March 28, 2024 • 35 mins
Altice’s debt woes pose a threat to the collateralized loan obligation market, says Gunther Stein, chief investment officer for US performing credit and CLOs at Sound Point Capital Management. “Altice is clearly an issue for Europe, and in particular the European CLO market,” Stein tells Bloomberg News’ Carmen Arroyo and James Crombie and Bloomberg Intelligence’s Robert Schiffman in the latest Credit Edge podcast. “It’s something we all have to be thoughtful around in terms of how we’re managing our portfolios,” he said, referring to investors’ exposure to borrowers with large capital structures. While the US leveraged finance market is bigger and more diversified than Europe, Altice is also a “relevant” borrower there, Stein adds. He expects higher-for-longer rates to boost leveraged loans and sees value in the technology and cable sectors, as well as health care companies like LifePoint. “There’s good value still in the leveraged loan space,” says Stein. In this episode, Sound Point also discusses CLO issuance, pricing and leveraged loan liquidity.
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Episode Transcript
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Speaker 1 (00:17):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome gun To Stein,
chief investment officer for US Performing Credit and CLO's at
Soundpoint Capital Management. How are you gun To? I'm great,
Thank you, Thank you so much for joining us today.
We're excited to dig into your market views and the outlook.
Also delighted to welcome back Carmen Arroyo with Bloomberg News
(00:41):
in New York. Great to see you again, Carmen.
Speaker 2 (00:42):
Thank you for having me.
Speaker 1 (00:43):
James and from Bloomberg Intelligence. Excellent, have back on the show.
Rob Schiffman from Bloomberg Intelligence, How are you doing?
Speaker 3 (00:49):
Best part of my day, James.
Speaker 1 (00:51):
So let's start with you gun To. Great to see
you on the Credit Edge. Just to set the scene
a little bit, credit markets are trading at very bullish levels.
Bond spreads of the titus in two years, which means
you don't get compensated very much for the risk of
borrowers not paying you back. Corporate debt across the globe
is very much in demand. There seems to be some
signs of froth developing, which I hope we'll talk about
in a bit. All the optimism seems to be founded
(01:12):
on a belief that the US economy can avoid recession.
Companies are doing just fine with these much higher borrowing costs,
and rate cuts are only a matter of time, which
boosts demand for yield and will support anyone struggling to pay.
At the same time, we're seeing record levels of debt issuance.
US companies have a lot more refinancing to do this year,
and they're taking advantage of a window to sell a
lot more bonds. But there's also a boom going on
(01:35):
in private markets asset based finance, structured debt like lateralized
loan obligations and asset backed securities issues really are taking
advantage of investor demand. Here, there seems to be not
very much to worry about, although a lot of people
are saying that there's a trillion dollar commercial real estate
debt wall bearing down upon US. Nonetheless, people don't seem worried.
(01:55):
What's your take on to as a long term participant
in this market, our credit Mardi's offering fair value relative
to the risk, you know, I think.
Speaker 4 (02:03):
That's a good question. James, and I would say, you
know that one, you know, at a high level, you know,
we we are in the camp that rates are going
to be higher for longer, and our view is generally
speaking that you know, the Fed's going to be careful
in terms of bringing down rates. You know that inflation
(02:23):
continues to be prevalent, and so we we we feel
that rates, you know, are more than likely going to
start coming down later in this year, and more than
likely is not going to be three cuts. You know,
our base case is more like you know, one or
two starting you know, arguably late summer, you know, early fall.
(02:43):
That that that that's our view. And so along with that,
you know, as in terms of positioning in terms of
the broad credit markets, you know, we do feel like
there's good value still in the leverage loan space. You know,
as you pointed out with with high yield, you know,
spreads are all time tights Kenley. If you're taking you know,
(03:04):
the view on high yield, you know you're also taking
a view on duration and rates, and you know, although
you know, we feel like rates at least in the
short end, are going to be coming down, you know
we'll see, you know, when they start actually coming down
at the back end, so you know that that that's
our view. We feel like, you know, as we progress,
(03:27):
you know, we we do continue to feel like there's
going to be a soft landing. So we're not you know,
overly worried about the economy, but we do feel like
there's better value in the leverage loan space. And there's
obviously a lot of different ways to play the leverage
loan space, including unlevered versus levered type strategies, you know,
such as in collateralized loan obligations.
Speaker 1 (03:49):
But just let me stop you on the loan side.
On the you know, leverage loans has been you know,
a big rally, had a big ready last year as well,
it's kind of extended this year. A lot of people
do like the flow rate nature of it. The demand
is going up because the clo formation is going up
so quickly, and there you know, on a net basis,
the supply isn't really there, so that's you know, technically
(04:09):
that's pushing up prices. But on the other hand, you've
got you know, fundamental concerns about defaults. You've got you know,
we just had a piece recently on how the ratio
between companies earnings and their interest expenses fall into the
lowest levels since the pandemic, isn't there a lot of
risk building there?
Speaker 4 (04:24):
Yeah, there's definitely some risk you know on you know,
on the flip side. You know, as you start looking forward,
you know, in terms of where we are from an
economic standpoint, if you you know, once again have to
buy into, so to speak, a soft landing. You know
that we feel you know that a lot of the
I mean, you know, when you start thinking about that
(04:45):
soft landing rates are going to be moving lower. That's
going to benefit a lot of these levered companies and
obviously companies that are borrowing on the floating rate side,
so that's going to be a direct benefit from them,
you know, I would say on you know, in addition,
on the supply side of the wage and at least
when what we're hearing, you know, talking to bankers is
that M and A is going to start picking up.
(05:05):
And you know, obviously you've seen some headlines around you know,
some M and A types of activities with uh, you know,
some public companies, including on the retail side. So we
feel like there is going to be M and A
picking up, and you know, along with that, you know,
we we will see some level of issuance on the
supply side. You know what. What I would also point out,
(05:26):
you know, is we're a big participant in the broadly
syndicated market. At least that's that's what I'm responsible for.
We do have a direct lending business as well. But
one of the benefits of you know, participating in the
broadly syndicated market where you know, you know, the a
large part of our market is fairly liquid, the loan's trade.
(05:48):
So what we can do in this particular marketplace, you know,
as an active manager, is reposition our portfolios around industries
that we like, companies that we like versus ones that
we don't like, and continue continue to maneuver the portfolios
over time and reshape them, you know, all the time.
(06:09):
And so that's really the benefit of participating in the
broadly syndicated market versus some of the other markets where
you know, you go in, you underwrite and basically your
you're spread lander over time, and it's really hard to
go ahead and get out of the position.
Speaker 2 (06:23):
I was wondering if you could talk a little bit
more about that. Are there any sectors that you're liking
right now. Are you trading out of any positions that
you don't want to be in anymore? Is there any
type of company that you're done with?
Speaker 4 (06:36):
Well, I would say, let me just frame it. In
some sectors that we like, you know, we're definitely we're
positive on the technology sector as a whole. And you know,
once again, looking at these companies as leverage lenders, you know,
in many cases, you know, we we we have limited upside.
(06:58):
You know, the best we can do is get paid
you know, par or effectively our money back, and you know,
things go bad, we get something materially less than par.
