1 00:00:18,120 --> 00:00:20,840 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:21,000 --> 00:00:23,560 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,960 --> 00:00:26,680 Speaker 1: This week, we're very pleased to welcome Michael Buchanan, co 4 00:00:26,840 --> 00:00:30,080 Speaker 1: Chief investment Officer at Western Asset Management. How are you, Michael. 5 00:00:30,400 --> 00:00:33,239 Speaker 2: I'm doing great, James, and appreciate you having me on. 6 00:00:33,479 --> 00:00:34,559 Speaker 2: I'm looking forward to this. 7 00:00:35,040 --> 00:00:36,839 Speaker 1: Thank you so much for joining usday. We're excited to 8 00:00:36,880 --> 00:00:40,080 Speaker 1: dig into your market views and the outlook. Also delighted 9 00:00:40,120 --> 00:00:43,080 Speaker 1: to welcome back Steve Flynn with Bloomberg Intelligence. Great to 10 00:00:43,080 --> 00:00:43,880 Speaker 1: see you again, Steve. 11 00:00:44,360 --> 00:00:45,760 Speaker 3: Great, thanks for having me James. 12 00:00:46,000 --> 00:00:47,599 Speaker 1: So just to set the scene a little bit here, 13 00:00:47,920 --> 00:00:50,919 Speaker 1: credit markets are coming under pressure as government yields keep 14 00:00:51,000 --> 00:00:53,880 Speaker 1: going up, but corporate bond spreads are very very tight, 15 00:00:54,240 --> 00:00:56,480 Speaker 1: so you're not getting very much compensation for the risk 16 00:00:56,520 --> 00:01:01,760 Speaker 1: of default or downgrade. Data on the US economy and inflation, meanwhile, 17 00:01:01,760 --> 00:01:04,759 Speaker 1: are coming in heart pushing yields even higher, making corporate 18 00:01:04,800 --> 00:01:07,160 Speaker 1: bonds look more attractive than they have done in years. 19 00:01:07,680 --> 00:01:10,760 Speaker 1: So demand is high and there are some signs of 20 00:01:10,760 --> 00:01:12,880 Speaker 1: froth in the marketplace, which I hope we will get 21 00:01:12,920 --> 00:01:15,360 Speaker 1: to a bit later in this show. At the same time, 22 00:01:15,440 --> 00:01:18,360 Speaker 1: we're seeing record levels of bond issuance and loan issuance. 23 00:01:18,400 --> 00:01:21,360 Speaker 1: There's also a boom in private markets asset based finance 24 00:01:21,400 --> 00:01:24,560 Speaker 1: and structured debt. Like clos, treasurers and CFOs have a 25 00:01:24,600 --> 00:01:27,320 Speaker 1: lot of options open to them, assuming they are happy 26 00:01:27,360 --> 00:01:31,200 Speaker 1: paying these higher rates. All this bullishness those seems founded 27 00:01:31,200 --> 00:01:33,880 Speaker 1: on a belief that the US economy will avoid recession. 28 00:01:34,240 --> 00:01:36,880 Speaker 1: Earnings are solid, most companies can afford to pay the 29 00:01:37,000 --> 00:01:40,280 Speaker 1: much higher borrowing costs, and everyone is in a good 30 00:01:40,280 --> 00:01:43,679 Speaker 1: place in terms of corporate America. On the other hand, though, 31 00:01:43,680 --> 00:01:46,000 Speaker 1: there seems to be quite a lot of worry about 32 00:01:46,640 --> 00:01:51,200 Speaker 1: commercial real estate, war, geopolitics, elections, and there are some 33 00:01:51,240 --> 00:01:56,120 Speaker 1: signs of balance sheet deterioration. Defaults and bankruptcies are ticking up. Meanwhile, 34 00:01:56,240 --> 00:01:59,320 Speaker 1: total returns are getting hammered by the rising treasury yields. 35 00:01:59,520 --> 00:02:01,760 Speaker 1: So on that notes, Michael, what do you make of 36 00:02:01,800 --> 00:02:03,840 Speaker 1: all this? Is it still the year of the bond 37 00:02:03,920 --> 00:02:06,640 Speaker 1: or the golden age for credit? As people keep telling us, 38 00:02:06,640 --> 00:02:07,280 Speaker 1: what's your view? 39 00:02:08,400 --> 00:02:14,120 Speaker 2: Yeah, James man listening to that, It's definitely a complex picture. 40 00:02:15,639 --> 00:02:18,799 Speaker 2: And I guess what I would say is that to 41 00:02:18,840 --> 00:02:21,520 Speaker 2: answer your question, yes, this is in our view, this 42 00:02:21,560 --> 00:02:24,520 Speaker 2: is going to be a really good year for fixed 43 00:02:24,560 --> 00:02:27,760 Speaker 2: income in general twenty twenty four, but also in particular 44 00:02:27,880 --> 00:02:32,280 Speaker 2: for corporate credit. We're pretty excited about that. We've really 45 00:02:32,320 --> 00:02:35,600 Speaker 2: been struggling, and you know, I think every one of 46 00:02:35,639 --> 00:02:40,400 Speaker 2: those insights that you brought up in your introduction is 47 00:02:40,919 --> 00:02:44,200 Speaker 2: something that contributes to one of these two forces. Basically, 48 00:02:44,240 --> 00:02:47,720 Speaker 2: we've had the macro environment, which has been a headwind 49 00:02:47,720 --> 00:02:52,680 Speaker 2: for credit, meaning rates going higher, central banks, you know, 50 00:02:52,760 --> 00:02:57,080 Speaker 2: leaning into restrictive policy. That's just been a big headwind 51 00:02:57,120 --> 00:03:00,760 Speaker 2: for anything in fixed income. But the flip side is 52 00:03:00,800 --> 00:03:04,200 Speaker 2: that a lot of these spread sectors, corporate credit, you know, 53 00:03:04,240 --> 00:03:07,760 Speaker 2: investment grade, high yield, if you look at the underlying 54 00:03:08,240 --> 00:03:12,120 Speaker 2: credit quality and you look at fundamentals, it's generally been 55 00:03:12,160 --> 00:03:17,200 Speaker 2: pretty supportive. You know, companies are performing well, and so 56 00:03:17,320 --> 00:03:22,200 Speaker 2: you see you know, spread behavior that's that's been contained 57 00:03:22,280 --> 00:03:25,400 Speaker 2: and well behaved. So you put it all together and 58 00:03:25,440 --> 00:03:29,080 Speaker 2: you kind of have these two conflicting forces. But what 59 00:03:29,120 --> 00:03:33,720 Speaker 2: it's translated into is, you know, reasonable returns to date 60 00:03:34,280 --> 00:03:39,240 Speaker 2: for credit investors, but they're doing that in the face 61 00:03:39,400 --> 00:03:44,080 Speaker 2: of increasing interest rate environment. And what we think is 62 00:03:44,120 --> 00:03:48,800 Speaker 2: going to happen in twenty twenty four here at some point, 63 00:03:48,920 --> 00:03:51,840 Speaker 2: and you know, we'll probably get more information today, but 64 00:03:52,000 --> 00:03:54,880 Speaker 2: at some point you're going to see the FED and 65 00:03:54,920 --> 00:03:58,760 Speaker 2: other central banks down shift from what we currently think 66 00:03:58,840 --> 00:04:02,680 Speaker 2: is restrictive policy to something either a little more neutral 67 00:04:02,760 --> 00:04:05,840 Speaker 2: or perhaps even a little more accommodative as the year 68 00:04:06,400 --> 00:04:11,360 Speaker 2: moves forward, and ultimately that will create a nice tailwind 69 00:04:11,680 --> 00:04:13,920 Speaker 2: for fixed income investors. 70 00:04:14,520 --> 00:04:17,840 Speaker 1: Listening to this later on in the week, for example, 71 00:04:17,839 --> 00:04:19,560 Speaker 1: I mean we are talking May first, the FED is 72 00:04:19,560 --> 00:04:23,000 Speaker 1: about to speak. Everyone is really very focused on rates 73 00:04:23,000 --> 00:04:25,080 Speaker 1: at the moment. I have to ask Michael, what's your view. 74 00:04:25,080 --> 00:04:27,840 Speaker 1: I mean, we've started the year thinking about six rate 75 00:04:27,880 --> 00:04:30,440 Speaker 1: cuts for this year. Now we've gone to zero, maybe 76 00:04:30,440 --> 00:04:31,000 Speaker 1: even a hike. 77 00:04:31,360 --> 00:04:34,279 Speaker 2: Yeah, I think you know again, well, I think the 78 00:04:34,320 --> 00:04:36,159 Speaker 2: first few months of the year were a bit of 79 00:04:36,160 --> 00:04:40,400 Speaker 2: a surprise because the FED had signaled that, you know, 80 00:04:40,440 --> 00:04:43,279 Speaker 2: they believe that the data was coming in favorable in 81 00:04:43,360 --> 00:04:49,479 Speaker 2: terms of inflation going towards their two percent target, you know, 82 00:04:49,560 --> 00:04:53,360 Speaker 2: in the communication from the FED late in twenty twenty three. 83 00:04:54,440 --> 00:04:58,120 Speaker 2: The market believe that that would open the door for 84 00:04:58,680 --> 00:05:00,960 Speaker 2: a number of cuts, like you said, maybe even six 85 00:05:01,600 --> 00:05:04,120 Speaker 2: or seven and then the data that's come in year 86 00:05:04,200 --> 00:05:06,799 Speaker 2: to date, for the first few months has been hot, 87 00:05:06,880 --> 00:05:10,119 Speaker 2: and you know, that's been a challenge for the FED. 88 00:05:10,720 --> 00:05:12,920 Speaker 2: And that's you know, all the way down to now, 89 00:05:12,960 --> 00:05:15,400 Speaker 2: I believe you know, about one hike or one cut 90 00:05:15,480 --> 00:05:19,760 Speaker 2: is priced in for the year. We still think cuts 91 00:05:19,760 --> 00:05:22,360 Speaker 2: are on the table. We think the FED is still 92 00:05:22,400 --> 00:05:25,200 Speaker 2: going to lean in that direction. I think they're waiting 93 00:05:25,279 --> 00:05:28,520 Speaker 2: for the data to give them some validation of that. 94 00:05:30,040 --> 00:05:34,000 Speaker 2: And you know, I think the the the bar for 95 00:05:34,160 --> 00:05:37,520 Speaker 2: actually going back and pivoting the other way for hiking 96 00:05:38,040 --> 00:05:41,599 Speaker 2: is quite high. So I know the market you're hearing 97 00:05:41,640 --> 00:05:46,600 Speaker 2: a lot of views about cuts versus hikes. Our general 98 00:05:46,680 --> 00:05:50,200 Speaker 2: view is that the bias is still towards cutting. The 99 00:05:50,200 --> 00:05:53,920 Speaker 2: FED wants that they do believe current policy is restrictive. 