going on there. Can you 0:06:45.920 --> 0:06:47.800 kind of put some numbers on it? Can you quantify 0:06:47.920 --> 0:06:51.000 like how much more of a pickup, how much more 0:06:51.040 --> 0:06:53.320 compensation are you getting for that extra risk. 0:06:54.560 --> 0:06:58.240 Yeah, Look, i'd say the way i'd i'd look at 0:06:58.240 --> 0:07:00.480 at the moment as follows. I think your proper looking 0:07:00.480 --> 0:07:05.240 at a four fifty market for a for a standard 0:07:05.279 --> 0:07:08.640 syndicated single B so four to fifty in spread, and 0:07:08.680 --> 0:07:12.200 you're looking at six twenty five six fifty maybe for 0:07:12.280 --> 0:07:16.600 similar quality corporates in the in the private debt market. 0:07:16.840 --> 0:07:19.200 So to the extent you can perform like for like, 0:07:19.280 --> 0:07:23.080 and it's challenging because there are reasons companies are going 0:07:23.080 --> 0:07:24.920 one route or the other. But to the extent you 0:07:24.920 --> 0:07:26.680 can do like for like, I think you're probably getting 0:07:26.680 --> 0:07:29.400 almost two hundred basis points of pickup for being on 0:07:29.440 --> 0:07:31.200 the on the private side of things, which for us 0:07:31.200 --> 0:07:36.600 feels ample compensation when additionally you're generally getting slightly better documentation, 0:07:36.840 --> 0:07:40.240 you're close to it, you have a real bilateral dialogue 0:07:40.240 --> 0:07:42.760 with the issuer and the sponsor. You know, that's a 0:07:42.800 --> 0:07:45.800 pretty compelling setup for US versus being in a super 0:07:45.840 --> 0:07:48.080 loosely documented syndicated loan, and. 0:07:48.000 --> 0:07:49.920 The relative liquidity doesn't bother you. 0:07:52.320 --> 0:07:54.000 Look, obviously, that's part of what you're getting paid for. 0:07:54.920 --> 0:07:57.600 It's a much less liquid product or even a wholey 0:07:57.680 --> 0:08:02.160 liquid product. But when you put your credit underwriting at 0:08:02.160 --> 0:08:03.960 the center of your process in the way we do, 0:08:04.520 --> 0:08:06.640 you know we have the confidence in our credit views 0:08:06.680 --> 0:08:08.680 and to lean into them. And when we're getting two 0:08:08.800 --> 0:08:10.840 hundred basis points that a pick up to give up 0:08:10.880 --> 0:08:14.600 liquidity in something which we've underwritten and we're super confident in, 0:08:14.680 --> 0:08:17.440 then you know that's something that is a trade that 0:08:17.480 --> 0:08:18.680 I think you're meant to do. 0:08:20.000 --> 0:08:23.040 These private credit deals are getting larger and larger in Europe. 0:08:23.040 --> 0:08:25.640 We have one that could possibly be the biggest ever 0:08:25.720 --> 0:08:29.040 in this market. As these loans get bigger, do you 0:08:29.080 --> 0:08:33.880 worry that there'll be a confluence between leverage loans and 0:08:33.920 --> 0:08:37.360 some of the documentations will weaken, some of the terms 0:08:37.400 --> 0:08:42.120 will weaken, or do you think there's still a differentiation. 0:08:43.160 --> 0:08:45.920 There's still a delta for sure at the moment between 0:08:45.960 --> 0:08:49.840 the terms you're getting in even the large UNITRNE and 0:08:50.080 --> 0:08:53.800 direct lending deals versus where the syndicated market is. So 0:08:54.679 --> 0:08:59.040 that convergence hasn't happened yet. I think it's true that 0:08:59.160 --> 0:09:02.480 the two markets are coming closer together. You know, you're 0:09:02.520 --> 0:09:05.520 seeing a direct lending market that's able to speak for 0:09:05.559 --> 0:09:09.840 bigger and bigger deals is able to you know, price 0:09:10.040 --> 0:09:14.440 really material slugs of debt, and you know, is another 0:09:14.520 --> 0:09:18.319 option for