And I think, as we all know, recoveries in some
companies have been awful. Talking you know, Nickels dimes twenty
thirty cents on the dollar. So, you know, with the
(07:20):
nice thing about the technology space is what we've seen
with a lot of these companies that have actually been
growing even over the past few years, when you know,
maybe the broad swath of the economy hasn't. And then
the other nice pieces they literally have thousands of different customers,
recurring revenue streams, and in many cases these companies can
(07:43):
survive on their own. But they're also very nice, attractive
acquisition targets for strategics or other private equity firms that
are looking to go ahead and grow their business and
do bolt on acquisitions where you can add these types
of businesses on and basically, you know, create a lot
of synergies. So the way I think about, you know,
(08:06):
as a lender of things that I like, I like
businesses that are larger, that are divisible, and that at
times can be strategic in terms of if you need
to go ahead and sell and you know, different parts
of the business.
Speaker 3 (08:23):
Hey, Guntherar, can I dig in a little bit deeper?
It's rob on this tech piece. We recently just less
we hosted a call with S and p's global tech
team and they noted a real dichotomy in ratings and
trajectory where larger high grade issuers were benefiting from AI demand,
but single B and below names, especially post LBO issuers
(08:47):
were really struggling even with the rates coming down generically
meaningfully higher rates than when they originally came to market,
and some were struggling with liquidity. Where are you most
comfortable down the curve and which sub sectors in technology
have you been adding to?
Speaker 4 (09:05):
So in terms of the curve, I think you probably
know most of what we play is you know, lower rated,
so single be ish and you know, I would say,
you know, going back to your point, you know, many
of the l B O s that that that you
know we have in our you know space are you know,
(09:32):
are are free at best. You know, have have some
free cash flow and but not a lot, right, So
so you know what we're banking on is really you know,
the acid value of the businesses over time and the
growth over time. I would say, you know, as we
look forward, you know, going back to what I said,
with the view that rates are going to be coming down,
(09:54):
one that's going to be beneficial in terms of free
cash flow. And two you know, as as I think
you now you know, with rates coming down, there's kind
of the view that valuates for a lot of these
tech companies will go up, right, So you do get
those two benefits.
Speaker 3 (10:10):
You know.
Speaker 4 (10:10):
In addition, if you play the technology space, and.
Speaker 3 (10:13):
Are there any subsectors within tech that you're more involved with?
Speaker 4 (10:17):
Software is definitely one of our favorites.
Speaker 3 (10:20):
So less capital intensive.
Speaker 4 (10:22):
Yeah, that's right.
Speaker 3 (10:24):
And what about from the rest of the T m
T space. You know, cable is a big part of
the high yield index. Are you participating in that space?
There's some pretty significant structural changes going on in both
cable and media, and just wondering what your views were.
Speaker 4 (10:40):
Yeah, so we definitely have exposure to cable. I would
say that, you know, once again, we're senior secured lenders
to you know, you know many of the cable names
out there, and I would say, you know, yes, there
there's some structural sifts. There's very topical situations going on
(11:03):
in particular out of Europe right now with Altis. You know,
going back to what I talked about earlier though that
that being said, you know, we do think there's a
lot of value to control the pipe into the consumer
and that over time that we're going to continue to
see more need for bandwidth and obviously controlling that pipe,
(11:27):
you know, there's value with that. And I would say,
you know, going back to what I said earlier about
being a lender, you know, these are definitely businesses that
are large. Many have different geographic regions that you know,
so worst case you could sell off regions, there could
be other strategic buyers. And also you know that you
(11:50):
can easily create synergies if if some large player wanted
to buy another company and go ahead and create synergies.
So you know, I think it goes back to kind
of what what what I talked about looking for as
a lender, or we're trying to protect our downside. You know,
these are you know, Cable is not a bad place. Definitely,
(12:11):
you have to be thoughtful as to your timing, you know,
with all of this and et cetera.
Speaker 3 (12:18):
Just as a follow I know James has got some
more broader macro issues. What about from the areas you
want to avoid?
Speaker 4 (12:25):
Yeah, I would say, you know, once again, as as
a lender, areas that were you know, less comfortable with
are going to be retail. You know, typically you know
a leverage retailer. As a term loan lender, you're typically
behind some sort of an asset back to facility. And
you know, these are businesses that have a lot of
(12:47):
operating leverage that you could be three times leverage today
and you could be six times leveraged, you know, in
you know, in a heartbeat, and you know, if God
forbids something goes bad with these business is you have
to provide capital to support them. You know, if you
had to go into a bankruptcy et cetera. So that
(13:07):
that's definitely an area that we're less favorable on. I
would say another area that we're also, you know, not
terribly comfortable with is is commercial mortgage companies out there.
And you know, you know, once again, we're somewhat uncomfortable
(13:27):
with what's going on in the commercial real estate space.
And and you know, at the end of the day,
you know where some of the valuations are going to
be coming in, both on the loans that are outstanding
as well as on the properties as as people start
taking prints, you know, in terms of the values.
Speaker 1 (13:44):
So I'm glad you've brought up altis. It's definitely the
elephant in the room for the CLO market right now.
But in terms of leverage loans, it kind of takes
us back to the default idea. And you know, defaults
are running higher than junk bonds. Recoveries are also very low,
So there's a kind of a there's a lot of
risk in this market. You know, maybe there's liquid as
you can trade in and out, but but how do
(14:04):
you head yourself against that risk? What do you do well?
Speaker 4 (14:07):
I mean, it goes back to the basics, James, And
you know, I'd say that, you know, when you initially,
you know, underwrite a company, it's it's it's like I said,
it's it's my general view that you know, bigger is better.
You know, larger companies typically have more liquidity, you know, pockets.
(14:30):
You know, we we we can talk a little bit
about all peace. You know, clearly there's there's issues and
challenges there. But you know that being said, he has
been able to go ahead and come up with a
number of different ways to create some level of liquidity.
And the question is how's he going to be deploying
that liquidity to go ahead and deleverage the company. But
(14:51):
you know, that's one of the benefits of a larger
scale type of business versus the smaller businesses that just
don't have a lot of different liquidity options. So that
that that that that's number one. And I would say that,
you know, in terms of you know, the you know,
(15:13):
as we look at at defaults and recoveries, I would say,
you know, being one of the bigger players in the
leverage loan space is obviously helpful if for whatever reason,
you have to go through some sort of a liability
management exercise. You know, typically being one of the larger players,
you have some benefits of providing some credit support on
(15:35):
the exit.
Speaker 1 (15:36):
So the default rate, we're sort of hearing about the
level around six percent for leverage loans, but that includes
I think distressed exchanges. What's your expectation this year for
leverage loan default rates?
Speaker 4 (15:47):
So we think it's it's going to tick up, you know,
I I you know the number that that I've been using,
and I think it actually might come in a little
lower is three and a half percent. James, that's kind
of that that I've been using. But like I said,
I might I think I might be coming in a
little lower than that.
Speaker 2 (16:01):
Maybe we can talk a little bit now about private markets.
Private cared has been growing a lot over the past
few years, and in twenty twenty three we saw lenders
take out a lot of broadly syndicated the loans out
of the market and refinance them into direct lending. Are
you worried about some sort of competition over supply given
that there's not a lot of supply in the loan market,
and you mentioned M and A, but those deals could
(16:23):
also go private. Is there any type of concern on
that front?