100 00:05:53,960 --> 00:05:56,080 Speaker 2: If you just look at where they think ultimately the 101 00:05:56,200 --> 00:06:00,800 Speaker 2: long term rate is going versus where current rates are. 102 00:06:01,120 --> 00:06:04,800 Speaker 2: You know, they would call that restrictive policy. So they're 103 00:06:04,839 --> 00:06:07,839 Speaker 2: waiting for the data to give them some confirmation. We 104 00:06:07,880 --> 00:06:10,640 Speaker 2: think ultimately they'll get that in the next few months 105 00:06:10,680 --> 00:06:12,760 Speaker 2: and that should clear the way, you know, for at 106 00:06:12,839 --> 00:06:15,640 Speaker 2: least one or two cuts in twenty twenty four. 107 00:06:16,279 --> 00:06:19,400 Speaker 3: Hi, Michael again, this is Steve Flynn, senior credit analysts 108 00:06:19,400 --> 00:06:23,279 Speaker 3: with Bloomberg Intelligence. Question. So you said you think there's 109 00:06:23,279 --> 00:06:25,680 Speaker 3: a bias towards cutting. I'm just swordering your view on 110 00:06:25,720 --> 00:06:28,400 Speaker 3: the economy. It's interesting if you look at the ec 111 00:06:28,720 --> 00:06:32,600 Speaker 3: FC function on Bloomberg, which is the probability of recession 112 00:06:32,760 --> 00:06:36,760 Speaker 3: based on like, you know, thirty contributors to Bloomberg, It's 113 00:06:36,800 --> 00:06:39,520 Speaker 3: now at thirty percent, and this is down from about 114 00:06:39,560 --> 00:06:41,640 Speaker 3: sixty five percent a year ago. So it seems like 115 00:06:41,680 --> 00:06:46,240 Speaker 3: the overall market is really seeing a much lower chance 116 00:06:46,279 --> 00:06:49,239 Speaker 3: of recession. Do you think that could have any impact 117 00:06:49,279 --> 00:06:50,760 Speaker 3: on your view for potential cutting. 118 00:06:51,480 --> 00:06:55,640 Speaker 2: I think it definitely plays into it. You know, you 119 00:06:55,720 --> 00:06:58,000 Speaker 2: go back a year, a year and a half ago, 120 00:06:58,000 --> 00:07:01,479 Speaker 2: and I think the general consensus was that a recession 121 00:07:01,720 --> 00:07:07,159 Speaker 2: was you know, almost unavoidable, and you know a lot 122 00:07:07,160 --> 00:07:10,200 Speaker 2: of times and I think the Fed even probably was 123 00:07:10,600 --> 00:07:15,280 Speaker 2: thinking the same thing. You know, the Fed doesn't always 124 00:07:15,280 --> 00:07:17,840 Speaker 2: get it right in terms of their prediction in terms 125 00:07:17,840 --> 00:07:21,960 Speaker 2: of where the economy is going to be. I do 126 00:07:22,000 --> 00:07:26,000 Speaker 2: think the soft landing camp, which is the camp that 127 00:07:26,040 --> 00:07:29,240 Speaker 2: we're in, I think you know that that's the right 128 00:07:29,360 --> 00:07:33,760 Speaker 2: path forward and the most likely path forward. For the economy. 129 00:07:34,200 --> 00:07:39,200 Speaker 2: But it's certainly it's not a certainty. And you know, 130 00:07:39,240 --> 00:07:42,920 Speaker 2: I think that thirty percent number that you suggested sounds 131 00:07:42,960 --> 00:07:45,680 Speaker 2: about right. That's when we do our analysis at our 132 00:07:46,040 --> 00:07:50,160 Speaker 2: macro committees. You know, again, soft landing is our most 133 00:07:50,320 --> 00:07:54,240 Speaker 2: likely scenario. Maybe we're a little different in that we 134 00:07:54,320 --> 00:07:59,280 Speaker 2: think the next most likely scenario is actually growth surprises 135 00:07:59,400 --> 00:08:02,160 Speaker 2: to the down side, and you know, we could slip 136 00:08:02,240 --> 00:08:06,000 Speaker 2: into a mild recession. We think the odds of any 137 00:08:06,080 --> 00:08:09,680 Speaker 2: kind of significant or severe recession are very low, just 138 00:08:09,720 --> 00:08:15,239 Speaker 2: because the corporate sectors in such good shape. Consumer balance sheets, 139 00:08:15,240 --> 00:08:18,080 Speaker 2: even though savings have been depleted, consumer balance sheets are 140 00:08:18,120 --> 00:08:22,160 Speaker 2: still healthy. So you know that that's the way we're 141 00:08:22,200 --> 00:08:24,520 Speaker 2: seeing the big picture. But but I think that's about right. 142 00:08:24,600 --> 00:08:28,520 Speaker 2: You know, you know, the thirty recession, you can't roll 143 00:08:28,560 --> 00:08:30,239 Speaker 2: it off the table. But I think it's a it's 144 00:08:30,240 --> 00:08:32,960 Speaker 2: it's not the base case, and it's it's a lower probability. 145 00:08:33,480 --> 00:08:35,560 Speaker 1: Isn't any kind of recession though bad for credit? If 146 00:08:35,600 --> 00:08:37,720 Speaker 1: you look at spreads, you know history of spreads, I mean, 147 00:08:37,720 --> 00:08:40,480 Speaker 1: they should be much much higher even you know, even 148 00:08:40,520 --> 00:08:41,800 Speaker 1: if there isn't a recession, Mean, what do you make 149 00:08:41,800 --> 00:08:42,680 Speaker 1: of the spreads right now. 150 00:08:42,960 --> 00:08:45,800 Speaker 4: Yeah, I think you're You're right, James. 151 00:08:45,800 --> 00:08:51,040 Speaker 2: I mean it's it's you look back historically, and anytime 152 00:08:51,080 --> 00:08:53,280 Speaker 2: you have a recession, even if it's a mild recession, 153 00:08:53,320 --> 00:08:57,840 Speaker 2: you're going to get spread widening. And given where spreads 154 00:08:57,840 --> 00:09:01,800 Speaker 2: are right now, they look full, you kind of go 155 00:09:01,920 --> 00:09:05,000 Speaker 2: back and you look at historical spreads for the investment 156 00:09:05,040 --> 00:09:07,800 Speaker 2: grade market or the high yield market, and it's really 157 00:09:07,840 --> 00:09:09,920 Speaker 2: hard to argue that that that you know, we're not 158 00:09:10,000 --> 00:09:15,479 Speaker 2: trading through historical averages. The reason that we're still constructive 159 00:09:15,640 --> 00:09:20,079 Speaker 2: on corporate credit and we still think that owning, whether 160 00:09:20,080 --> 00:09:22,240 Speaker 2: it's high yield or investment grade, you're going to do 161 00:09:22,320 --> 00:09:27,800 Speaker 2: well in that asset class. For twenty twenty four is twofold. Again, 162 00:09:27,840 --> 00:09:30,560 Speaker 2: we think the odds of a recession are fairly low. 163 00:09:30,640 --> 00:09:33,920 Speaker 2: We think, you know, the odds of a simply slower 164 00:09:34,000 --> 00:09:38,200 Speaker 2: growth from where we are now is the most likely path. 165 00:09:39,960 --> 00:09:42,480 Speaker 2: And we also would say this that you know, you 166 00:09:42,520 --> 00:09:46,760 Speaker 2: can't just look at spreads in isolation and draw conclusion 167 00:09:46,800 --> 00:09:49,200 Speaker 2: from that. You can't say that you know the high 168 00:09:49,240 --> 00:09:53,320 Speaker 2: yield market, you know, for instance, historically has you know, 169 00:09:53,400 --> 00:09:56,840 Speaker 2: traded at four hundred over just making these numbers up. 170 00:09:56,840 --> 00:09:59,400 Speaker 2: You can probably you know, depending on any time period 171 00:09:59,440 --> 00:10:02,040 Speaker 2: you want, you can come up with different estimates. But 172 00:10:02,440 --> 00:10:04,800 Speaker 2: you know, let's say historically the high marks trade at 173 00:10:04,800 --> 00:10:07,199 Speaker 2: four hundred over. It's a three hundred over now, therefore 174 00:10:07,240 --> 00:10:10,240 Speaker 2: it must be rich. You really have to look at 175 00:10:10,240 --> 00:10:14,880 Speaker 2: the intersection of fundamentals and valuations, and when we do that, 176 00:10:15,800 --> 00:10:19,120 Speaker 2: we would say that that valuations are quite strong or 177 00:10:19,160 --> 00:10:23,079 Speaker 2: I mean fundamentals are quite strong right now, even I 178 00:10:23,120 --> 00:10:29,160 Speaker 2: would say uniquely strong and actually justify or validate where 179 00:10:29,200 --> 00:10:33,760 Speaker 2: spreads are. So I think going if you're let's say 180 00:10:33,760 --> 00:10:38,320 Speaker 2: we are going into a recession, I think at least 181 00:10:38,360 --> 00:10:42,200 Speaker 2: the corporate sector is in a good position fundamentally to 182 00:10:43,280 --> 00:10:47,040 Speaker 2: endure and be resilient through a recession. And also from 183 00:10:47,080 --> 00:10:52,360 Speaker 2: a strategic standpoint, we have migrated our credit book a 184 00:10:52,360 --> 00:10:55,640 Speaker 2: little more towards higher quality, with the thought being that 185 00:10:55,840 --> 00:10:58,959 Speaker 2: overall yields are pretty high, they're compelling. You're going to 186 00:10:59,040 --> 00:11:02,960 Speaker 2: do well with the income carry and the overall yield 187 00:11:03,080 --> 00:11:06,240 Speaker 2: you get from owning corporate credit right now, so you 188 00:11:06,240 --> 00:11:10,760 Speaker 2: don't necessarily need to take incremental risk, let's say, and 189 00:11:10,800 --> 00:11:13,000 Speaker 2: get in, you know, go into higher beta or lower 190 00:11:13,120 --> 00:11:16,080 Speaker 2: rated corporate credit. If you're in high high yield, you 191 00:11:16,080 --> 00:11:18,120 Speaker 2: can simply hang out in the sort of double bees 192 00:11:18,640 --> 00:11:22,640 Speaker 2: single bees. And if if we do slip into a 193 00:11:22,679 --> 00:11:26,000 Speaker 2: mild recession again, you you should be able to be 194 00:11:26,080 --> 00:11:28,960 Speaker 2: a little more resilient there. You will get spread widening, 195 00:11:29,040 --> 00:11:32,080 Speaker 2: but it'll be a little more dampened then you might 196 00:11:32,120 --> 00:11:35,480 Speaker 2: otherwise experience if you're in something you know, a higher 197 00:11:35,520 --> 00:11:38,080 Speaker 2: beta triple C for for instance. 198 00:11:38,880 --> 00:11:40,600 Speaker 1: I do want to get into the sort of specifics 199 00:11:40,600 --> 00:11:42,760 Speaker 1: of your portfolio in terms of sector and rating, But 200 00:11:43,120 --> 00:11:44,960 Speaker 1: before that, I do want to go back to this question. 