all but the very very largest companies. So 0:09:18.640 --> 0:09:21.240 I think we're seeing the syndicated and direct lending markets 0:09:21.360 --> 0:09:24.040 coming closer together. The way we've set up our credit 0:09:24.040 --> 0:09:26.800 business in Europe is really allowing us to pivot with 0:09:26.840 --> 0:09:29.760 issuers between the two. So if you look at some 0:09:29.920 --> 0:09:32.439 of the biggest financings we've done on both sides of 0:09:32.440 --> 0:09:34.760 the Atlantic this year, they've been in kind of public 0:09:34.800 --> 0:09:38.679 private structures, So deals like the as the deal that 0:09:39.040 --> 0:09:41.520 we did here in Europe that was a direct piece 0:09:41.559 --> 0:09:44.120 of financing. But for a company with a high your 0:09:44.160 --> 0:09:45.800 bond curve, I think you're going to see more and 0:09:45.800 --> 0:09:47.640 more of that, and I think setting up your business 0:09:47.640 --> 0:09:50.400 to be able to pivot with issuers between the multiple 0:09:50.440 --> 0:09:54.319 sources of funding is a really compelling offering to partner 0:09:54.400 --> 0:09:55.760 with them. 0:09:55.960 --> 0:09:59.400 Private credit really is the hot thing this year. People 0:09:59.440 --> 0:10:01.880 are talking about the Golden Age and we just tell 0:10:01.920 --> 0:10:04.160 a story. We're showing showing that, you know, there's five 0:10:04.240 --> 0:10:06.679 hundred billion dollars of new money raised for it and 0:10:07.080 --> 0:10:09.560 not a lot to buy. How do you kind of 0:10:09.840 --> 0:10:12.439 find opportunities and do you have a kind of sector focus. 0:10:12.520 --> 0:10:14.040 I mean, do you have anything you particularly like at 0:10:14.040 --> 0:10:15.400 the moment in terms of sector. 0:10:17.640 --> 0:10:20.160 So, look, we definitely agree it's a golden age. I 0:10:20.200 --> 0:10:22.640 think there's a few nuances in terms of the way 0:10:22.679 --> 0:10:24.320 we look at private credit versus a lot. 0:10:24.240 --> 0:10:24.840 Of our peers. 0:10:25.679 --> 0:10:28.360 You know, you'll have heard our CEO, Mark Rowan talking 0:10:28.400 --> 0:10:31.040 about the way we think of private credit not just 0:10:31.080 --> 0:10:34.840 in terms of financing LBOs, but but really a much 0:10:34.880 --> 0:10:38.800 broader opportunity set, so including lots and lots of investment 0:10:38.840 --> 0:10:42.199 grade opportunities. If you look at investment grade issuers in Europe, 0:10:42.200 --> 0:10:44.640 a lot of them are looking to diversify their funding 0:10:44.679 --> 0:10:48.800 sources away from the bond market. You look at it 0:10:48.880 --> 0:10:52.640 deals like the deal we did with Venovia in the 0:10:52.800 --> 0:10:55.720 in the spring of this year, where you know, the 0:10:55.760 --> 0:10:59.600 company had really good assets but was seeking to protect 0:10:59.600 --> 0:11:03.400 its rate and by speaking you know, in scale and 0:11:03.440 --> 0:11:06.559 being thoughtful around structure, we were able to do something 0:11:06.559 --> 0:11:09.280 which was protective to their rating and you know, very 0:11:09.360 --> 0:11:11.880 very attractive for us. So I think that's really an 0:11:11.880 --> 0:11:14.559 important angle for us in terms of what we look 0:11:14.600 --> 0:11:17.720 to do in private credit rather than exclusively in the 0:11:18.360 --> 0:11:22.920 in the kind of traditional unit change space in terms 0:11:22.920 --> 0:11:26.240 of sectors. Look, it's it's probably a bit a bit 0:11:26.240 --> 0:11:28.839 glib and interesting to say that with macro data slowing 0:11:28.880 --> 0:11:31.600 the way it is, we're steering clear of anything that's 0:11:31.600 --> 0:11:34.760 going to cycle super hard. For example, a lot of 0:11:34.800 --> 0:11:38.440 the post COVID winners, you know, the travel, the revenge 0:11:38.480 --> 0:11:41.080 travel dynamic, you saw, a lot of that stuff has 0:11:41.360 --> 0:11:44.679 done super well. Pricing has been pushed enormously in a 0:11:44.720 --> 0:11:47.560 lot of those issuers, and I think it's something we'd 0:11:47.559 --> 0:11:50.720 probably seek to to steer clear of. You know, there's 0:11:50.760 --> 0:11:52.920 there's plenty of returns to be made top of capital 0:11:52.920 --> 0:11:55.960 structure in non sectical businesses where your ability to be 0:11:56.520 --> 0:12:01.280 speaking in size, quick to execute, and sophisticated in your 0:12:01.360 --> 0:12:02.920 underwright really is enough of an edge. 0:12:03.640 --> 0:12:05.760 And when you look across the board at everything, I 0:12:05.760 --> 0:12:09.360 mean you cover quite a broad sworth of credit globally. 0:12:10.160 --> 0:12:13.160 Is private credit the best opportunity let's take it on 0:12:13.160 --> 0:12:15.960 a twelve month horizon. Is that the best thing to 0:12:16.000 --> 0:12:16.800 look at right now? 0:12:18.200 --> 0:12:22.079 Yes, Look, there's a ton of opportunity across the credit market. 0:12:23.120 --> 0:12:25.240 You know, there's some very interesting features to the high 0:12:25.280 --> 0:12:27.520 your bond market in Europe, given how short dated that 0:12:27.559 --> 0:12:32.079 market's got, So we're super engaged in looking at you know, 0:12:32.320 --> 0:12:34.959 the names that need to refine will and won't be 0:12:35.000 --> 0:12:37.160 able to et cetera. But if I had to pick 0:12:37.240 --> 0:12:40.079 a single area that I think you're mental lean into 0:12:40.400 --> 0:12:43.360 and frankly where we're seeing, where we're seeing clients lean 0:12:43.400 --> 0:12:45.360 into as well, it is private credit. 0:12:45.880 --> 0:12:48.320 And is it mostly in the Europe or mostly in 0:12:48.400 --> 0:12:51.000 the US or any particular geographic focus. 0:12:52.720 --> 0:12:56.000 No, Look, I think I think you're seeing attractive opportunities 0:12:56.000 --> 0:13:00.360 on both sides of the Atlantic. You know, I struggle 0:13:00.440 --> 0:13:02.760 really to differentiate in terms of there being one market 0:13:02.760 --> 0:13:06.559 that's outright compelling versus the others. There's probably a little 0:13:06.559 --> 0:13:09.120 bit more spread still in Europe in a lot of 0:13:09.160 --> 0:13:12.640 private credit, but as we touched it at the beginning, that's, 0:13:13.080 --> 0:13:15.640 you know, possibly for good reason, given slightly softer macro here. 0:13:15.920 --> 0:13:18.560 So I don't think there's like a standout relative value 0:13:18.559 --> 0:13:21.000 in terms of private credit product on either side of 0:13:21.000 --> 0:13:21.480 the Atlantic. 0:13:22.559 --> 0:13:27.200 You mentioned refinancings. So far, within this higher rate environment, 0:13:27.240 --> 0:13:29.160 there hasn't been that much of a need because a 0:13:29.200 --> 0:13:33.080 lot of companies pushed out maturities doing COVID and right afterwards. 0:13:33.440 --> 0:13:35.680 But now the matuary wall is starting to build and 0:13:35.720 --> 0:13:37.840 people are companies that are going to have to deal 0:13:37.880 --> 0:13:39.959 with it next year and the year after. Do you 0:13:40.000 --> 0:13:44.160 think there's enough capital and appetite to refinance all these firms? 