Speaker 4 (16:28):
Well, I think what you're seeing and I think you
guys put an article out not too long ago about
you know, a lot of the private credit stuff, or
some of the private credit stuff coming back to the
broadly syndicated market. You know, I think the reality is
that the broadly syndicated market is just a you know,
a place where you know, you can get tighter and
(16:51):
cheaper execution. And so you know, as you know what
was done in the private credit market from what I'm hearing,
you know, all protections rolling off on a lot of
these deals that were done last year, you know, they're
starting to move over to the broadly syndicated market. So
you know that that that that's what I see in
the near term.
Speaker 1 (17:10):
So leverage loan prices just keep going up. Is that
the outlook for the rest of you I.
Speaker 4 (17:16):
Don't know about Dot James. I think that they can
grind up a bit, but we're going to be hit
with some supply. And in addition to that, you know,
there's you know, there's more than likely going to be
some level of volatility, you know, whether it's in the
rate market, you know, or the equity markets that you know,
I think, you know, seem to be so fairly fully
valued at this point in time, and you know that
(17:38):
at the end of the day, the leverage loan space
is you know, a relative value part of you know,
the credit you know chain. And so if if we
see some weakness, I yield more than likely we will
see some weakness in the leverage loan space. And and
I would go back to where you know, if you're
you know, an active credit manager, that hopefully you can
(18:02):
you can be repositioning and taking advantage of this type
of volatility. But Canley, in my mind, this is not
necessarily a bad volatility. This is, you know, good volatility
because you're an active manager and you should be able
to figure out when to go ahead and put the
risk on and when to take it off, and you
know which sectors, which companies to buy, and which ones
(18:23):
to sell versus you know, the flip side of that.
If you're purely a spread lender, you know you're just
going to go ahead and you know, let the spread
and the leverage whatever you have on just kind of
you really drive your returns.
Speaker 3 (18:37):
Jameson mentioned all tease. I think it's just too big
of an It feels like too big of an item
just to leave there. I wonder whether or not. You
think this is really an issue that's causing have it
across the CLO market? You know, is it a one off?
And if it's not, you know what other altisses are
(18:58):
there that might be out there that could cast some
sort of larger web of negativity, especially since you know,
everything seems to be priced to perfection these days. Are
there are there technical issues that people really aren't seeing
right now that they're just getting a hint of.
Speaker 4 (19:15):
Yeah, Look, I think all teas is clearly an issue
for Europe right and in particular, you know, the European
scilow market. You know, I was over in Europe two
weeks ago, and and you know, I was told that
for some European managers that you know, all tees could
be you know, up to four percent, you know, in
(19:37):
terms of some of their deals at least you know,
across you know, all the different silos that all tees has.
And you know, so in the US, it you know
it it's a relevant uh name, you know, across the board.
But you know, we we have a much more diverse
(19:58):
and a very very large mar market over here, so
we can we can and and many of us have
a lot of divers our portfolios. But you know, I
think your your question is a good one. You know, look,
you know that there there are a number of very
very large names, and the reality is, you know, the
skill O market where it you know in the US
(20:23):
controls roughly sixty plus percent of you know, investments in
in broadly syndicated. You know that that many of the
larger players are going to have you size and very
large positions in a number of these names. You know that,
you know it. You know it's something that we all
(20:44):
have to be thoughtful around in terms of how we're
managing our portfolios. And and Kenley, you know hopefully we're
you know, we're early in terms of exiting you know,
these positions, and you know hopefully that you know that
active management piece is is helpful over time. But you know,
(21:04):
I keep on coming back to that that you know,
and by the way, there's no difference in terms of
that versus you know, some of the larger issuance in
the high yield space. And you know, once again just
with active management, you know, hopefully you know, we're crude
in terms of how we're we're managing that risk across
all the different structures. You know, I would say, you know,
(21:26):
the celos obviously have a lot of you know, structural
features to go ahead and and you know mitigate kind
of risk concerns were just within the structures in terms
of you know, position sizing. You know, if the triple cs,
et cetera, where they basically you can force different types
(21:47):
of constraints and maybe even de leveraging of the deals.
Speaker 2 (21:51):
So we're talking a little bit about CLOS and over
the past two years, clos have had not great years.
The equity was not working, the arbitruct was not year.
But now they seem to be back, and we've seen
issuance kind of boom in the past couple of months.
There's more people buying triple a's what's kind of your
outlook on that front. Do you expect spreads to come in?
(22:13):
Do you think this is like going to stay like
this the rest of the year. Do you think issuance
is going to slow down?
Speaker 4 (22:19):
Yeah, look that that that that's an interesting question. And
you know, I would say that I was around the
institutionalization of the leverage loan space, you know, going back
you know, you know, post the financial crisis, where you know,
can't leak you know, many consultants didn't even know what
(22:39):
leverage loans were. And now it's it's viewed as an
asset class, right, you know, just not not only in
scillow form, but in you know, kind of institutional form.
There's the funds ETFs. Uh, you know, consultants, have you
exposure to floating rate loans, et cetera. And I would
(23:00):
say it feels to me that on the CLO liability
side that we are starting to really take off in
terms of you know, the magnitude and the breadth of
the investor base across all the liability stack, not just
you know, at the at the top, you know, but
(23:22):
but but you know, across the board. And and I'm
seeing you know, many traditional you know, asset management firms
that have, you know, or are buying into whether it's
triple a's, double a's or triple b's, but even down
at the junior parts of the capitol structchu stack, namely, uh,
(23:43):
you know, double b's and triple b's. So that that
that in a case and point you know, I think
you guys probably have seen this, but you know, the
e t F, you know, the growth just in the
E t F side of the equation for you know slow, uh,
like abilities, namely Triple A's has really grown.
Speaker 2 (24:02):
Do you have any expectation or estimate of like issuance
for the year.
Speaker 4 (24:07):
The numbers that I've seen, you know, for this year
in terms of issuance are roughly one hundred and thirty billion.
I think February what was like the second largest or
month you know, in history in terms of the amount
of new issue issuance in this close space. You know,
I don't know that we're going to be able to
go continue to go at the same pace that February was,
(24:29):
but there's no doubt that there is going to be
you know, it feels like there's going to be some
good growth this year, especially versus last year, and on.
Speaker 1 (24:39):
The new buy is going to I mean, who are
you seeing You don't have to mention the names of
the companies, but what kinds of investor you're sining? Is
it sovereign? Well, isn't it a fund?
Speaker 4 (24:47):
Yeah, it's really it's really broad James. Yeah, it's it's look,
you know, going back, you know, four or five years ago,
like if you were playing you know, if you're replacing
a skill, oh, you know, the the investor base would
be you know, total return funds, hedge funds, some you
know Keenhley credit managers that would be buying them as uh.
(25:10):
Now you know it's it's it's broad it's insurance companies,
it's it's acid you know, asset management firms. Uh, you know,
like fixed income funds. You know, it's you know, banks
are definitely broad based. Banks globally are buying the top
of the stack.