201 00:11:45,000 --> 00:11:48,320 Speaker 1: I mean, it just puzzles me, and especially like talking 202 00:11:48,320 --> 00:11:49,680 Speaker 1: to people that have been doing this a long time, 203 00:11:49,920 --> 00:11:53,280 Speaker 1: like like you, Michael, it's it's you know, it's such 204 00:11:53,280 --> 00:11:56,080 Speaker 1: a small like the spread in a in a corporate 205 00:11:56,080 --> 00:11:58,520 Speaker 1: bond is such a small percentage of the yield. Obviously 206 00:11:58,520 --> 00:12:01,560 Speaker 1: the yields inflated by the treasury haven't gone up, but 207 00:12:01,640 --> 00:12:04,120 Speaker 1: it's the smallest percentage since two thousand and seven. And 208 00:12:04,160 --> 00:12:07,640 Speaker 1: we all know what happened next there. But does that 209 00:12:07,720 --> 00:12:10,240 Speaker 1: not concern you in the slightest bit. I mean, you know, textbook, 210 00:12:10,280 --> 00:12:13,680 Speaker 1: it should be compensating you for the risk of corporate 211 00:12:13,760 --> 00:12:14,319 Speaker 1: versus government. 212 00:12:14,400 --> 00:12:17,400 Speaker 4: Right, yeah, no, it's James. It's a really good point. 213 00:12:17,480 --> 00:12:21,040 Speaker 2: And I would say as a credit investor, of course, 214 00:12:21,080 --> 00:12:24,440 Speaker 2: we always want more spread, you know, all else being equal, 215 00:12:24,880 --> 00:12:28,880 Speaker 2: you know, we're happier when spreads are wider, when we're 216 00:12:29,200 --> 00:12:34,000 Speaker 2: you know, getting more incremental compensation for taking that credit risk. 217 00:12:34,559 --> 00:12:38,199 Speaker 2: So I'll just I'll say that, but you know a 218 00:12:38,200 --> 00:12:40,320 Speaker 2: lot of times the market just doesn't give us a 219 00:12:40,360 --> 00:12:43,199 Speaker 2: really easy choice like that, where you know you'll have 220 00:12:43,320 --> 00:12:47,160 Speaker 2: the you know, the combination of really good fundamentals, which 221 00:12:47,280 --> 00:12:50,160 Speaker 2: again that's kind of the way we're seeing the market 222 00:12:50,280 --> 00:12:54,839 Speaker 2: right now, very good fundamentals and very generous spreads. Right now, 223 00:12:54,880 --> 00:12:58,640 Speaker 2: I would say we're getting we're getting the combination of 224 00:12:59,120 --> 00:13:02,240 Speaker 2: healthy fundamental good fundamentals, you know, not just how they 225 00:13:02,280 --> 00:13:06,480 Speaker 2: look today, but when we do our analysts work and 226 00:13:06,520 --> 00:13:08,920 Speaker 2: we look forward over the next two to three quarters, 227 00:13:08,920 --> 00:13:14,680 Speaker 2: we see those fundamentals continuing. So we're getting that healthy backdrop. 228 00:13:15,440 --> 00:13:18,240 Speaker 2: But then the bigger challenge really is that you know, 229 00:13:18,280 --> 00:13:21,320 Speaker 2: you'd like to get more compensation, you'd like to get 230 00:13:21,360 --> 00:13:25,680 Speaker 2: more spread for that. So what it translates to for 231 00:13:25,800 --> 00:13:28,720 Speaker 2: us is that you know, corporate credit is at maybe 232 00:13:28,800 --> 00:13:34,840 Speaker 2: fair value, reasonable value. You know, I do think that 233 00:13:36,240 --> 00:13:39,440 Speaker 2: if you think there's some other drivers that you need 234 00:13:39,480 --> 00:13:42,960 Speaker 2: to think about, especially in the investment grade market. But 235 00:13:43,000 --> 00:13:46,200 Speaker 2: this even filters into the high yield market, and that 236 00:13:46,400 --> 00:13:48,480 Speaker 2: is you know, we'll go all the way back to 237 00:13:51,400 --> 00:13:57,920 Speaker 2: the two thousand and with the Corporate Credit Facility, when 238 00:13:57,920 --> 00:14:04,040 Speaker 2: the FED announced the corporate Credit Facility and introduced corporate 239 00:14:04,080 --> 00:14:08,880 Speaker 2: bonds into their their their their arsenal and started buying 240 00:14:09,000 --> 00:14:13,440 Speaker 2: corporate bonds that had never been the case before. So 241 00:14:13,600 --> 00:14:16,679 Speaker 2: they do have that in their toolkit as well, so 242 00:14:16,679 --> 00:14:18,960 Speaker 2: so kind of keep that in mind. It's it's something 243 00:14:19,000 --> 00:14:20,880 Speaker 2: that you know, if we were to go to a 244 00:14:20,920 --> 00:14:25,000 Speaker 2: period of significant draw down, the FED and now other 245 00:14:25,080 --> 00:14:27,840 Speaker 2: central banks have that in their their toolkit, they will 246 00:14:28,200 --> 00:14:32,560 Speaker 2: and have shown the ability and the willingness to buy 247 00:14:33,040 --> 00:14:33,840 Speaker 2: corporate credit. 248 00:14:34,360 --> 00:14:37,640 Speaker 3: So, Michael Steve, again you're talking a little bit about 249 00:14:37,680 --> 00:14:39,880 Speaker 3: high yeld if we dig a little deeper and mentioning spread. 250 00:14:39,920 --> 00:14:42,400 Speaker 3: I mean, one sector that trades very, very wide is 251 00:14:42,440 --> 00:14:45,120 Speaker 3: the communications sector r it's by far the widest sector 252 00:14:45,680 --> 00:14:47,400 Speaker 3: in high yield. I don't know how you think about 253 00:14:47,400 --> 00:14:49,680 Speaker 3: that sector. Obviously, there's a lot of changes going on 254 00:14:49,800 --> 00:14:53,520 Speaker 3: there with you know, high competition for broadband, and you know, 255 00:14:53,560 --> 00:14:57,200 Speaker 3: the changing the way people consume media. But do you 256 00:14:57,240 --> 00:14:59,840 Speaker 3: see that as a sector where you worry about defaults 257 00:14:59,920 --> 00:15:02,040 Speaker 3: or or are you attracted by the you know, the 258 00:15:02,120 --> 00:15:04,440 Speaker 3: high spread and potential out for outperformance. 259 00:15:05,120 --> 00:15:07,040 Speaker 4: Yeah, you know, Steve, you're you're right. 260 00:15:07,080 --> 00:15:10,800 Speaker 2: I mean, that is a sector that is definitely within 261 00:15:10,920 --> 00:15:15,000 Speaker 2: scope right now. It's one of the cheapest sectors in 262 00:15:15,040 --> 00:15:17,960 Speaker 2: the high yield market for for good reason. 263 00:15:19,040 --> 00:15:20,120 Speaker 4: You know, certainly there's. 264 00:15:20,080 --> 00:15:24,920 Speaker 2: We all know about cord cutting, the fundamental pressure that 265 00:15:25,040 --> 00:15:29,040 Speaker 2: a lot of these these companies are are experiencing. If 266 00:15:29,080 --> 00:15:33,640 Speaker 2: you look at the transaction multiples, you know, cable wireless, 267 00:15:33,640 --> 00:15:36,360 Speaker 2: you know that used to trade it really fancy multiples 268 00:15:36,440 --> 00:15:40,720 Speaker 2: in terms of enterprise values. You know that's come down dramatically. 269 00:15:42,040 --> 00:15:44,880 Speaker 2: But at the end of the day, you know, these 270 00:15:44,920 --> 00:15:48,800 Speaker 2: companies are still generating a tremendous amount of cash flow. 271 00:15:48,800 --> 00:15:50,440 Speaker 4: If you look at you know. 272 00:15:50,440 --> 00:15:54,440 Speaker 2: Each one there, you know they still have subscribers that 273 00:15:54,480 --> 00:15:59,240 Speaker 2: are paying monthly bills. There's a lot of cash flow 274 00:15:59,360 --> 00:16:04,000 Speaker 2: to work with. You look at where valuations are right now. 275 00:16:05,000 --> 00:16:07,800 Speaker 2: You know, in many cases you're talking bonds that are 276 00:16:07,840 --> 00:16:13,200 Speaker 2: in the thirties, forties, fifties. You know, it's just been 277 00:16:13,360 --> 00:16:16,640 Speaker 2: a sector that's been under a tremendous amount of pressure. 278 00:16:17,160 --> 00:16:20,880 Speaker 2: Some of that is fundamental, some of that is due 279 00:16:20,960 --> 00:16:27,080 Speaker 2: to liability management exercises that have become increasingly popular in 280 00:16:27,240 --> 00:16:31,520 Speaker 2: the high yeal market and also kind of presenting ongoing risks. 281 00:16:31,520 --> 00:16:34,200 Speaker 4: Sort of a different topic, and I won't venture too. 282 00:16:34,040 --> 00:16:38,160 Speaker 2: Far into that right now, but steve to kind of 283 00:16:38,240 --> 00:16:39,120 Speaker 2: cut to the chase. 284 00:16:39,560 --> 00:16:43,240 Speaker 4: We like that that sector right now. 285 00:16:43,240 --> 00:16:47,240 Speaker 2: Communications in general, we think that the relative value is 286 00:16:47,320 --> 00:16:53,720 Speaker 2: heavily skewed in favor of investors. Not without risk, for sure, 287 00:16:54,960 --> 00:16:58,040 Speaker 2: you know you need to be very careful, but again 288 00:16:58,120 --> 00:17:03,280 Speaker 2: I think that's it's we're always looking for those types 289 00:17:03,320 --> 00:17:09,040 Speaker 2: of businesses where you are getting stable, consistent, reliable, predictable 290 00:17:09,119 --> 00:17:12,680 Speaker 2: cash flows, and we do think in general communications as 291 00:17:12,680 --> 00:17:16,920 Speaker 2: a sector offers that. And again, valuations where they are, 292 00:17:16,960 --> 00:17:19,359 Speaker 2: we think are are quite compelling. 293 00:17:20,080 --> 00:17:23,560 Speaker 3: And given that you as co chief investment officer looking 294 00:17:23,560 --> 00:17:25,399 Speaker 3: at both investment grade and high yield. I mean, one 295 00:17:25,400 --> 00:17:28,879 Speaker 3: of the big names that pops out is Charter right. Charter, 296 00:17:29,720 --> 00:17:31,399 Speaker 3: you know, it's been under some pressure, it has some 297 00:17:31,480 --> 00:17:34,520 Speaker 3: things going on, but you know it has seventy billion 298 00:17:34,560 --> 00:17:37,240 Speaker 3: dollars of secured bonds and loans that have two of 299 00:17:37,280 --> 00:17:41,360 Speaker 3: the three rating injuries as investment grades. So I think 300 00:17:41,359 --> 00:17:45,160 Speaker 3: it's it's really really important for Charter and maintain its ratings. Right, 301 00:17:45,200 --> 00:17:48,040 Speaker 3: you cannot have that much debt drop into high yield. 302 00:17:48,080 --> 00:17:51,359 Speaker 3: It's Charter's unsecured bonds already the biggest name in high yield. 303 00:17:51,440 --> 00:17:55,600 Speaker 3: So they've made now an adjustment to their preferred net 304 00:17:55,680 --> 00:17:59,520 Speaker 3: leverage ratio. Right, they had always say a target of 305 00:17:59,560 --> 00:18:01,879 Speaker 3: four to four and a half times consolating that leverage, 306 00:18:01,880 --> 00:18:04,280 Speaker 3: but have always operated at the high end of that range, 307 00:18:04,280 --> 00:18:06,600 Speaker 3: and now they're going to move towards the middle of 308 00:18:06,640 --> 00:18:10,080 Speaker 3: the range, which is positive progress. Is that a name 309 00:18:10,119 --> 00:18:12,160 Speaker 3: you worry about a lot? Is that something you're comfortable 310 00:18:12,200 --> 00:18:14,840 Speaker 3: now with their slight change in the preferred leverage target? 