0:13:44.440 --> 0:13:46.760 Given the higher interest rate which seems to be staying 0:13:46.840 --> 0:13:50.520 higher for longer, they might not be able. Many companies 0:13:50.559 --> 0:13:52.520 might not be able to hold the debt burdens that 0:13:52.559 --> 0:13:54.720 they have now. So can you address that a bit? 0:13:55.240 --> 0:13:57.400 Yeah, that's what's so interesting. So if you look at 0:13:57.440 --> 0:13:59.760 the European high yield market at the moment, it's the 0:13:59.760 --> 0:14:02.320 short to status that's ever been. The waighted average life 0:14:02.480 --> 0:14:04.160 of the European h how your market is about three and 0:14:04.200 --> 0:14:07.320 a half years, So for these companies, the time really 0:14:07.400 --> 0:14:11.240 is now. It made sense that they weren't refinancing all 0:14:11.280 --> 0:14:14.680 that proactively, given both credit spreads and rates were higher. 0:14:15.120 --> 0:14:18.480 But over the next couple of years, in the next 0:14:18.480 --> 0:14:20.560 three years, fifty percent of the European high your market 0:14:20.560 --> 0:14:22.680 has got to refinance, and they're going to refinance that 0:14:22.800 --> 0:14:26.400 higher all in cost of funding. That's a super interesting 0:14:26.520 --> 0:14:30.240 dynamic for us because if you're buying bonds materially below 0:14:30.280 --> 0:14:34.440 par on average, they're taking out sixteen months ahead of maturity, 0:14:34.720 --> 0:14:37.480 So you've got a real pull to part story there. 0:14:37.960 --> 0:14:40.480 But you've got to get it right because some of 0:14:40.480 --> 0:14:42.800 these companies aren't going to be able to and you 0:14:42.840 --> 0:14:45.680 haven't got very much time, you know, if something goes wrong, 0:14:45.720 --> 0:14:48.080 you haven't got very much time to correct your mistake 0:14:48.120 --> 0:14:50.640 to get yourself into a refinance of our shape. So 0:14:50.880 --> 0:14:52.840 we think there's this is why you're going to start 0:14:52.840 --> 0:14:56.840 to see even more dispersion because the maturity is the 0:14:57.120 --> 0:15:01.080 best catalyst for establishing whether you know credit is viable 0:15:01.160 --> 0:15:04.240 or not. In terms of whether there's enough capital out there. Yeah, 0:15:04.240 --> 0:15:07.880 I think there is across across private, private debt and 0:15:08.120 --> 0:15:11.240 public markets that there's still a lot of capital. There's 0:15:11.240 --> 0:15:14.560 an enormous amount of appetite for credit generally because of 0:15:14.600 --> 0:15:16.800 the way risk reward has improved at the top of 0:15:16.840 --> 0:15:20.040 the capital structure. But that's going to be pointed at 0:15:20.080 --> 0:15:23.560 the viable businesses, the capital structures that work, and for 0:15:23.640 --> 0:15:27.800 those who are just two levered running into refinancing, you know, 0:15:28.000 --> 0:15:30.400 they're not all going to make it, and that kind 0:15:30.400 --> 0:15:33.440 of catalyst the environment is something that's very invigorating for 0:15:33.520 --> 0:15:35.520 us as a fundamental driven credit house. 0:15:35.880 --> 0:15:37.960 So Christian. Before we talk to Matt Gooynder over at 0:15:38.000 --> 0:15:40.320 Bloomberg Intelligence, I just kind of wanted to push a 0:15:40.360 --> 0:15:43.080 bit on the risks. Obviously, this is a credit show. 0:15:43.120 --> 0:15:45.240 We credit guys. We worry about stuff all the time, 0:15:45.280 --> 0:15:49.320 and there's so much macro stress, there's so much political stress, 0:15:49.360 --> 0:15:53.280 there's so much you know, fundamental stress. Frankly, what really 0:15:53.400 --> 0:15:55.840 keeps you up at night worrying about credit at the moment, 0:15:55.880 --> 0:15:57.240 what are you most concerned about? 