Speaker 2 (25:30):
I was wondering a little bit about the equity portion
because over the past two years we've seen a lot
of the like kind of like companies just racing our
ass managers just raising their own funds and doing deals
with captive equity. I was wondering if you're seeing that
change and go back to a more like normal process
where the equity is actually syndicated.
Speaker 4 (25:51):
We we are seeing, I mean, one, you know, many
folks have captive equity. We are starting to see more
interest in terms of third party equity as well. So
definitely that's the case. And I would say, you know,
the liability tightening is definitely helping that.
Speaker 2 (26:13):
And on the liability tightening, do you have any expectations
sure this triple A spreads are going Are they going
to be around one hundred basis points.
Speaker 4 (26:21):
By your end, I think that that that I mean,
right now they're roughly one fifty, so that would continue
to be a really big move. I like, I think
they can maybe compress a little bit, but you know,
I'm not expecting them to go in that tight I mean,
things can always, you know, surprise us. You know, I
would say, you know, when you step back for a
(26:45):
minute here, in general, you know, higher rates typically mean
a little bit more volatility than lower rates. Right, so
as we look forward, you know, because you know that
that's my base case, higher rates for longer going to
have some level of volatility. There is correlation across a
lot of these markets. So and you know we're also
(27:07):
moving into you know, an election, right which could also
create some level of volatility.
Speaker 3 (27:13):
So listen, It's not that often we get to talk
to somebody who manages as much money as you do,
and people are always asking what the smart money is doing,
and I think, you know, they certainly don't want to
know from me. But the question I get all the
time is what's the next in Vidia? I think we
get it from a credit perspective, the best case is
par But if you're thinking about asset growth. You know,
(27:35):
are there a couple of names out there that you'd
like to highlight that you think people are supposed to
be taking a look at that are undervalue, that have
much greater growth potential than others.
Speaker 4 (27:46):
You know, I would say, you know, we're leverage loan investors,
so typically are upsides capped and we have all, you know,
typically a lot of downside. I would say, you know
that in terms of you know, total return opportunity, I
would I would look at some of the secured bonds
(28:08):
that are out there, you know, because you know, in
a lot of cases, you have the floors of being
a secured you know, participant in the capital structure of
these companies, but the upside of a bond and you
know that could obviously be anywhere from you know, five
to ten points any cases. You know, companies don't like
(28:30):
having secured bonds in their capital structure, so they might
actually take them out, you know, then then later so
you know that that that that's where I would kind
of focus. And you know, names that you know, we're
we're pretty comfortable with are going to be names like
Life Point, you know, et cetera. One of the hospital
companies you know that that I think has done a
pretty good job here recently in terms of delivering results.
Speaker 3 (28:53):
I've gone there.
Speaker 2 (28:54):
I have a question because you joined sound Point right
after the company bought a short or bloom and so
I was wondering, how's that transition going. Has the combination
worked out?
Speaker 4 (29:05):
Yes, it is a company at Yeah, it's worked out nicely.
Speaker 3 (29:10):
You know.
Speaker 4 (29:10):
We we we were fortunate to go ahead and bring
on board a number of people, and I would say
both on the investment side as well as on the
non investment side. I would say on the investment side,
we have five of their more analysts, you know, the
(29:30):
the you know, working with them has been fantastic, it's been.
But in addition to that, we brought over a number
of their quantitative strategists that that that work directly for
the investment team in terms of putting together data and
analytics as well as uh, you know, a lot of
(29:52):
information for us on the investment side. And it's been
you know great, you know, working with all these folks.
So I think the the acquisition or merger or whatever
we want to call it, at least in my mind,
couldn't have gone better.
Speaker 1 (30:07):
Just going back to something you said earlier about liquidity,
that you find it fairly easy to trade in and
out of loans. The conventional wisdom in markets has always
been that loans have been relatively illiquid compared to high
yield bonds particularly, And I just wondered, you know, how
would you compare the two How is how easy or
difficult is it to trade big blocks? And you know, what,
(30:28):
what are the relative differences between the two markets right
now in tons of liquidity?
Speaker 2 (30:32):
Yeah?
Speaker 4 (30:32):
No, I I think that's you know, another good question, James.
I would say, for for look, the larger, broadly syndicated
names that are that that one can trade with most
dealers that that are away from one particular agent bank
are going to be highly liquid. I think in some
(30:55):
cases there is one agent bank that that I really
don't want to to name, that with that particular institution
you can trade with them and they generally provide good liquidity.
But you know, with a lot of the other names
where you can broadly trade them with you know, five
or seven different counterparties, you can execute you know, multiple
(31:18):
millions on a regular way, just as you can in bombs. Right,
So I would say that they're very similar in terms
of the ability to execute for most larger names.
Speaker 1 (31:32):
Okay, and to sort of feedback off Rob's question about
the next and video, and just to sort of wrap
things up a bit, if you look at everything you're
you're you're surveying right now in terms of investment opportunities,
what do you think the best relative value is right
now for let's say, just for this year.
Speaker 4 (31:47):
Well, that's why I you know, I came back to
the leverage loan space, right. I think if you look
at you know, leverage loans, you know I was looking here,
you know, in preparation for this call. You know, if
you look at the five year sharp ratio for loans,
you know, I think it's like zero point eighty five, So,
you know, good returns with relatively low volatility. I think
(32:10):
with the view that and that's on lever right, so
with the view that that rates are going to be
higher for longer, I think that continues to be a
pretty good place to be.
Speaker 1 (32:21):
And what about the things that that you're already worried about.
We've had one guest on this show recently saying that
commercial real estate could blow up four hundred banks in
the US, which presumably would ripple through everything and be
very problematic for the loan market. What do you what
are you worried about?
Speaker 4 (32:37):
You know, I think what you're worry about is what
you really don't know, and you know, so you have
to be directionally prepared, you know, for you know, for
you know, with with an outlook. And I would say
right now, in general, you know, our portfolios are going
to be somewhat defensive positioned in terms of you know
(33:02):
when and more liquid. You know, the portfolios where we
have a lot of flexibility are going to have very limited,
lower quality type of exposure, namely triples, et cetera. But
you know, and you know, so that's how we're positioned.
We think that with the higher rate environment that we're
(33:22):
going to continue to have some level of volatility. I
don't think it's going to be catastrophic. I do think,
you know, going back to the commercial real estate question,
I think you know that the FED and everybody is
is you know that there's a lot of things that
they're keeping an eye on, but that's one of them.
And directionally, as rates go lower, that will be helpful.
But at the same time you know that that there
(33:44):
has to be a revaluation in terms of you know
what a lot of these properties are worth, and you
know we're you know we're we're where folks are in
terms of the mortgage is outstanding to that.
Speaker 1 (33:56):
Great stuff to sign IF Industment off for the US
Performing credit and CLO's at Soundpoint Capital Management. It's been
a pleasure having you on the credit edge. Many thanks,
thank you. Also want to say a big thanks to
Carmen Arroyo with Bloomberg News. Brilliant to see you again, cheers,
Thank you so much, James, and to Robert Schiffman with
Bloomberg Intelligence. Great to have you back on the show.
Speaker 3 (34:14):
Great times, James.