311 00:18:16,440 --> 00:18:18,200 Speaker 4: We we we do like Charter. 312 00:18:18,359 --> 00:18:22,480 Speaker 2: We we we've got you know, we've we've been a 313 00:18:22,520 --> 00:18:27,159 Speaker 2: supporter of Charter for for quite some time. Again, a 314 00:18:27,160 --> 00:18:30,840 Speaker 2: lot of that relates to the specifics of the business. 315 00:18:32,359 --> 00:18:34,639 Speaker 2: But again I would I always you know, at Western Asset, 316 00:18:34,640 --> 00:18:38,160 Speaker 2: we always try to bring it back to relative value. 317 00:18:38,760 --> 00:18:41,919 Speaker 2: And when we look at where Charter trades, and you 318 00:18:42,000 --> 00:18:44,320 Speaker 2: kind of have an opportunity. If you want to stay secured, 319 00:18:44,400 --> 00:18:46,600 Speaker 2: you can be in the investment grade portion of the 320 00:18:46,720 --> 00:18:49,760 Speaker 2: capital structure. If you want to take a little more risk, 321 00:18:50,160 --> 00:18:52,719 Speaker 2: you can go into the unsecured portion of the of 322 00:18:52,760 --> 00:18:57,960 Speaker 2: the charter capital structure. So there's kind of something for 323 00:18:58,200 --> 00:19:02,919 Speaker 2: everyone there. But we do we we do like it 324 00:19:03,040 --> 00:19:06,000 Speaker 2: right now. We wish they'd be maybe and and maybe 325 00:19:06,000 --> 00:19:10,080 Speaker 2: they're moving in this direction a little less shareholder friendly, 326 00:19:10,160 --> 00:19:14,520 Speaker 2: a little more you know, bondholder vigilant or bondholder focused. 327 00:19:15,800 --> 00:19:18,119 Speaker 2: And and I think when you have, like you mentioned, Steve, 328 00:19:18,320 --> 00:19:21,280 Speaker 2: two of three ratings that are that are I G. 329 00:19:22,400 --> 00:19:26,040 Speaker 2: There is a there is a big gap still between 330 00:19:26,960 --> 00:19:31,480 Speaker 2: how a triple B company issues versus how a double 331 00:19:31,520 --> 00:19:34,600 Speaker 2: B company issues, just in terms of the cost of funding. 332 00:19:35,160 --> 00:19:38,080 Speaker 2: And and you know, Charter management smart, they know that 333 00:19:38,280 --> 00:19:42,159 Speaker 2: they're cognizant of that. So our belief is that you know, 334 00:19:42,200 --> 00:19:44,720 Speaker 2: they will do what they need to do to keep. 335 00:19:44,560 --> 00:19:46,000 Speaker 4: That investment grade rating. 336 00:19:46,520 --> 00:19:49,600 Speaker 2: As you mentioned, seventy billions, it's a lot of it's 337 00:19:49,600 --> 00:19:52,560 Speaker 2: a lot of debt. You wouldn't want to see that 338 00:19:52,640 --> 00:19:54,840 Speaker 2: drop into the high ual market. But if it did, 339 00:19:55,040 --> 00:19:56,760 Speaker 2: and I and I don't think it will, but if 340 00:19:56,800 --> 00:20:00,359 Speaker 2: it did, it's not unprecedented. We've gone through peer of 341 00:20:01,640 --> 00:20:05,840 Speaker 2: that before. I mean, the energy crisis in twenty fifteen 342 00:20:06,000 --> 00:20:10,879 Speaker 2: sixteen really almost you know kind of you know, for 343 00:20:11,160 --> 00:20:13,920 Speaker 2: for two or three years, you know, you just had 344 00:20:14,560 --> 00:20:17,240 Speaker 2: a number of downgrades that were coming into the high 345 00:20:17,280 --> 00:20:20,479 Speaker 2: yield market, and the high yeld market did a pretty 346 00:20:20,480 --> 00:20:25,879 Speaker 2: good job of absorbing that. That supply wasn't without disruption, 347 00:20:26,400 --> 00:20:29,720 Speaker 2: there wasn't some price there, It wasn't without price discovery. 348 00:20:30,480 --> 00:20:32,840 Speaker 2: But the high old market is you know, it's a 349 00:20:32,880 --> 00:20:36,280 Speaker 2: it's a much bigger market now than you know what 350 00:20:36,320 --> 00:20:39,720 Speaker 2: it was ten fifteen, twenty years ago. It's capable of 351 00:20:39,760 --> 00:20:42,919 Speaker 2: absorbing that kind of supply. The only thing is, you know, 352 00:20:42,960 --> 00:20:45,760 Speaker 2: it's gonna it's gonna, like I said, be a period 353 00:20:45,800 --> 00:20:49,120 Speaker 2: of a little bit of price adjustment and price discovery. 354 00:20:49,720 --> 00:20:52,359 Speaker 1: So you brought up relative value, Michael, Thank you for that. 355 00:20:52,400 --> 00:20:55,560 Speaker 1: It's one of my favorite topics. Whereas if you know, 356 00:20:55,600 --> 00:20:58,280 Speaker 1: you look around everything you're doing right now across the board, 357 00:20:58,960 --> 00:21:02,840 Speaker 1: you know, big firm, big mandate, where is the best 358 00:21:02,880 --> 00:21:03,720 Speaker 1: relative value for you? 359 00:21:04,440 --> 00:21:04,720 Speaker 4: Yeah? 360 00:21:04,760 --> 00:21:09,280 Speaker 2: So I it I manage a strategy that that's called 361 00:21:09,359 --> 00:21:12,560 Speaker 2: multi asset credit. And the fun thing about that strategy, James, 362 00:21:12,640 --> 00:21:15,520 Speaker 2: is that it doesn't have a benchmark. It allows you 363 00:21:15,600 --> 00:21:19,680 Speaker 2: to have the autonomy and the flexibility to go where 364 00:21:19,760 --> 00:21:24,600 Speaker 2: where the best opportunities are and really emphasize and and 365 00:21:24,800 --> 00:21:28,320 Speaker 2: leverage off of that relative value analysis that that we 366 00:21:28,400 --> 00:21:31,200 Speaker 2: do here in the relative value analysis that that you're 367 00:21:31,240 --> 00:21:35,919 Speaker 2: talking about. So, I think some interesting areas right now. 368 00:21:36,880 --> 00:21:40,000 Speaker 2: We'll just kind of move off of corporate credit for 369 00:21:40,040 --> 00:21:43,679 Speaker 2: a second and move over to structured credit. And I 370 00:21:43,720 --> 00:21:48,840 Speaker 2: think within structured credit, commercial real estate is an interesting 371 00:21:49,520 --> 00:21:53,080 Speaker 2: area that our team has been allocating a lot of 372 00:21:53,840 --> 00:21:56,080 Speaker 2: a lot of resources on, a lot of focus on, 373 00:21:56,720 --> 00:21:58,840 Speaker 2: and we are finding opportunities there. 374 00:21:59,720 --> 00:22:00,199 Speaker 4: And and I. 375 00:22:00,200 --> 00:22:03,480 Speaker 2: Would say when people hear commercial real estate, they initially 376 00:22:03,560 --> 00:22:07,440 Speaker 2: think office real estate, and that's not necessarily what I'm 377 00:22:07,480 --> 00:22:11,080 Speaker 2: talking about. I think we office real estate. Most of 378 00:22:11,160 --> 00:22:15,280 Speaker 2: us are very aware of the challenges that market faces, 379 00:22:15,320 --> 00:22:18,359 Speaker 2: the overhang there. You know, we probably still have at 380 00:22:18,440 --> 00:22:24,680 Speaker 2: least a year plus of continued stress in that market. Eventually, 381 00:22:24,680 --> 00:22:27,280 Speaker 2: we do think you're going to find some opportunities there, 382 00:22:28,200 --> 00:22:31,960 Speaker 2: you know, like any market where everyone gets too aligned 383 00:22:32,000 --> 00:22:35,479 Speaker 2: in a negative way, you know, ultimately the pendulum swings 384 00:22:35,520 --> 00:22:38,439 Speaker 2: too far and it creates opportunity. But we wouldn't say 385 00:22:38,440 --> 00:22:43,200 Speaker 2: we're necessarily there yet, but it has created the overhang 386 00:22:43,240 --> 00:22:49,000 Speaker 2: of office real estate has created some vulnerabilities, or not vulnerabilities, 387 00:22:49,240 --> 00:22:52,919 Speaker 2: maybe some weakness in terms of valuations in other parts 388 00:22:53,440 --> 00:22:58,199 Speaker 2: of the commercial real estate market. So you know, industrial 389 00:22:58,280 --> 00:23:04,440 Speaker 2: real estate, think warehouses, storage, distribution centers. You know, that's 390 00:23:04,440 --> 00:23:09,600 Speaker 2: an area that's fundamentally working well and attractive. Hotel lodging 391 00:23:10,200 --> 00:23:12,520 Speaker 2: continues to. 392 00:23:11,320 --> 00:23:14,280 Speaker 4: To do well. A lot of opportunities there. 393 00:23:14,800 --> 00:23:19,359 Speaker 2: Even retail, I would say, is a is an area 394 00:23:19,480 --> 00:23:25,399 Speaker 2: where the there's there's opportunity and our our teams finding 395 00:23:25,480 --> 00:23:28,560 Speaker 2: some some compelling stories there is that. 396 00:23:28,480 --> 00:23:30,320 Speaker 1: In terms of the actual loan, I mean you buying 397 00:23:30,359 --> 00:23:33,080 Speaker 1: those a discount. Now in the secondary how's that? How 398 00:23:33,160 --> 00:23:34,240 Speaker 1: how's that trading? 399 00:23:34,920 --> 00:23:40,760 Speaker 2: There's there's both opportunities. The generic market where we're uh 400 00:23:40,960 --> 00:23:43,560 Speaker 2: executing a lot of these trades in is referred to 401 00:23:43,560 --> 00:23:47,840 Speaker 2: as just single assets, single borrower. But some of these 402 00:23:47,880 --> 00:23:51,000 Speaker 2: are on the secondary side, and and you know, if 403 00:23:51,000 --> 00:23:54,120 Speaker 2: you're patient, some can be on the on the primary side. 404 00:23:54,880 --> 00:23:59,040 Speaker 2: We are seeing, you know, the new issue volumes have 405 00:23:59,040 --> 00:24:01,600 Speaker 2: have ticked up a little bit there. So you know, 406 00:24:01,640 --> 00:24:03,919 Speaker 2: there there's a there's a little there's there's ways to 407 00:24:03,960 --> 00:24:06,840 Speaker 2: source in in both of those markets, James. 