0:15:58.720 --> 0:16:02.320 Well, look, the the higher rates environment is part of 0:16:02.320 --> 0:16:05.880 the opportunity here, but as Lisa just touched on it, 0:16:05.880 --> 0:16:08.640 it's also part of the threat. You know, all these 0:16:08.720 --> 0:16:11.360 capital structures that were put in place in a very 0:16:11.400 --> 0:16:15.080 different rates environment and frankly speaking normally a lower spread environment, 0:16:15.280 --> 0:16:19.560 have now got to reset their debtor. Their capital structures 0:16:19.760 --> 0:16:22.280 at are much much higher all in interest cost. If 0:16:22.280 --> 0:16:25.640 that's happening at a time when macro is deteriorating fast 0:16:25.920 --> 0:16:28.880 and you're unable to improve your earnings, that obviously can 0:16:28.920 --> 0:16:31.560 be a very uncomfortable vice that these companies are put in. 0:16:31.880 --> 0:16:35.160 So the macro slowdown, combined with the fact that at 0:16:35.280 --> 0:16:38.840 least so far in Europe, you haven't seen rates collapse. 0:16:39.720 --> 0:16:41.760 Is an uncomfortable place for the market to be in. 0:16:41.920 --> 0:16:45.240 It's providing a huge array of opportunities, it's providing great 0:16:45.280 --> 0:16:47.160 all in returns to credit, which they say, on the 0:16:47.160 --> 0:16:49.960 medium term we think are ultra attractive and you're meant 0:16:50.000 --> 0:16:52.520 to be in. But you've got to be relying on 0:16:52.520 --> 0:16:55.200 your credit selection making sure you're not going to find 0:16:55.200 --> 0:16:58.160 yourself in one of these capital structures where with this 0:16:58.240 --> 0:17:00.120 confluence of factors it just doesn't work inn. 0:17:01.000 --> 0:17:03.080 So the best head is just to avoid what could 0:17:03.080 --> 0:17:03.520 blow up. 0:17:04.560 --> 0:17:07.800 Yeah, look, it's a glib thing to say, and you'll 0:17:07.840 --> 0:17:11.399 always find fundamentals driven credit managers like us saying that 0:17:12.119 --> 0:17:15.200 it's the most important thing. But it's more the most 0:17:15.200 --> 0:17:17.199 important thing now than it has been for most of 0:17:17.200 --> 0:17:19.280 the ten years, the last ten years. Rather because the 0:17:19.320 --> 0:17:22.359 last ten years have seen you know, endlessly falling rates, 0:17:23.240 --> 0:17:27.280 easy refinancing conditions, generally speaking, very tight spreads. That period 0:17:27.320 --> 0:17:30.520 is over, so it really really matters now. And as 0:17:30.520 --> 0:17:32.720 I said, because of the relatively short dated nature of 0:17:32.760 --> 0:17:35.399 the market, and that's in both high yield and leverage loans. 0:17:36.280 --> 0:17:39.080 The you know that the test of all these capital 0:17:39.080 --> 0:17:41.000 structures is coming sooner rather than later. 0:17:41.960 --> 0:17:44.959 Great stuff. Christram Leach, co head of European Credit at Apollo, 0:17:45.119 --> 0:17:46.439 thank you so much for joining us. 0:17:46.880 --> 0:17:49.280 Thank you very much, indeed, and Lisa lu. 0:17:49.240 --> 0:17:51.120 Bloomberg News in London. Brilliant to see you again. 0:17:51.240 --> 0:17:53.199 Cheers, thanks, bye bye. 0:17:54.920 --> 0:17:56.680 So, as I mentioned earlier, we were joined by Matt 0:17:56.720 --> 0:17:59.640 Ginner with Bloomberg Intelligence in New York. How's it going, Matt, 0:18:00.000 --> 0:18:02.640 Everything's going good. Thanks for having me on again, appreciate 0:18:02.680 --> 0:18:04.520 it great. So last time you were on the show, 0:18:04.520 --> 0:18:07.600 we talked about revenge spending. We all did it. Maybe 0:18:07.640 --> 0:18:10.199 it's cooling off a bit now, but today we're going 0:18:10.280 --> 0:18:12.639 to look at pensions. Most of us have one, or 0:18:12.640 --> 0:18:15.359 at least some kind of savings plan. But why do 0:18:15.440 --> 0:18:17.960 we care about pensions in the context of credit Matt? 0:18:18.359 --> 0:18:22.000 Yeah, So our team we recently did some work trying 0:18:22.040 --> 0:18:24.320 to assess the potential impact of the surge and rates 0:18:24.359 --> 0:18:26.960 that we've seen for companies within the S and P 0:18:27.040 --> 0:18:31.000 five hundred, they have some of the largest underfunded pension positions, 0:18:31.040 --> 0:18:33.520 So there's a lot of inputs that sort of get 0:18:33.520 --> 0:18:37.320 distilled down into coming up with total assets within the pension, 0:18:38.080 --> 0:18:42.480 total liabilities, and those assets need to fund into future. 