Speaker 1 (34:16):
You can find all Carmen Arroyo's great scoops on the
Bloomberg Terminal and of course at Bloomberg dot com. Also
check out Rob Schiffman's excellent analysis on the Terminal or
call him directly. He's a great guy to talk to,
and Bloomberg Intelligence is a fantastic resource. And please do
subscribe wherever you get your podcasts. We're on Apple, Spotify
and all good podcast providers, including the Bloomberg Terminal. Give
(34:39):
us a review, tell your friends, or email me directly
at jcrombieight at Bloomberg dot Net. I'm James Cromby. It's
been a pleasure having you join us again next week
on the Credit Edge
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome gun To Stein,
chief investment officer for US Performing Credit and CLO's at
Soundpoint Capital Management. How are you gun To? I'm great,
Thank you, Thank you so much for joining us today.
We're excited to dig into your market views and the outlook.
Also delighted to welcome back Carmen Arroyo with Bloomberg News
(00:41):
in New York. Great to see you again, Carmen.
Speaker 2 (00:42):
Thank you for having me.
Speaker 1 (00:43):
James and from Bloomberg Intelligence. Excellent, have back on the show.
Rob Schiffman from Bloomberg Intelligence, How are you doing?
Speaker 3 (00:49):
Best part of my day, James.
Speaker 1 (00:51):
So let's start with you gun To. Great to see
you on the Credit Edge. Just to set the scene
a little bit, credit markets are trading at very bullish levels.
Bond spreads of the titus in two years, which means
you don't get compensated very much for the risk of
borrowers not paying you back. Corporate debt across the globe
is very much in demand. There seems to be some
signs of froth developing, which I hope we'll talk about
in a bit. All the optimism seems to be founded
(01:12):
on a belief that the US economy can avoid recession.
Companies are doing just fine with these much higher borrowing costs,
and rate cuts are only a matter of time, which
boosts demand for yield and will support anyone struggling to pay.
At the same time, we're seeing record levels of debt issuance.
US companies have a lot more refinancing to do this year,
and they're taking advantage of a window to sell a
lot more bonds. But there's also a boom going on
(01:35):
in private markets asset based finance, structured debt like lateralized
loan obligations and asset backed securities issues really are taking
advantage of investor demand. Here, there seems to be not
very much to worry about, although a lot of people
are saying that there's a trillion dollar commercial real estate
debt wall bearing down upon US. Nonetheless, people don't seem worried.
(01:55):
What's your take on to as a long term participant
in this market, our credit Mardi's offering fair value relative
to the risk, you know, I think.
Speaker 4 (02:03):
That's a good question. James, and I would say, you
know that one, you know, at a high level, you know,
we we are in the camp that rates are going
to be higher for longer, and our view is generally
speaking that you know, the Fed's going to be careful
in terms of bringing down rates. You know that inflation
(02:23):
continues to be prevalent, and so we we we feel
that rates, you know, are more than likely going to
start coming down later in this year, and more than
likely is not going to be three cuts. You know,
our base case is more like you know, one or
two starting you know, arguably late summer, you know, early fall.
(02:43):
That that that that's our view. And so along with that,
you know, as in terms of positioning in terms of
the broad credit markets, you know, we do feel like
there's good value still in the leverage loan space. You know,
as you pointed out with with high yield, you know,
spreads are all time tights Kenley. If you're taking you know,
(03:04):
the view on high yield, you know you're also taking
a view on duration and rates, and you know, although
you know, we feel like rates at least in the
short end, are going to be coming down, you know
we'll see, you know, when they start actually coming down
at the back end, so you know that that that's
our view. We feel like, you know, as we progress,
(03:27):
you know, we we do continue to feel like there's
going to be a soft landing. So we're not you know,
overly worried about the economy, but we do feel like
there's better value in the leverage loan space. And there's
obviously a lot of different ways to play the leverage
loan space, including unlevered versus levered type strategies, you know,
such as in collateralized loan obligations.
Speaker 1 (03:49):
But just let me stop you on the loan side.
On the you know, leverage loans has been you know,
a big rally, had a big ready last year as well,
it's kind of extended this year. A lot of people
do like the flow rate nature of it. The demand
is going up because the clo formation is going up
so quickly, and there you know, on a net basis,
the supply isn't really there, so that's you know, technically
(04:09):
that's pushing up prices. But on the other hand, you've
got you know, fundamental concerns about defaults. You've got you know,
we just had a piece recently on how the ratio
between companies earnings and their interest expenses fall into the
lowest levels since the pandemic, isn't there a lot of
risk building there?
Speaker 4 (04:24):
Yeah, there's definitely some risk you know on you know,
on the flip side. You know, as you start looking forward,
you know, in terms of where we are from an
economic standpoint, if you you know, once again have to
buy into, so to speak, a soft landing. You know
that we feel you know that a lot of the
I mean, you know, when you start thinking about that
(04:45):
soft landing rates are going to be moving lower. That's
going to benefit a lot of these levered companies and
obviously companies that are borrowing on the floating rate side,
so that's going to be a direct benefit from them,
you know, I would say on you know, in addition,
on the supply side of the wage and at least
when what we're hearing, you know, talking to bankers is
that M and A is going to start picking up.
(05:05):
And you know, obviously you've seen some headlines around you know,
some M and A types of activities with uh, you know,
some public companies, including on the retail side. So we
feel like there is going to be M and A
picking up, and you know, along with that, you know,
we we will see some level of issuance on the
supply side. You know what. What I would also point out,
(05:26):
you know, is we're a big participant in the broadly
syndicated market. At least that's that's what I'm responsible for.
We do have a direct lending business as well. But
one of the benefits of you know, participating in the
broadly syndicated market where you know, you know, the a
large part of our market is fairly liquid, the loan's trade.
(05:48):
So what we can do in this particular marketplace, you know,
as an active manager, is reposition our portfolios around industries
that we like, companies that we like versus ones that
we don't like, and continue continue to maneuver the portfolios
over time and reshape them, you know, all the time.
(06:09):
And so that's really the benefit of participating in the
broadly syndicated market versus some of the other markets where
you know, you go in, you underwrite and basically your
you're spread lander over time, and it's really hard to
go ahead and get out of the position.
Speaker 2 (06:23):
I was wondering if you could talk a little bit
more about that. Are there any sectors that you're liking
right now. Are you trading out of any positions that
you don't want to be in anymore? Is there any
type of company that you're done with?
Speaker 4 (06:36):
Well, I would say, let me just frame it. In
some sectors that we like, you know, we're definitely we're
positive on the technology sector as a whole. And you know,
once again, looking at these companies as leverage lenders, you know,
in many cases, you know, we we we have limited upside.
(06:58):
You know, the best we can do is get paid
you know, par or effectively our money back, and you know,
things go bad, we get something materially less than par.
And I think, as we all know, recoveries in some
companies have been awful. Talking you know, Nickels dimes twenty
thirty cents on the dollar. So, you know, with the
(07:20):
nice thing about the technology space is what we've seen
with a lot of these companies that have actually been
growing even over the past few years, when you know,
maybe the broad swath of the economy hasn't. And then
the other nice pieces they literally have thousands of different customers,
recurring revenue streams, and in many cases these companies can
(07:43):
survive on their own. But they're also very nice, attractive
acquisition targets for strategics or other private equity firms that
are looking to go ahead and grow their business and
do bolt on acquisitions where you can add these types
of businesses on and basically, you know, create a lot
of synergies. So the way I think about, you know,
(08:06):
as a lender of things that I like, I like
businesses that are larger, that are divisible, and that at
times can be strategic in terms of if you need
to go ahead and sell and you know, different parts
of the business.