408 00:24:06,680 --> 00:24:08,679 Speaker 1: Because the you know, general sense is that that's a 409 00:24:08,720 --> 00:24:11,160 Speaker 1: bit of a you know, an accident waiting to happen, 410 00:24:11,200 --> 00:24:13,800 Speaker 1: and there's a lot more to shake out, and you 411 00:24:13,840 --> 00:24:15,720 Speaker 1: know the banks are going to be under a lot 412 00:24:15,720 --> 00:24:18,320 Speaker 1: of stress because of it. But but you think it's 413 00:24:18,400 --> 00:24:21,760 Speaker 1: it's become cheap enough to become an opportunity for a 414 00:24:21,800 --> 00:24:23,320 Speaker 1: big asset manager. Let yours. 415 00:24:23,720 --> 00:24:29,720 Speaker 2: Well, yeah, I'll differentiate between office real estate, which you 416 00:24:29,720 --> 00:24:34,119 Speaker 2: know is definitely it's it's experiencing, as we all know, 417 00:24:34,359 --> 00:24:38,880 Speaker 2: challenges related to occupancy. We think you're going to continue 418 00:24:38,920 --> 00:24:43,119 Speaker 2: to have you know, real pressure in that space. But 419 00:24:43,240 --> 00:24:47,240 Speaker 2: so I'm talking away from office real estate and more 420 00:24:47,359 --> 00:24:52,640 Speaker 2: into those other areas of commercial real estate, which again fundamentally, 421 00:24:53,080 --> 00:24:55,880 Speaker 2: you know, we do a lot of work on fundamentals, 422 00:24:55,920 --> 00:24:58,280 Speaker 2: and then it's not just corporate fundamentals, even in our 423 00:24:58,320 --> 00:25:02,600 Speaker 2: structured credit team, you know, bottom up fundamentals by you know, 424 00:25:02,680 --> 00:25:08,840 Speaker 2: by by region, by age of structure, just a lot 425 00:25:08,840 --> 00:25:11,639 Speaker 2: of a lot of fundamental work. But those those sectors 426 00:25:11,680 --> 00:25:15,040 Speaker 2: generally are are doing well and to your point, James 427 00:25:15,080 --> 00:25:18,920 Speaker 2: about the regional banks, I think that's a really good point. 428 00:25:19,680 --> 00:25:22,320 Speaker 2: We know that a lot of regional banks are carrying 429 00:25:22,480 --> 00:25:25,879 Speaker 2: a lot of commercial real estate, a lot of that office. 430 00:25:27,240 --> 00:25:29,720 Speaker 2: I think it's it's likely as we start to get 431 00:25:29,720 --> 00:25:32,199 Speaker 2: closer and closer to the point where a lot of 432 00:25:32,200 --> 00:25:36,760 Speaker 2: those loans are maturing or needing refinancing, we're going to 433 00:25:36,840 --> 00:25:37,240 Speaker 2: start to. 434 00:25:37,200 --> 00:25:39,399 Speaker 4: See some some. 435 00:25:38,760 --> 00:25:42,840 Speaker 2: Some stressed sales of of of real estate, of of 436 00:25:42,840 --> 00:25:46,439 Speaker 2: office real estate. And you know, again it's it's going 437 00:25:46,520 --> 00:25:48,879 Speaker 2: to get interesting. I think the good news is if 438 00:25:48,920 --> 00:25:50,960 Speaker 2: you you know, if you if you want to kind 439 00:25:50,960 --> 00:25:53,760 Speaker 2: of look at the glasses being half full, is there's 440 00:25:53,840 --> 00:25:58,040 Speaker 2: a lot of capital that's being raised to go after 441 00:25:58,119 --> 00:26:01,600 Speaker 2: those types of opportunities. You know, we're not the only 442 00:26:01,680 --> 00:26:04,000 Speaker 2: ones who think at some point you will see an 443 00:26:04,000 --> 00:26:09,040 Speaker 2: opportunity there. Opportunistic investors want to take advantage of those 444 00:26:09,240 --> 00:26:12,640 Speaker 2: when when they show themselves. So I do think you're 445 00:26:12,640 --> 00:26:17,040 Speaker 2: going to have a lot of private capital that is 446 00:26:17,520 --> 00:26:21,679 Speaker 2: ready to go to go after opportunities when they present themselves. 447 00:26:22,480 --> 00:26:23,960 Speaker 3: Oh, Michael, I just wanted to ask you a question 448 00:26:24,000 --> 00:26:26,119 Speaker 3: about M and A. It seems that you know it's 449 00:26:26,160 --> 00:26:29,240 Speaker 3: a much tougher regulatory environment, you know, one example being 450 00:26:29,280 --> 00:26:34,119 Speaker 3: the recent FTC suing to block the Tapestry acquisition of Capri. 451 00:26:34,800 --> 00:26:37,359 Speaker 3: I was just wondering when a Western asset, when you 452 00:26:37,359 --> 00:26:41,000 Speaker 3: think about participating in company bonds that are participating in 453 00:26:41,160 --> 00:26:45,080 Speaker 3: M and A, do now put a higher likelihood that 454 00:26:45,119 --> 00:26:47,600 Speaker 3: a deal will not go through? Or with regard to 455 00:26:47,640 --> 00:26:51,480 Speaker 3: providing merger financing, do you need extra protections given the 456 00:26:51,560 --> 00:26:53,520 Speaker 3: higher risk that deals will not get approval? 457 00:26:54,280 --> 00:27:01,720 Speaker 2: Yeah, so I would say almost We almost never would invest, 458 00:27:02,520 --> 00:27:05,040 Speaker 2: you know, uh, in a in a situation or in 459 00:27:05,080 --> 00:27:09,119 Speaker 2: a company based solely on our belief that a merger 460 00:27:09,200 --> 00:27:13,640 Speaker 2: will er or won't go through. That's always tricky. You 461 00:27:13,680 --> 00:27:16,160 Speaker 2: just never know how how that's going to play out. 462 00:27:16,200 --> 00:27:19,680 Speaker 2: You don't want to expose your clients to to to 463 00:27:19,920 --> 00:27:22,760 Speaker 2: regulatory risk. There's just a lot of things that can 464 00:27:22,840 --> 00:27:26,520 Speaker 2: happen behind closed doors that that you know, where we won't. 465 00:27:26,520 --> 00:27:30,040 Speaker 2: We don't really feel like we have a fundamental advantage there, 466 00:27:30,600 --> 00:27:34,240 Speaker 2: So you know, it's it's you just wouldn't find a 467 00:27:34,280 --> 00:27:36,399 Speaker 2: situation like that where we're going to be putting a 468 00:27:36,440 --> 00:27:38,840 Speaker 2: lot of a lot of faith or a lot of 469 00:27:38,920 --> 00:27:41,440 Speaker 2: capital to work based on a view that we think 470 00:27:41,480 --> 00:27:42,640 Speaker 2: an acquisition will or. 471 00:27:42,720 --> 00:27:43,520 Speaker 4: Won't go through. 472 00:27:44,560 --> 00:27:47,240 Speaker 2: What I would say is, you know, obviously, in our 473 00:27:47,440 --> 00:27:50,399 Speaker 2: in our high yield group, you know, the the l 474 00:27:50,480 --> 00:27:53,080 Speaker 2: b O part of of M and AS is plays 475 00:27:53,520 --> 00:27:57,040 Speaker 2: a big role. And you know, sort of two observations 476 00:27:57,119 --> 00:27:59,280 Speaker 2: or two takeaways that I have about. 477 00:28:00,440 --> 00:28:02,359 Speaker 4: You know, the bigger question you just said. 478 00:28:03,119 --> 00:28:06,359 Speaker 2: One is we really haven't seen a lot of l 479 00:28:06,400 --> 00:28:10,440 Speaker 2: b O s lately, that the volume is really quieted 480 00:28:10,480 --> 00:28:13,600 Speaker 2: down or and maybe some of that is exactly what 481 00:28:13,640 --> 00:28:16,879 Speaker 2: you said, you know, due to regulatory reasons, but it 482 00:28:17,000 --> 00:28:19,720 Speaker 2: is having an impact on the bank loan market. The 483 00:28:20,000 --> 00:28:24,960 Speaker 2: bank loan market's been a big financer of leverage buyout 484 00:28:25,040 --> 00:28:28,280 Speaker 2: transactions and there just haven't been hasn't been a lot 485 00:28:28,320 --> 00:28:31,520 Speaker 2: of supply there, which is actually creating a bit of 486 00:28:31,520 --> 00:28:34,520 Speaker 2: a favorable technical in the In the bank loan market, 487 00:28:34,840 --> 00:28:39,960 Speaker 2: you're continuing to see clos that are that are that 488 00:28:40,040 --> 00:28:44,600 Speaker 2: are being called so that's taking you know, that's taking 489 00:28:45,880 --> 00:28:48,880 Speaker 2: loans out of the market. You know a lot of 490 00:28:48,920 --> 00:28:55,560 Speaker 2: companies continue to do refinancings or paydowns. So you combine 491 00:28:55,600 --> 00:28:59,040 Speaker 2: that with supply that used to come up a good 492 00:28:59,080 --> 00:29:01,680 Speaker 2: pipeline of supply that used to come from the LBO 493 00:29:01,840 --> 00:29:04,720 Speaker 2: market that we haven't just seen that much. It's creating 494 00:29:04,880 --> 00:29:13,080 Speaker 2: a decent fundamental in bank loans. And the other thing 495 00:29:13,120 --> 00:29:18,560 Speaker 2: too again, and I mentioned this earlier, but the liability 496 00:29:18,640 --> 00:29:23,320 Speaker 2: management exercises that we're seeing so many of in the 497 00:29:23,400 --> 00:29:26,600 Speaker 2: highild space as well in the bank loan space, a 498 00:29:26,640 --> 00:29:33,280 Speaker 2: lot of those are being created because of the documentation 499 00:29:33,480 --> 00:29:37,320 Speaker 2: that was done, particularly in twenty twenty one, in twenty 500 00:29:37,520 --> 00:29:42,040 Speaker 2: twenty two. So I think as leverage buyouts start to 501 00:29:42,080 --> 00:29:45,080 Speaker 2: gain traction again, you know, in the coming quarters, in 502 00:29:45,120 --> 00:29:48,440 Speaker 2: the coming years, I think investors in both the bank 503 00:29:48,480 --> 00:29:50,959 Speaker 2: loan space as well as the public high yield market 504 00:29:51,080 --> 00:29:55,680 Speaker 2: are going to be more vigilant in terms of tightening 505 00:29:55,800 --> 00:30:02,320 Speaker 2: up the covenants, tightening up the flexibility those covenants allow 506 00:30:03,200 --> 00:30:07,400 Speaker 2: that have really brought about this dramatic increase and liability 507 00:30:07,400 --> 00:30:11,280 Speaker 2: management exercises or coercive exchanges, the so called creditor on 508 00:30:11,360 --> 00:30:12,360 Speaker 2: creditor violence. 509 00:30:13,000 --> 00:30:13,160 Speaker 4: Yeah. 510 00:30:13,160 --> 00:30:15,040 Speaker 1: I mean, as you said, a lot of those liability 511 00:30:15,040 --> 00:30:18,000 Speaker 1: management exchanges aren't being done particularly on particularly in fair 512 00:30:18,080 --> 00:30:21,200 Speaker 1: terms for the investors. How do you handle that? I 513 00:30:21,200 --> 00:30:23,160 Speaker 1: mean you must be getting burned on some of these deals. 