0:18:42.920 --> 0:18:44.879 So despite all that, there's a couple of levers that 0:18:44.960 --> 0:18:47.960 can really get these liabilities moving one way or the other. 0:18:48.640 --> 0:18:51.080 Those being the discount rate used to measure the pension 0:18:51.119 --> 0:18:54.960 liabilities owed and the return on assets within the pension plan, 0:18:55.440 --> 0:18:58.479 the difference, if any, when the liabilities exceed the pension 0:18:58.480 --> 0:19:01.080 plan assets being referred to as the underfunded portion. 0:19:01.560 --> 0:19:02.960 Let me just start you that because it's getting very 0:19:03.040 --> 0:19:05.879 very technical, very very quickly break it down for us, 0:19:06.160 --> 0:19:09.040 for those who don't know how this stuff works. How 0:19:09.080 --> 0:19:12.120 does it work in practice? I mean, you mentioned underfunded, 0:19:12.480 --> 0:19:15.359 You mentioned discount rate. Break it down in really basic 0:19:15.400 --> 0:19:15.920 terms for us. 0:19:16.240 --> 0:19:19.320 Yeah, So the mechanics of the discount rate is pretty straightforward. 0:19:19.359 --> 0:19:22.440 So the higher the potential rate you can theoretically earn, 0:19:22.840 --> 0:19:26.920 the lower the future payments would be, and vice versa. 0:19:27.080 --> 0:19:30.800 So the yield on the Moody's Double A index is 0:19:30.840 --> 0:19:33.880 what's typically used as a proxy for where discount rates 0:19:33.880 --> 0:19:36.800 could end up when these companies snap the line or 0:19:36.840 --> 0:19:39.880 take their measurement, which happens at year end. So we've 0:19:39.880 --> 0:19:44.120 seen yields on the double A index continue to climb, 0:19:44.840 --> 0:19:46.879 which started in twenty twenty one, as the FED has 0:19:46.920 --> 0:19:49.920 aggressively raised so for contacts last year, the surgeon rates 0:19:50.000 --> 0:19:55.399 helps drive down total underfunding by about forty percent. So 0:19:55.520 --> 0:19:58.199 using the EQS function that we have available on the terminal, 0:19:58.200 --> 0:20:02.800 were identified the top fIF teen most underfunded pension plans 0:20:02.800 --> 0:20:06.360 that could stand a benefit by revising upward their discount 0:20:06.480 --> 0:20:09.400 rate that they use to measure those liabilities. The guys 0:20:09.400 --> 0:20:13.920 at surface to the top were ge Lockheed, Boeing, Exxon, 0:20:14.040 --> 0:20:17.840 and AT and T. With the entirety of those underfunded 0:20:17.880 --> 0:20:21.280 pension obligations totally about eighty five billion, and those top 0:20:21.320 --> 0:20:23.720 fifteen comprising a little over half of that figure. 0:20:24.200 --> 0:20:26.320 But in really basic terms of these are large companies 0:20:26.359 --> 0:20:28.840 in the US that are basically saying to their employees 0:20:29.200 --> 0:20:32.120 paying to some plan, and when you retire, will give 0:20:32.119 --> 0:20:35.360 you x amount as a recurring payment over time. 0:20:35.520 --> 0:20:36.359 That's exactly correct. 0:20:36.359 --> 0:20:38.600 And what we're talking about is how the funds that 0:20:38.600 --> 0:20:42.360 the companies have available in those funds in the pension pools. 0:20:42.480 --> 0:20:45.040 I'm not going to use funds because it's confusing, is 0:20:45.680 --> 0:20:47.760 not sufficient to cover what they need to pay in 0:20:47.760 --> 0:20:49.760