Speaker 3 (08:23):
Hey, Guntherar, can I dig in a little bit deeper?
It's rob on this tech piece. We recently just less
we hosted a call with S and p's global tech
team and they noted a real dichotomy in ratings and
trajectory where larger high grade issuers were benefiting from AI demand,
but single B and below names, especially post LBO issuers
(08:47):
were really struggling even with the rates coming down generically
meaningfully higher rates than when they originally came to market,
and some were struggling with liquidity. Where are you most
comfortable down the curve and which sub sectors in technology
have you been adding to?
Speaker 4 (09:05):
So in terms of the curve, I think you probably
know most of what we play is you know, lower rated,
so single be ish and you know, I would say,
you know, going back to your point, you know, many
of the l B O s that that that you
know we have in our you know space are you know,
(09:32):
are are free at best. You know, have have some
free cash flow and but not a lot, right, So
so you know what we're banking on is really you know,
the acid value of the businesses over time and the
growth over time. I would say, you know, as we
look forward, you know, going back to what I said,
with the view that rates are going to be coming down,
(09:54):
one that's going to be beneficial in terms of free
cash flow. And two you know, as as I think
you now you know, with rates coming down, there's kind
of the view that valuates for a lot of these
tech companies will go up, right, So you do get
those two benefits.
Speaker 3 (10:10):
You know.
Speaker 4 (10:10):
In addition, if you play the technology space, and.
Speaker 3 (10:13):
Are there any subsectors within tech that you're more involved with?
Speaker 4 (10:17):
Software is definitely one of our favorites.
Speaker 3 (10:20):
So less capital intensive.
Speaker 4 (10:22):
Yeah, that's right.
Speaker 3 (10:24):
And what about from the rest of the T m
T space. You know, cable is a big part of
the high yield index. Are you participating in that space?
There's some pretty significant structural changes going on in both
cable and media, and just wondering what your views were.
Speaker 4 (10:40):
Yeah, so we definitely have exposure to cable. I would
say that, you know, once again, we're senior secured lenders
to you know, you know many of the cable names
out there, and I would say, you know, yes, there
there's some structural sifts. There's very topical situations going on
(11:03):
in particular out of Europe right now with Altis. You know,
going back to what I talked about earlier though that
that being said, you know, we do think there's a
lot of value to control the pipe into the consumer
and that over time that we're going to continue to
see more need for bandwidth and obviously controlling that pipe,
(11:27):
you know, there's value with that. And I would say,
you know, going back to what I said earlier about
being a lender, you know, these are definitely businesses that
are large. Many have different geographic regions that you know,
so worst case you could sell off regions, there could
be other strategic buyers. And also you know that you
(11:50):
can easily create synergies if if some large player wanted
to buy another company and go ahead and create synergies.
So you know, I think it goes back to kind
of what what what I talked about looking for as
a lender, or we're trying to protect our downside. You know,
these are you know, Cable is not a bad place. Definitely,
(12:11):
you have to be thoughtful as to your timing, you know,
with all of this and et cetera.
Speaker 3 (12:18):
Just as a follow I know James has got some
more broader macro issues. What about from the areas you
want to avoid?
Speaker 4 (12:25):
Yeah, I would say, you know, once again, as as
a lender, areas that were you know, less comfortable with
are going to be retail. You know, typically you know
a leverage retailer. As a term loan lender, you're typically
behind some sort of an asset back to facility. And
you know, these are businesses that have a lot of
(12:47):
operating leverage that you could be three times leverage today
and you could be six times leveraged, you know, in
you know, in a heartbeat, and you know, if God
forbids something goes bad with these business is you have
to provide capital to support them. You know, if you
had to go into a bankruptcy et cetera. So that
(13:07):
that's definitely an area that we're less favorable on. I
would say another area that we're also, you know, not
terribly comfortable with is is commercial mortgage companies out there.
And you know, you know, once again, we're somewhat uncomfortable
(13:27):
with what's going on in the commercial real estate space.
And and you know, at the end of the day,
you know where some of the valuations are going to
be coming in, both on the loans that are outstanding
as well as on the properties as as people start
taking prints, you know, in terms of the values.
Speaker 1 (13:44):
So I'm glad you've brought up altis. It's definitely the
elephant in the room for the CLO market right now.
But in terms of leverage loans, it kind of takes
us back to the default idea. And you know, defaults
are running higher than junk bonds. Recoveries are also very low,
So there's a kind of a there's a lot of
risk in this market. You know, maybe there's liquid as
you can trade in and out, but but how do
(14:04):
you head yourself against that risk? What do you do well?
Speaker 4 (14:07):
I mean, it goes back to the basics, James, And
you know, I'd say that, you know, when you initially,
you know, underwrite a company, it's it's it's like I said,
it's it's my general view that you know, bigger is better.
You know, larger companies typically have more liquidity, you know, pockets.
(14:30):
You know, we we we can talk a little bit
about all peace. You know, clearly there's there's issues and
challenges there. But you know that being said, he has
been able to go ahead and come up with a
number of different ways to create some level of liquidity.
And the question is how's he going to be deploying
that liquidity to go ahead and deleverage the company. But
(14:51):
you know, that's one of the benefits of a larger
scale type of business versus the smaller businesses that just
don't have a lot of different liquidity options. So that
that that that that's number one. And I would say that,
you know, in terms of you know, the you know,
(15:13):
as we look at at defaults and recoveries, I would say,
you know, being one of the bigger players in the
leverage loan space is obviously helpful if for whatever reason,
you have to go through some sort of a liability
management exercise. You know, typically being one of the larger players,
you have some benefits of providing some credit support on
(15:35):
the exit.
Speaker 1 (15:36):
So the default rate, we're sort of hearing about the
level around six percent for leverage loans, but that includes
I think distressed exchanges. What's your expectation this year for
leverage loan default rates?
Speaker 4 (15:47):
So we think it's it's going to tick up, you know,
I I you know the number that that I've been using,
and I think it actually might come in a little
lower is three and a half percent. James, that's kind
of that that I've been using. But like I said,
I might I think I might be coming in a
little lower than that.
Speaker 2 (16:01):
Maybe we can talk a little bit now about private markets.
Private cared has been growing a lot over the past
few years, and in twenty twenty three we saw lenders
take out a lot of broadly syndicated the loans out
of the market and refinance them into direct lending. Are
you worried about some sort of competition over supply given
that there's not a lot of supply in the loan market,
and you mentioned M and A, but those deals could
(16:23):
also go private. Is there any type of concern on
that front?
Speaker 4 (16:28):
Well, I think what you're seeing and I think you
guys put an article out not too long ago about
you know, a lot of the private credit stuff, or
some of the private credit stuff coming back to the
broadly syndicated market. You know, I think the reality is
that the broadly syndicated market is just a you know,
a place where you know, you can get tighter and
(16:51):
cheaper execution. And so you know, as you know what
was done in the private credit market from what I'm hearing,
you know, all protections rolling off on a lot of
these deals that were done last year, you know, they're
starting to move over to the broadly syndicated market. So
you know that that that that's what I see in
the near term.