514 00:30:23,920 --> 00:30:28,640 Speaker 2: Well, I think you you know, it's any capital structure 515 00:30:28,720 --> 00:30:33,520 Speaker 2: that's trading at a deep discount to par you have 516 00:30:33,600 --> 00:30:38,640 Speaker 2: to think is vulnerable to these types of of of 517 00:30:38,640 --> 00:30:44,440 Speaker 2: of exercises, these types of coercive exchanges. The best way 518 00:30:44,480 --> 00:30:48,400 Speaker 2: to combat that is one, you know, you do, I 519 00:30:48,400 --> 00:30:52,280 Speaker 2: think have to have a very credible. 520 00:30:54,320 --> 00:30:55,320 Speaker 4: Workout effort. 521 00:30:56,000 --> 00:31:00,760 Speaker 2: You know, we we have dedicated professionals that actually work 522 00:31:00,840 --> 00:31:06,480 Speaker 2: with other creditors, work on creditor committees, are in constant 523 00:31:06,520 --> 00:31:11,280 Speaker 2: contact with legal and financial advisors, uh, trying to one 524 00:31:11,400 --> 00:31:14,760 Speaker 2: get insight on you know, which companies might be vulnerable 525 00:31:14,840 --> 00:31:18,360 Speaker 2: to these types of exercises. But when they do take place, 526 00:31:19,280 --> 00:31:21,160 Speaker 2: and it would be very hard this year to kind 527 00:31:21,160 --> 00:31:23,720 Speaker 2: of miss all of those again, they're there are just 528 00:31:23,800 --> 00:31:26,040 Speaker 2: so many in the in the high yal market, but 529 00:31:26,080 --> 00:31:30,560 Speaker 2: when they do take place, to make sure that, you know, 530 00:31:30,640 --> 00:31:35,000 Speaker 2: we're coordinated with other creditors where uh, to the extent 531 00:31:35,120 --> 00:31:37,960 Speaker 2: possible and where it makes sense, linking arms with other 532 00:31:38,040 --> 00:31:43,080 Speaker 2: creditors to fight back and and and and do everything 533 00:31:43,120 --> 00:31:48,200 Speaker 2: we can to preserve underlying asset value and ultimately avoid impairments. 534 00:31:48,240 --> 00:31:50,880 Speaker 2: So I do think, you know, we've we're fortunate in 535 00:31:50,920 --> 00:31:53,760 Speaker 2: that we have that type of team here. We have 536 00:31:53,840 --> 00:31:56,760 Speaker 2: that type of effort, you know that that proactively works 537 00:31:56,800 --> 00:32:00,560 Speaker 2: with a lot of other creditors to to work in 538 00:32:00,600 --> 00:32:05,920 Speaker 2: the best interests of our clients and other bondholders. It's 539 00:32:05,920 --> 00:32:07,880 Speaker 2: a it's a tough one though, James. I mean, you 540 00:32:07,920 --> 00:32:10,960 Speaker 2: know again, we're it's it's a it's a reality in 541 00:32:11,000 --> 00:32:13,840 Speaker 2: the in the high Yueld market. We're seeing it more 542 00:32:13,880 --> 00:32:16,920 Speaker 2: and more and again that is why I believe that 543 00:32:17,440 --> 00:32:23,000 Speaker 2: going forward you will start to see more scrutiny on 544 00:32:23,000 --> 00:32:26,240 Speaker 2: on covenants and tightening up on on general covenants that 545 00:32:26,320 --> 00:32:28,880 Speaker 2: will be favorable ultimately for the high old market. 546 00:32:29,440 --> 00:32:33,160 Speaker 1: Another dynamic that you kind of brought up was private capsule, 547 00:32:33,520 --> 00:32:36,200 Speaker 1: which is such a hot topic at the moment. I mean, 548 00:32:36,280 --> 00:32:40,360 Speaker 1: it's it's grown so quickly. I I've told someone recently 549 00:32:40,360 --> 00:32:43,280 Speaker 1: about the covenants that they are getting worse volumes of 550 00:32:43,280 --> 00:32:46,800 Speaker 1: picking up every Everyone's very excited. It just I mean, 551 00:32:46,840 --> 00:32:49,400 Speaker 1: having done this for what it just looks like what 552 00:32:49,480 --> 00:32:52,800 Speaker 1: leveraged loans were about twenty years ago. But what's the excitement, 553 00:32:52,840 --> 00:32:54,360 Speaker 1: Michael White's what's the buzz? 554 00:32:55,080 --> 00:33:00,600 Speaker 2: Yeah, Well, private credit definitely has has been very popular 555 00:33:01,760 --> 00:33:04,040 Speaker 2: and if you think about it, it makes sense. Coming 556 00:33:04,040 --> 00:33:07,600 Speaker 2: out of the global financial crisis. You know, a lot 557 00:33:07,640 --> 00:33:10,520 Speaker 2: of the bigger banks were stepping away from lending to those, 558 00:33:10,760 --> 00:33:15,160 Speaker 2: you know, small to medium sized corporations. So in that 559 00:33:15,320 --> 00:33:20,840 Speaker 2: void stepped managers who were willing to offer those types 560 00:33:20,920 --> 00:33:27,200 Speaker 2: of borrowers money at attractive rates. You know, and and 561 00:33:27,200 --> 00:33:31,360 Speaker 2: and obviously the trade off is, you know, you for 562 00:33:31,360 --> 00:33:34,720 Speaker 2: for less liquidity. So if you're investing in private credit, 563 00:33:35,120 --> 00:33:37,560 Speaker 2: you know, it's not the day to day liquidity that 564 00:33:37,600 --> 00:33:39,760 Speaker 2: we enjoy in the in the public markets, so you're 565 00:33:39,760 --> 00:33:42,600 Speaker 2: getting less liquidity. But the flip side of that is, 566 00:33:43,040 --> 00:33:46,400 Speaker 2: you know, you were getting incremental spread, you were getting 567 00:33:47,200 --> 00:33:51,720 Speaker 2: enhancements to structure, you were perhaps getting better collateral. So 568 00:33:51,760 --> 00:33:54,400 Speaker 2: it really resonated with with a lot of investors. They 569 00:33:54,400 --> 00:33:57,640 Speaker 2: were willing to give up that liquidity in order to 570 00:33:57,640 --> 00:34:02,520 Speaker 2: get these other enhancements that I just mentioned. But you know, 571 00:34:02,760 --> 00:34:07,400 Speaker 2: the market's become very popular. It's grown very quickly. By 572 00:34:07,440 --> 00:34:10,839 Speaker 2: some estimates, the private credit market now is. 573 00:34:10,800 --> 00:34:11,920 Speaker 4: The same size as the. 574 00:34:13,680 --> 00:34:17,120 Speaker 2: Syndicated loan market as well as the high yield market. 575 00:34:18,080 --> 00:34:20,000 Speaker 2: I do think it's a it's a it's a good 576 00:34:20,080 --> 00:34:22,880 Speaker 2: thing when you step back and think about the big picture, 577 00:34:23,440 --> 00:34:28,239 Speaker 2: you know, companies now have more avenues or more paths 578 00:34:28,280 --> 00:34:31,120 Speaker 2: to finance in the market. It's not just a high 579 00:34:31,160 --> 00:34:33,360 Speaker 2: yield in the loan market, but it's it's private credit, 580 00:34:34,360 --> 00:34:39,279 Speaker 2: and that ultimately should lead to more financial flexibility and 581 00:34:39,360 --> 00:34:44,239 Speaker 2: perhaps even lower defaults on a longer term basis. So 582 00:34:44,280 --> 00:34:47,399 Speaker 2: I do think there's there, there's there's there's definitively a 583 00:34:47,480 --> 00:34:52,240 Speaker 2: good positive that has come from private credit. But like anything, 584 00:34:52,320 --> 00:34:54,640 Speaker 2: you know, it's the more money that has gone to 585 00:34:54,680 --> 00:34:59,920 Speaker 2: that market, the more competitive it's become, the more spread 586 00:35:00,040 --> 00:35:04,160 Speaker 2: compression you've seen, there's just more competition for for more deals. 587 00:35:05,360 --> 00:35:07,279 Speaker 2: So so I do think if you were to, you know, 588 00:35:07,320 --> 00:35:10,520 Speaker 2: look at the amount of compensation you get for owning 589 00:35:10,560 --> 00:35:15,600 Speaker 2: private credit versus public credit, that spread, which toggles over 590 00:35:15,640 --> 00:35:19,480 Speaker 2: the years and you know, expands and contracts, strikes me 591 00:35:19,560 --> 00:35:23,200 Speaker 2: that we're we're more on the tighter side there than 592 00:35:23,239 --> 00:35:25,560 Speaker 2: what we've what we've seen over the past ten. 593 00:35:25,440 --> 00:35:30,040 Speaker 4: To fifteen years. But I do think it's it's it's interesting. 594 00:35:30,080 --> 00:35:32,160 Speaker 2: I do think you're going to continue to see you know, 595 00:35:32,160 --> 00:35:35,520 Speaker 2: a lot of people talk about this dis intermediation between 596 00:35:35,680 --> 00:35:39,759 Speaker 2: public markets and private markets. We very much believe that 597 00:35:39,840 --> 00:35:43,080 Speaker 2: we see that, you know, that rigid line between what 598 00:35:43,200 --> 00:35:46,480 Speaker 2: is private credit and what is public credit that is 599 00:35:46,640 --> 00:35:50,920 Speaker 2: really started to blur, and it's just not so clear 600 00:35:51,000 --> 00:35:54,160 Speaker 2: now that you know your your private credit managers are 601 00:35:54,200 --> 00:35:58,319 Speaker 2: specifically going to stay within the clear crisp domain of 602 00:35:58,440 --> 00:36:03,000 Speaker 2: private credit and public managers like ourselves are you know, 603 00:36:03,080 --> 00:36:08,720 Speaker 2: managers of public debt generally, we're also you know, looking 604 00:36:08,760 --> 00:36:14,320 Speaker 2: at and incorporating more and more private like transactions into 605 00:36:14,360 --> 00:36:15,760 Speaker 2: our client portfolios. 606 00:36:16,160 --> 00:36:18,520 Speaker 3: Michael, I just wanted to follow one last question on 607 00:36:19,040 --> 00:36:22,000 Speaker 3: your potential to see a greater amount of liability management 608 00:36:22,040 --> 00:36:25,400 Speaker 3: exchanges in the high yield market. Right when I think 609 00:36:25,400 --> 00:36:27,520 Speaker 3: about the communications sector, I could think of, you know, 610 00:36:27,760 --> 00:36:31,200 Speaker 3: several potential candidates as we look over the next couple 611 00:36:31,239 --> 00:36:36,239 Speaker 3: of years. So when Western Assets considering participating in an exchange, 612 00:36:37,000 --> 00:36:39,520 Speaker 3: is it you know, nobody likes to take a haircut 613 00:36:39,680 --> 00:36:43,160 Speaker 3: to their principal ode, right, but are you guys, are 614 00:36:43,160 --> 00:36:46,520 Speaker 3: you principle is Western okay with doing that if you're 615 00:36:46,560 --> 00:36:48,760 Speaker 3: going to be in a better position within the capital 616 00:36:48,760 --> 00:36:53,040 Speaker 3: structure and the company has a much more manageable debt 617 00:36:53,080 --> 00:36:55,279 Speaker 3: load going forward? Is it that simple to think about 618 00:36:55,280 --> 00:36:55,680 Speaker 3: it that way? 619 00:36:56,880 --> 00:36:59,240 Speaker 4: It's it's a it's a it's it's the right question. 620 00:37:00,520 --> 00:37:00,680 Speaker 4: You know. 621 00:37:00,680 --> 00:37:03,760 Speaker 2: Obviously, when we initially make a loan, we we expect 622 00:37:03,760 --> 00:37:06,200 Speaker 2: to get our coupons and we expect to get paid 623 00:37:06,239 --> 00:37:11,160 Speaker 2: back par you know, at maturity or earlier. But you know, 624 00:37:11,280 --> 00:37:16,120 Speaker 2: as as companies, you know, go about the the you know, 625 00:37:16,160 --> 00:37:19,880 Speaker 2: their their normal path of business. You know, conditions can change, 626 00:37:19,960 --> 00:37:23,239 Speaker 2: things can change, and a lot of times it you know, 627 00:37:23,280 --> 00:37:25,359 Speaker 2: we we end up with a with a company that 628 00:37:25,520 --> 00:37:29,760 Speaker 2: is in a challenged situation. And and again that's really 629 00:37:29,800 --> 00:37:34,440 Speaker 2: where these liability liability management exercises are happening. They're not 630 00:37:34,600 --> 00:37:38,680 Speaker 2: happening with companies that have bonds that are trading at 631 00:37:38,760 --> 00:37:42,600 Speaker 2: or near par. They're usually happening with a company that's 632 00:37:42,800 --> 00:37:49,840 Speaker 2: witnessing some stress. So our willingness to engage in an 633 00:37:49,920 --> 00:37:53,279 Speaker 2: exchange is really you know, it ultimately boils down to 634 00:37:53,440 --> 00:37:55,920 Speaker 2: what's in the best interest of our of our client. 635 00:37:56,000 --> 00:37:59,239 Speaker 2: You know, we look at the the current condition of 636 00:37:59,320 --> 00:38:03,360 Speaker 2: the company, what are our options that are on the table, 637 00:38:04,680 --> 00:38:09,200 Speaker 2: and really try to to to extract the best decision 638 00:38:09,880 --> 00:38:14,959 Speaker 2: given that type of information. So you know, I would 639 00:38:15,000 --> 00:38:19,720 Speaker 2: say we're we're we're very resistant if we have to 640 00:38:19,920 --> 00:38:23,359 Speaker 2: or we're very resistant to taking impairment. But if it's 641 00:38:23,400 --> 00:38:26,760 Speaker 2: a situation where you know, let's say bonds are already 642 00:38:26,760 --> 00:38:29,160 Speaker 2: trading at thirty or forty cents on the dollar, and 643 00:38:29,200 --> 00:38:32,560 Speaker 2: we think that there is likely impairment down the road, 644 00:38:33,200 --> 00:38:37,359 Speaker 2: and we can be involved in an exchange and by 645 00:38:37,400 --> 00:38:42,080 Speaker 2: doing so increase the underlying collateral that we have, increase 646 00:38:42,239 --> 00:38:46,680 Speaker 2: the ultimate recovery that we have for our clients. But 647 00:38:46,840 --> 00:38:50,280 Speaker 2: perhaps that comes with taking some impairment. I think we'd 648 00:38:50,360 --> 00:38:52,759 Speaker 2: be willing to do that. So it's you know, every 649 00:38:52,800 --> 00:38:55,439 Speaker 2: situation's a little different, and I don't think you could 650 00:38:55,440 --> 00:38:58,200 Speaker 2: ever say, you know, no, we won't, we won't ever 651 00:38:58,280 --> 00:39:01,239 Speaker 2: do an exchange. You know, we'll never take impairment to par. 652 00:39:01,760 --> 00:39:04,120 Speaker 2: You always have to look at the situation at hand 653 00:39:04,239 --> 00:39:06,520 Speaker 2: and what's in the best interest in how do we 654 00:39:06,600 --> 00:39:09,920 Speaker 2: maximize recovery for for for our clients. 655 00:39:10,520 --> 00:39:12,759 Speaker 1: So, going back to an earlier question, Michael, interns of 656 00:39:12,760 --> 00:39:16,120 Speaker 1: relative value, I mean, I'm guessing you look globally as well. 657 00:39:17,280 --> 00:39:19,279 Speaker 1: You know, what's what's the thing that gives you the edge, 658 00:39:19,400 --> 00:39:22,799 Speaker 1: you know, besides real estate, besides structure, credit, is there 659 00:39:22,840 --> 00:39:25,880 Speaker 1: anything else that's giving you extra return at the moment. 660 00:39:26,640 --> 00:39:29,280 Speaker 4: Yeah, you know a few things. 661 00:39:30,760 --> 00:39:35,080 Speaker 2: You know, a local currency, emerging markets, you know that 662 00:39:35,200 --> 00:39:39,279 Speaker 2: we think that a few cdiosyncratic, but you know quite 663 00:39:39,320 --> 00:39:44,279 Speaker 2: a few of those situations India, Mexico, Brazil, all in 664 00:39:44,360 --> 00:39:45,239 Speaker 2: local currency. 665 00:39:45,719 --> 00:39:48,840 Speaker 1: Is that corporal or sovereign that's sovereign, okay? 666 00:39:49,600 --> 00:39:52,960 Speaker 2: And again local currency, so you know you are taking 667 00:39:53,640 --> 00:39:56,520 Speaker 2: you know, an element of currency risk. But nominal rates 668 00:39:56,520 --> 00:39:59,600 Speaker 2: are very high, and you know, again we think that 669 00:40:00,560 --> 00:40:05,800 Speaker 2: when you compare real rates in those economies I mentioned 670 00:40:05,920 --> 00:40:10,920 Speaker 2: versus develop market real rates, they look pretty compelling to us. Also, 671 00:40:11,320 --> 00:40:13,319 Speaker 2: you know, I've kind of we talked a little bit 672 00:40:13,360 --> 00:40:18,439 Speaker 2: about levered loans, but but perhaps a sister of the 673 00:40:18,520 --> 00:40:22,560 Speaker 2: loan market is clos and I think I've mentioned it earlier, 674 00:40:22,880 --> 00:40:26,720 Speaker 2: but clo tranches. So the idea that you know, taking 675 00:40:26,719 --> 00:40:30,239 Speaker 2: a collateralized loan obligation and the tranches that are created 676 00:40:30,719 --> 00:40:35,840 Speaker 2: from that transaction, to us, those look very attractive and everything. 677 00:40:35,960 --> 00:40:38,319 Speaker 2: You know, they're from triple A all the way down 678 00:40:38,400 --> 00:40:42,719 Speaker 2: to you know, the more mezzanine tranches double bs. We 679 00:40:42,800 --> 00:40:48,600 Speaker 2: think relative to the rating and relative to the structural 680 00:40:48,640 --> 00:40:51,560 Speaker 2: integrity of each one of those trenches, and how well 681 00:40:51,560 --> 00:40:54,720 Speaker 2: we feel that they'll hold up through periods of stress. 682 00:40:55,160 --> 00:41:00,200 Speaker 2: We think that those are those are quite compelling. You know, 683 00:41:00,239 --> 00:41:03,440 Speaker 2: over time, we think you are going to see spread compression. 684 00:41:03,640 --> 00:41:07,440 Speaker 2: For you know, a c l O UH tranch of 685 00:41:07,480 --> 00:41:11,080 Speaker 2: a specific rating versus how a corporate bond with the 686 00:41:11,160 --> 00:41:14,480 Speaker 2: same rating trades. Right now, there's a very generous gap. 687 00:41:14,880 --> 00:41:15,960 Speaker 4: You know, if you own a see it. 688 00:41:16,040 --> 00:41:18,400 Speaker 2: Let's say, you know, triple B c l O tranch 689 00:41:18,480 --> 00:41:21,759 Speaker 2: versus a triple B investment grade credit. There's a very 690 00:41:21,880 --> 00:41:24,760 Speaker 2: there is a very big yield gap there. Over time, 691 00:41:25,280 --> 00:41:28,000 Speaker 2: we think that you will see that that spread compression 692 00:41:28,040 --> 00:41:30,959 Speaker 2: and you'll see c l O tranches by the same 693 00:41:31,040 --> 00:41:34,280 Speaker 2: rating trade you know, certainly not at the same spread 694 00:41:34,280 --> 00:41:36,640 Speaker 2: as the corporate issuer, but but you know that gap 695 00:41:36,680 --> 00:41:37,920 Speaker 2: should tighten up somewhat. 696 00:41:38,400 --> 00:41:39,920 Speaker 1: Do you also buy the equity of the c l O. 697 00:41:40,920 --> 00:41:46,680 Speaker 2: I think it's it's very very attractive. We if if 698 00:41:46,719 --> 00:41:52,200 Speaker 2: if if client, if we have a portfolio where specifically 699 00:41:52,520 --> 00:41:53,680 Speaker 2: it's designed. 700 00:41:53,320 --> 00:41:55,719 Speaker 4: To own c l O equity and that kind of. 701 00:41:56,320 --> 00:42:00,440 Speaker 2: Risk reward profile, you know, we we we we own it. 702 00:42:00,480 --> 00:42:04,120 Speaker 2: But I would say in most of our portfolios, you know, 703 00:42:04,160 --> 00:42:08,399 Speaker 2: again we're we're looking for fixed income investments. We're looking for, 704 00:42:09,080 --> 00:42:13,600 Speaker 2: you know, coupons. We're looking for a security that pays 705 00:42:13,680 --> 00:42:17,839 Speaker 2: us back part at maturity or earlier. So as much 706 00:42:17,880 --> 00:42:21,680 Speaker 2: as I like CLO equity is an asset class for 707 00:42:21,880 --> 00:42:25,880 Speaker 2: most of our strategies, it's not an appropriate investment and 708 00:42:25,960 --> 00:42:29,440 Speaker 2: doesn't really make sense in terms of the client mission 709 00:42:29,520 --> 00:42:30,440 Speaker 2: or their guidelines. 710 00:42:31,360 --> 00:42:34,080 Speaker 1: Okay, interesting, I was at a conference earlier this week 711 00:42:34,320 --> 00:42:37,400 Speaker 1: on clos and it was jammed, you know, packed record attendance, 712 00:42:37,520 --> 00:42:39,640 Speaker 1: and everyone was talking about, you know, taking on as 713 00:42:39,719 --> 00:42:42,200 Speaker 1: much risk as possible give, giving you a macro view 714 00:42:42,239 --> 00:42:44,600 Speaker 1: that you think, right's all coming down. You see them 715 00:42:44,640 --> 00:42:46,480 Speaker 1: a little bit more on the on the more bullish 716 00:42:46,680 --> 00:42:51,160 Speaker 1: side about credit. Do you worry it's told Michael about 717 00:42:51,239 --> 00:42:55,279 Speaker 1: Froth about signs of you know, potential over exuberance in 718 00:42:55,280 --> 00:42:55,800 Speaker 1: this market. 719 00:42:56,360 --> 00:42:58,720 Speaker 2: Yeah, I mean I worry about a lot of things, James. 720 00:42:58,760 --> 00:43:02,080 Speaker 2: I guess that's the that's that's that's the job at hand. 721 00:43:03,920 --> 00:43:07,600 Speaker 2: I would I would say this again, I mentioned this earlier. 