Speaker 1 (17:10):
So leverage loan prices just keep going up. Is that
the outlook for the rest of you I.
Speaker 4 (17:16):
Don't know about Dot James. I think that they can
grind up a bit, but we're going to be hit
with some supply. And in addition to that, you know,
there's you know, there's more than likely going to be
some level of volatility, you know, whether it's in the
rate market, you know, or the equity markets that you know,
I think, you know, seem to be so fairly fully
valued at this point in time, and you know that
(17:38):
at the end of the day, the leverage loan space
is you know, a relative value part of you know,
the credit you know chain. And so if if we
see some weakness, I yield more than likely we will
see some weakness in the leverage loan space. And and
I would go back to where you know, if you're
you know, an active credit manager, that hopefully you can
(18:02):
you can be repositioning and taking advantage of this type
of volatility. But Canley, in my mind, this is not
necessarily a bad volatility. This is, you know, good volatility
because you're an active manager and you should be able
to figure out when to go ahead and put the
risk on and when to take it off, and you
know which sectors, which companies to buy, and which ones
(18:23):
to sell versus you know, the flip side of that.
If you're purely a spread lender, you know you're just
going to go ahead and you know, let the spread
and the leverage whatever you have on just kind of
you really drive your returns.
Speaker 3 (18:37):
Jameson mentioned all tease. I think it's just too big
of an It feels like too big of an item
just to leave there. I wonder whether or not. You
think this is really an issue that's causing have it
across the CLO market? You know, is it a one off?
And if it's not, you know what other altisses are
(18:58):
there that might be out there that could cast some
sort of larger web of negativity, especially since you know,
everything seems to be priced to perfection these days. Are
there are there technical issues that people really aren't seeing
right now that they're just getting a hint of.
Speaker 4 (19:15):
Yeah, Look, I think all teas is clearly an issue
for Europe right and in particular, you know, the European
scilow market. You know, I was over in Europe two
weeks ago, and and you know, I was told that
for some European managers that you know, all tees could
be you know, up to four percent, you know, in
(19:37):
terms of some of their deals at least you know,
across you know, all the different silos that all tees has.
And you know, so in the US, it you know
it it's a relevant uh name, you know, across the board.
But you know, we we have a much more diverse
(19:58):
and a very very large mar market over here, so
we can we can and and many of us have
a lot of divers our portfolios. But you know, I
think your your question is a good one. You know, look,
you know that there there are a number of very
very large names, and the reality is, you know, the
skill O market where it you know in the US
(20:23):
controls roughly sixty plus percent of you know, investments in
in broadly syndicated. You know that that many of the
larger players are going to have you size and very
large positions in a number of these names. You know that,
you know it. You know it's something that we all
(20:44):
have to be thoughtful around in terms of how we're
managing our portfolios. And and Kenley, you know hopefully we're
you know, we're early in terms of exiting you know,
these positions, and you know hopefully that you know that
active management piece is is helpful over time. But you know,
(21:04):
I keep on coming back to that that you know,
and by the way, there's no difference in terms of
that versus you know, some of the larger issuance in
the high yield space. And you know, once again just
with active management, you know, hopefully you know, we're crude
in terms of how we're we're managing that risk across
all the different structures. You know, I would say, you know,
(21:26):
the celos obviously have a lot of you know, structural
features to go ahead and and you know mitigate kind
of risk concerns were just within the structures in terms
of you know, position sizing. You know, if the triple cs,
et cetera, where they basically you can force different types
(21:47):
of constraints and maybe even de leveraging of the deals.
Speaker 2 (21:51):
So we're talking a little bit about CLOS and over
the past two years, clos have had not great years.
The equity was not working, the arbitruct was not year.
But now they seem to be back, and we've seen
issuance kind of boom in the past couple of months.
There's more people buying triple a's what's kind of your
outlook on that front. Do you expect spreads to come in?
(22:13):
Do you think this is like going to stay like
this the rest of the year. Do you think issuance
is going to slow down?
Speaker 4 (22:19):
Yeah, look that that that that's an interesting question. And
you know, I would say that I was around the
institutionalization of the leverage loan space, you know, going back
you know, you know, post the financial crisis, where you know,
can't leak you know, many consultants didn't even know what
(22:39):
leverage loans were. And now it's it's viewed as an
asset class, right, you know, just not not only in
scillow form, but in you know, kind of institutional form.
There's the funds ETFs. Uh, you know, consultants, have you
exposure to floating rate loans, et cetera. And I would
(23:00):
say it feels to me that on the CLO liability
side that we are starting to really take off in
terms of you know, the magnitude and the breadth of
the investor base across all the liability stack, not just
you know, at the at the top, you know, but
(23:22):
but but you know, across the board. And and I'm
seeing you know, many traditional you know, asset management firms
that have, you know, or are buying into whether it's
triple a's, double a's or triple b's, but even down
at the junior parts of the capitol structchu stack, namely, uh,
(23:43):
you know, double b's and triple b's. So that that
that in a case and point you know, I think
you guys probably have seen this, but you know, the
e t F, you know, the growth just in the
E t F side of the equation for you know slow, uh,
like abilities, namely Triple A's has really grown.
Speaker 2 (24:02):
Do you have any expectation or estimate of like issuance
for the year.
Speaker 4 (24:07):
The numbers that I've seen, you know, for this year
in terms of issuance are roughly one hundred and thirty billion.
I think February what was like the second largest or
month you know, in history in terms of the amount
of new issue issuance in this close space. You know,
I don't know that we're going to be able to
go continue to go at the same pace that February was,
(24:29):
but there's no doubt that there is going to be
you know, it feels like there's going to be some
good growth this year, especially versus last year, and on.
Speaker 1 (24:39):
The new buy is going to I mean, who are
you seeing You don't have to mention the names of
the companies, but what kinds of investor you're sining? Is
it sovereign? Well, isn't it a fund?
Speaker 4 (24:47):
Yeah, it's really it's really broad James. Yeah, it's it's look,
you know, going back, you know, four or five years ago,
like if you were playing you know, if you're replacing
a skill, oh, you know, the the investor base would
be you know, total return funds, hedge funds, some you
know Keenhley credit managers that would be buying them as uh.
(25:10):
Now you know it's it's it's broad it's insurance companies,
it's it's acid you know, asset management firms. Uh, you know,
like fixed income funds. You know, it's you know, banks
are definitely broad based. Banks globally are buying the top
of the stack.
Speaker 2 (25:30):
I was wondering a little bit about the equity portion
because over the past two years we've seen a lot
of the like kind of like companies just racing our
ass managers just raising their own funds and doing deals
with captive equity. I was wondering if you're seeing that
change and go back to a more like normal process
where the equity is actually syndicated.
Speaker 4 (25:51):
We we are seeing, I mean, one, you know, many
folks have captive equity. We are starting to see more
interest in terms of third party equity as well. So
definitely that's the case. And I would say, you know,
the liability tightening is definitely helping that.
Speaker 2 (26:13):
And on the liability tightening, do you have any expectations
sure this triple A spreads are going Are they going
to be around one hundred basis points.