722 00:43:07,680 --> 00:43:10,160 Speaker 2: You know, I would love spreads to be wider than 723 00:43:10,160 --> 00:43:13,680 Speaker 2: they they currently are. But I don't look at spreads 724 00:43:13,680 --> 00:43:18,319 Speaker 2: and say we're in an exuberant territory. To me, the 725 00:43:18,360 --> 00:43:21,960 Speaker 2: spreads that that we see today are are consistent and 726 00:43:22,080 --> 00:43:29,320 Speaker 2: makes sense with the strong fundamental backdrop. So so I 727 00:43:29,480 --> 00:43:32,120 Speaker 2: I don't feel like we're you know, we're we're we're 728 00:43:32,160 --> 00:43:34,320 Speaker 2: at a point where you know, we're not seeing bubble 729 00:43:34,560 --> 00:43:36,400 Speaker 2: like behavior. 730 00:43:37,920 --> 00:43:39,360 Speaker 4: But you need to watch it closely. 731 00:43:39,400 --> 00:43:44,160 Speaker 2: Obviously, you know, our our we we've always believed that, 732 00:43:45,400 --> 00:43:48,200 Speaker 2: you know, we we spend a lot of time doing 733 00:43:48,239 --> 00:43:50,759 Speaker 2: our our fundamental work and it's not just how to 734 00:43:50,880 --> 00:43:55,080 Speaker 2: fundamentals look today, but it's it's how to fundamentals how 735 00:43:55,120 --> 00:43:57,000 Speaker 2: how do we think they're going to look and evolve 736 00:43:57,120 --> 00:44:00,520 Speaker 2: over the next two to three quarters. And we usually 737 00:44:00,600 --> 00:44:03,600 Speaker 2: do start to see if if anytime we've had a 738 00:44:03,640 --> 00:44:08,560 Speaker 2: recession or a meaningful pullback and credit or meaningful widening 739 00:44:08,600 --> 00:44:12,839 Speaker 2: I meaning meaningful draw down and credit, which is usually 740 00:44:12,920 --> 00:44:16,279 Speaker 2: consistent with a recession, but anytime we've had that in 741 00:44:16,320 --> 00:44:20,680 Speaker 2: the market, it usually comes with some kind of fundamental 742 00:44:20,920 --> 00:44:24,120 Speaker 2: fraying or fracturing in corporate credit. So we feel like 743 00:44:24,120 --> 00:44:26,680 Speaker 2: we're in a we have a nice vantage point and 744 00:44:26,719 --> 00:44:29,200 Speaker 2: that we you know, through our through our bottom up work, 745 00:44:29,239 --> 00:44:32,200 Speaker 2: we tend to see a lot of the early indicators 746 00:44:33,239 --> 00:44:36,000 Speaker 2: that that tell us where the economy is going. So 747 00:44:37,520 --> 00:44:39,000 Speaker 2: you know, if if we were to start to see 748 00:44:39,040 --> 00:44:42,560 Speaker 2: some of these signs that perhaps see you know that 749 00:44:42,600 --> 00:44:45,960 Speaker 2: you're starting to see stress show up in certain segments 750 00:44:46,000 --> 00:44:49,719 Speaker 2: of the economy, I think we're in a pretty good 751 00:44:49,840 --> 00:44:53,239 Speaker 2: position to react to that. And if spreads were you know, 752 00:44:53,440 --> 00:44:56,960 Speaker 2: staying unchanged in that type of environment, you know, obviously 753 00:44:57,080 --> 00:45:00,439 Speaker 2: we we'd react, and we'd we'd react quickly. But again, 754 00:45:00,520 --> 00:45:03,880 Speaker 2: right now, you know, I'm just not seeing you know, 755 00:45:04,000 --> 00:45:07,000 Speaker 2: that type of froth in the in the corporate credit market. 756 00:45:07,040 --> 00:45:09,240 Speaker 4: I think the you know, love them to be cheaper. 757 00:45:09,280 --> 00:45:12,200 Speaker 2: But I think, you know, the valuations that we're looking 758 00:45:12,239 --> 00:45:16,640 Speaker 2: at today look reasonable relative to the strong fundamentals. 759 00:45:17,480 --> 00:45:19,680 Speaker 1: But you can't rule out some kind of volatility event 760 00:45:19,800 --> 00:45:23,400 Speaker 1: for example, you know, geopolitical or even you know, US 761 00:45:23,400 --> 00:45:25,960 Speaker 1: election related that suddenly throws everything for a loop and 762 00:45:26,120 --> 00:45:27,920 Speaker 1: would feed through to spreads, right, I mean, how do 763 00:45:27,920 --> 00:45:28,680 Speaker 1: you hedge against that? 764 00:45:29,200 --> 00:45:32,959 Speaker 2: It's hard, you know, geopolitics is always a really tough 765 00:45:33,000 --> 00:45:36,759 Speaker 2: one too, you know, to to think about, because you 766 00:45:37,200 --> 00:45:39,040 Speaker 2: have two things that you have to be. 767 00:45:39,040 --> 00:45:39,800 Speaker 4: Able to predict. 768 00:45:39,840 --> 00:45:43,520 Speaker 2: One is the event itself, and then secondly, what is 769 00:45:43,560 --> 00:45:47,920 Speaker 2: the market reaction to the event. And we do a 770 00:45:47,920 --> 00:45:51,560 Speaker 2: lot of stress testing with our portfolios. We you know, 771 00:45:51,680 --> 00:45:55,719 Speaker 2: create different scenarios and then you know, use our specialists 772 00:45:55,719 --> 00:45:57,840 Speaker 2: to come up with what we think the mark market 773 00:45:57,880 --> 00:46:01,480 Speaker 2: reaction would be. So, for instance, and elevated an elevation 774 00:46:02,400 --> 00:46:08,600 Speaker 2: of of of of the crisis in the Middle East, 775 00:46:09,120 --> 00:46:11,439 Speaker 2: and you know, we will say, okay, well what should 776 00:46:11,480 --> 00:46:14,520 Speaker 2: happen to oil? Where we'll spreads go? You know, everything 777 00:46:14,520 --> 00:46:16,360 Speaker 2: from triple A all the way down to triple C. 778 00:46:16,560 --> 00:46:19,440 Speaker 2: We stress test our portfolios. But again, you know, you 779 00:46:19,520 --> 00:46:22,239 Speaker 2: have two variables that you're playing with there, You're you know, 780 00:46:22,360 --> 00:46:25,840 Speaker 2: the the event itself and then the market reaction. So 781 00:46:26,920 --> 00:46:29,200 Speaker 2: I do worry about things like that, and we do 782 00:46:29,280 --> 00:46:32,520 Speaker 2: try to place probabilities on those, and we do try 783 00:46:32,560 --> 00:46:38,280 Speaker 2: to to build in, you know, some some diversifiers into 784 00:46:38,280 --> 00:46:42,320 Speaker 2: all of our portfolios that would give us a little 785 00:46:42,480 --> 00:46:46,600 Speaker 2: draw down protection. You know, a lot of times you 786 00:46:46,640 --> 00:46:49,360 Speaker 2: can't prevent the draw down, but you can dampen it. 787 00:46:50,160 --> 00:46:52,200 Speaker 2: And so that that that's the reason we do a 788 00:46:52,239 --> 00:46:54,919 Speaker 2: lot of that stress testing. But it's complicated and it's 789 00:46:54,960 --> 00:46:59,080 Speaker 2: it's tricky to get right. On the election side, I 790 00:46:59,080 --> 00:47:02,160 Speaker 2: think this is a interesting election. I mean, everyone it's 791 00:47:02,200 --> 00:47:04,000 Speaker 2: an interesting election. I don't know if we've ever seen 792 00:47:04,000 --> 00:47:07,960 Speaker 2: anything like this before. But you know, again, I always 793 00:47:07,960 --> 00:47:09,960 Speaker 2: try to boil it down to markets. And if you 794 00:47:10,000 --> 00:47:13,319 Speaker 2: think about it, the two candidates in terms of their 795 00:47:13,360 --> 00:47:19,920 Speaker 2: platforms are you know, they're usually economic policies is front 796 00:47:19,960 --> 00:47:22,400 Speaker 2: and center, and we're talking a lot about economic policy 797 00:47:22,480 --> 00:47:25,239 Speaker 2: as we get closer and closer to election. That really 798 00:47:25,320 --> 00:47:27,520 Speaker 2: doesn't seem to be the case here. You know, this 799 00:47:27,560 --> 00:47:30,359 Speaker 2: is going to be an election about you know, it's 800 00:47:30,360 --> 00:47:35,880 Speaker 2: about personalities, it's about social issues, it's about borders. You 801 00:47:35,920 --> 00:47:40,399 Speaker 2: really haven't heard that much on policy, And I guess 802 00:47:40,440 --> 00:47:42,719 Speaker 2: the one thing I would say is that we've had 803 00:47:42,760 --> 00:47:45,520 Speaker 2: a preview to some extent of both of these candidates. 804 00:47:45,560 --> 00:47:46,719 Speaker 4: Both have been presidents. 805 00:47:47,160 --> 00:47:50,560 Speaker 2: We have seen some of the economic initiatives that have 806 00:47:51,440 --> 00:47:55,719 Speaker 2: been stressed during these presidencies. So you know, from an 807 00:47:55,719 --> 00:47:59,200 Speaker 2: economic standpoint, it's perhaps a little easier to gauge and 808 00:47:59,719 --> 00:48:04,080 Speaker 2: and I think the market perhaps is filtering that in 809 00:48:04,160 --> 00:48:08,399 Speaker 2: and you know, you're not seeing as much elevated risk 810 00:48:08,520 --> 00:48:11,879 Speaker 2: or concern as it relates to economic policy with these 811 00:48:11,880 --> 00:48:12,799 Speaker 2: two candidates. 812 00:48:13,040 --> 00:48:16,160 Speaker 1: Great stuff. Michael Muchannan co chief investment officer at Western 813 00:48:16,200 --> 00:48:18,160 Speaker 1: Asset Management. It's been a pleasure having you on the 814 00:48:18,160 --> 00:48:18,920 Speaker 1: Credit Edge. 815 00:48:19,320 --> 00:48:22,279 Speaker 2: Well, thank you, James, and thank you Steve. I really 816 00:48:22,320 --> 00:48:24,240 Speaker 2: appreciate the opportunity. 817 00:48:23,800 --> 00:48:25,879 Speaker 1: And of course to Steve Flame with Bloomberg Intelligence, thank 818 00:48:25,880 --> 00:48:26,879 Speaker 1: you so much for being on the show. 819 00:48:27,120 --> 00:48:27,480 Speaker 4: Thank you. 820 00:48:28,120 --> 00:48:31,360 Speaker 1: Check out all of Steve's excellent analysis on the Bloomberg Terminal, 821 00:48:31,400 --> 00:48:34,000 Speaker 1: and please do subscribe wherever you get your podcasts. We're 822 00:48:34,000 --> 00:48:38,200 Speaker 1: on Apple, Spotify, and all other good podcast providers, including 823 00:48:38,200 --> 00:48:40,799 Speaker 1: the Bloomberg Terminal. Give us a review, tell your friends, 824 00:48:40,920 --> 00:48:44,359 Speaker 1: or email me directly at Jcroumby eight at Bloomberg dot net. 825 00:48:45,040 --> 00:48:47,319 Speaker 1: I'm James Crumby. It's been a pleasure having you join 826 00:48:47,400 --> 00:49:09,239 Speaker 1: us again next week on the Credit Edge.