Speaker 4 (26:21):
By your end, I think that that that I mean,
right now they're roughly one fifty, so that would continue
to be a really big move. I like, I think
they can maybe compress a little bit, but you know,
I'm not expecting them to go in that tight I mean,
things can always, you know, surprise us. You know, I
would say, you know, when you step back for a
(26:45):
minute here, in general, you know, higher rates typically mean
a little bit more volatility than lower rates. Right, so
as we look forward, you know, because you know that
that's my base case, higher rates for longer going to
have some level of volatility. There is correlation across a
lot of these markets. So and you know we're also
(27:07):
moving into you know, an election, right which could also
create some level of volatility.
Speaker 3 (27:13):
So listen, It's not that often we get to talk
to somebody who manages as much money as you do,
and people are always asking what the smart money is doing,
and I think, you know, they certainly don't want to
know from me. But the question I get all the
time is what's the next in Vidia? I think we
get it from a credit perspective, the best case is
par But if you're thinking about asset growth. You know,
(27:35):
are there a couple of names out there that you'd
like to highlight that you think people are supposed to
be taking a look at that are undervalue, that have
much greater growth potential than others.
Speaker 4 (27:46):
You know, I would say, you know, we're leverage loan investors,
so typically are upsides capped and we have all, you know,
typically a lot of downside. I would say, you know
that in terms of you know, total return opportunity, I
would I would look at some of the secured bonds
(28:08):
that are out there, you know, because you know, in
a lot of cases, you have the floors of being
a secured you know, participant in the capital structure of
these companies, but the upside of a bond and you
know that could obviously be anywhere from you know, five
to ten points any cases. You know, companies don't like
(28:30):
having secured bonds in their capital structure, so they might
actually take them out, you know, then then later so
you know that that that that's where I would kind
of focus. And you know, names that you know, we're
we're pretty comfortable with are going to be names like
Life Point, you know, et cetera. One of the hospital
companies you know that that I think has done a
pretty good job here recently in terms of delivering results.
Speaker 3 (28:53):
I've gone there.
Speaker 2 (28:54):
I have a question because you joined sound Point right
after the company bought a short or bloom and so
I was wondering, how's that transition going. Has the combination
worked out?
Speaker 4 (29:05):
Yes, it is a company at Yeah, it's worked out nicely.
Speaker 3 (29:10):
You know.
Speaker 4 (29:10):
We we we were fortunate to go ahead and bring
on board a number of people, and I would say
both on the investment side as well as on the
non investment side. I would say on the investment side,
we have five of their more analysts, you know, the
(29:30):
the you know, working with them has been fantastic, it's been.
But in addition to that, we brought over a number
of their quantitative strategists that that that work directly for
the investment team in terms of putting together data and
analytics as well as uh, you know, a lot of
(29:52):
information for us on the investment side. And it's been
you know great, you know, working with all these folks.
So I think the the acquisition or merger or whatever
we want to call it, at least in my mind,
couldn't have gone better.
Speaker 1 (30:07):
Just going back to something you said earlier about liquidity,
that you find it fairly easy to trade in and
out of loans. The conventional wisdom in markets has always
been that loans have been relatively illiquid compared to high
yield bonds particularly, And I just wondered, you know, how
would you compare the two How is how easy or
difficult is it to trade big blocks? And you know, what,
(30:28):
what are the relative differences between the two markets right
now in tons of liquidity?
Speaker 2 (30:32):
Yeah?
Speaker 4 (30:32):
No, I I think that's you know, another good question, James.
I would say, for for look, the larger, broadly syndicated
names that are that that one can trade with most
dealers that that are away from one particular agent bank
are going to be highly liquid. I think in some
(30:55):
cases there is one agent bank that that I really
don't want to to name, that with that particular institution
you can trade with them and they generally provide good liquidity.
But you know, with a lot of the other names
where you can broadly trade them with you know, five
or seven different counterparties, you can execute you know, multiple
(31:18):
millions on a regular way, just as you can in bombs. Right,
So I would say that they're very similar in terms
of the ability to execute for most larger names.
Speaker 1 (31:32):
Okay, and to sort of feedback off Rob's question about
the next and video, and just to sort of wrap
things up a bit, if you look at everything you're
you're you're surveying right now in terms of investment opportunities,
what do you think the best relative value is right
now for let's say, just for this year.
Speaker 4 (31:47):
Well, that's why I you know, I came back to
the leverage loan space, right. I think if you look
at you know, leverage loans, you know I was looking here,
you know, in preparation for this call. You know, if
you look at the five year sharp ratio for loans,
you know, I think it's like zero point eighty five, So,
you know, good returns with relatively low volatility. I think
(32:10):
with the view that and that's on lever right, so
with the view that that rates are going to be
higher for longer, I think that continues to be a
pretty good place to be.
Speaker 1 (32:21):
And what about the things that that you're already worried about.
We've had one guest on this show recently saying that
commercial real estate could blow up four hundred banks in
the US, which presumably would ripple through everything and be
very problematic for the loan market. What do you what
are you worried about?
Speaker 4 (32:37):
You know, I think what you're worry about is what
you really don't know, and you know, so you have
to be directionally prepared, you know, for you know, for
you know, with with an outlook. And I would say
right now, in general, you know, our portfolios are going
to be somewhat defensive positioned in terms of you know
(33:02):
when and more liquid. You know, the portfolios where we
have a lot of flexibility are going to have very limited,
lower quality type of exposure, namely triples, et cetera. But
you know, and you know, so that's how we're positioned.
We think that with the higher rate environment that we're
(33:22):
going to continue to have some level of volatility. I
don't think it's going to be catastrophic. I do think,
you know, going back to the commercial real estate question,
I think you know that the FED and everybody is
is you know that there's a lot of things that
they're keeping an eye on, but that's one of them.
And directionally, as rates go lower, that will be helpful.
But at the same time you know that that there
(33:44):
has to be a revaluation in terms of you know
what a lot of these properties are worth, and you
know we're you know we're we're where folks are in
terms of the mortgage is outstanding to that.
Speaker 1 (33:56):
Great stuff to sign IF Industment off for the US
Performing credit and CLO's at Soundpoint Capital Management. It's been
a pleasure having you on the credit edge. Many thanks,
thank you. Also want to say a big thanks to
Carmen Arroyo with Bloomberg News. Brilliant to see you again, cheers,
Thank you so much, James, and to Robert Schiffman with
Bloomberg Intelligence. Great to have you back on the show.
Speaker 3 (34:14):
Great times, James.
Speaker 1 (34:16):
You can find all Carmen Arroyo's great scoops on the
Bloomberg Terminal and of course at Bloomberg dot com. Also
check out Rob Schiffman's excellent analysis on the Terminal or
call him directly. He's a great guy to talk to,
and Bloomberg Intelligence is a fantastic resource. And please do
subscribe wherever you get your podcasts. We're on Apple, Spotify
and all good podcast providers, including the Bloomberg Terminal. Give
(34:39):
us a review, tell your friends, or email me directly
at jcrombieight at Bloomberg dot Net. I'm James Cromby. It's
been a pleasure having you join us again next week
on the Credit Edge
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