February 1, 2024 • 38 mins
Collateralized loan obligations are among the best debt investment opportunities for this year, according to John Wright, global head of credit at Bain Capital. Spreads on the structured investment vehicles, which repackage leveraged loans into bonds of varying risk, may tighten further, even as default rates rise, Wright tells Bloomberg News’ Lisa Lee and James Crombie and Bloomberg Intelligence’s Mike Holland in the latest Credit Edge podcast. He also sees robust potential for growth in India and Australia, as well as in private credit, especially for buyouts. Slim recovery rates in the loan market are among the biggest worries. Also in this episode, BI’s Holland analyzes the outlook for WeightWatchers, whose bonds are dropping. The company faces a tough road ahead but there is a path to survival, Holland says.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome John Wright, global
head of credit at Bain Capital.
Speaker 2 (00:28):
How are you, John, I'm great, Thanks for having me, James,
Thanks so.
Speaker 1 (00:31):
Much for joining today. We're excited to dig into your
market views and the outlook. We're also delighted to welcome
back Bloomberg's very own Lisa Lee covering credit markets from London.
Great to see you again, Lisa, to be here again,
and from Bloomberg Intelligence. Excellent, see Mike Holland again. Welcome back, Mike.
Speaker 3 (00:46):
Thank you, James. Great to be here.
Speaker 1 (00:47):
So let's start with you, John. It's great to have
you on the Credit Edge. Credit markets are trading at
very tight levels. There's more demand than suppliers. Investors race
to lock in these relatively high yields while they still
can before the Fed starts easing. But meanwhile we're seeing
record levels of issuance. Companies have a lot more refinanced
to do this year, and they're taking advantage of a
(01:07):
window to sell bonds and loans. But there's a lot
of debate also about how much and how soon the
FED will cut rates, which will also have a big
impact on credit. And at the same time, the economy
is expected to slow, which will have an impact on earnings.
Let's start there, John, In this environment, how do you
view valuations our investors being compensated enough for the corporate
(01:29):
credit risks, I mean all of the you know, the
likelihood of downgrades, defaults, and bankruptcies.
Speaker 4 (01:36):
Yeah, sure, Well, I think to start with, i'd say
what a difference a year makes if we think about
the market outlook last year, at the beginning of the year,
consensus was very much focused on in imminent recession and
I think it was one of the most well predicted
recessions across the macro community. And clearly that recession recession
hasn't come to take place. And if anything, I think
(01:57):
our macro view is actually still pretty construct of the
on the back of what is very strong fiscal stimulus
from from the government, and so overall, i'd say the
economy has done much better than certainly we expected and
I think the market expected. How that translates into the
COLO market and what we're seeing happening in the COLO
market today at the end of last year into this year,
(02:20):
I'd say we finally are seeing some rationalization for what
has been very.
Speaker 2 (02:25):
Widespread for COLO liabilities.
Speaker 4 (02:27):
Part of that is driven by increased demand from banks
as well as just a recognition that the spread on
the COLO liability side has been much wider than the
underlying loan market relative to history, and so that's driving
a lot of activity, that's driving demand for loans, that's
driving COLO creation, and that's led to a place where
in the loan market we're seeing a lot of refinance activity.
(02:49):
I think we've seen close to seventy billion dollars of
repricings this year in the loan market. So taking that
all into context, I think now we're at a place
where loan valuations are really close to fair relative to historicals,
and I think from a macro perspective, we feel like
default rates have come up from sub one percent to
somewhere around two to three percent, and I think they're
(03:11):
likely to stay in that range. That's not a problematic
range for the COLO market of the market. I think
that's actually an area where firms like ours, where we're
credit pickers, where there is a good amount of dispersion
within the loan market, we feel like we can drive
differentiated return. So overall, I think valuations are fair and
I think the tightening and liability spreads for the COLO
(03:32):
market has been healthy. I do think as we roll
the clock forward for the next few months, we'd expect
to see some new.
Speaker 2 (03:39):
Organic supply of loans.
Speaker 4 (03:41):
The lack of supply of loans is partly driving that
technical support, and as that supply comes online, I think
we'll see some easing of this tightening pressure.
Speaker 1 (03:49):
So a huge amount to unpack there, John, You've gone
right down the rabbit hole of colos. But I just
want to back up a little bit on your macro
view in terms of you know, first of all, recession,
do you expect one to be this year in the US?
Speaker 2 (04:00):
We don't.
Speaker 4 (04:01):
We don't expect a recession. I know you asked the
question about rates, and I think we've been surprised to
the upside. We as a market have been surprised to
the upside by how well the economy has done, and
we think there's still a lot of real support.
Speaker 2 (04:15):
For economic activity.
Speaker 4 (04:17):
As I mentioned, I think the piece that a lot
of economists miss was the impact of the deficit spending
the government's doing and how that's having an impact on
the economy. So I think on the margin, our view
is the economy is relatively robust in the short term,
that inflation is something that the FED is going to
be focused on containing, And while inflation has come down
(04:38):
a bunch, that doesn't mean that it can't go back up.
And that that means the cuts are probably not going
to come as quickly as the market expects.
Speaker 2 (04:46):
So not much, I think, less than what the market expects.
Speaker 4 (04:49):
You know, clearly, if the economy does slow down faster
than our expectations, they could come faster. But I think
our base case is that the markets expecting and almost
hoping for more cuts than than what's likely.
Speaker 1 (05:00):
Okay, so you've gone into clos very quickly. That for
all our listeners out there who don't know about it,
it's collateralized loan obligations. That's kind of repackaging of leverage
loans into securities of different risk levels. That market has
been a bit of a tough one because there hasn't
been a lot of supply of leverage loans. The leverage
(05:21):
loan market seems to be a bit challenged on the
one hand because of defaults. I think people expect there's
be more defaults in leverage loans, and also because the
proposition for floating rate investments is somewhat diminished by the
fact that the FED is going to start an easy campaign,
so you won't get that upside of rates. How does
that all fit into your assessment of the outlook for clos.
Speaker 4 (05:41):
John, Sure, we'll see alos in credit markets more broadly,
especially on the leverage loan side, our floating rate in nature,
and so they've benefited from higher rates. I think in
some ways as credit investors were looking at risks as
rates go higher, meaning the pressure that puts on companies
in terms of their interest bridge and their ability.
Speaker 2 (06:00):
To pay their debts.
Speaker 4 (06:02):
The flip side of that is, in a tougher economic environment,
if you do see those rate cuts come through, that
is actually a day one benefit to these floating rate borrowers.
So overall, I'd say we're still very constructive on the
opportunity and the credit market. And I think the COLO
market is one that is inherently, very closely linked to
the loan market because COLO is on about two thirds
(06:24):
of the underlying loan market and is really the largest
buyer of leverage loans, and the relationship between the borrowing
costs and the COLO market and the yields at which
you can buy loans is a relationship that tends to
drive what amount.
Speaker 2 (06:38):
Of activity that there is.
Speaker 4 (06:40):
So all of those things I think present some really
interesting opportunities, both on the COLO liability side as well
as the valuations in the loan market.
Speaker 5 (06:47):
Talking about leverage loan suppli it's one of the reasons
why supply has been so low is that M and
A activity has been reduced. In addition, when there is
LBOs and M and A, a lot of those financings
have gone to what's now the emergent private credit space.
With clos improving, with the market improving, do you expect
some of that market share to come back? And what
(07:10):
will it take for us to see robust supply again.
Speaker 4 (07:13):
Sure, that's a great question to address private credit versus
the broadly syndicated market. I think it's it makes the
most sense to look at it through the lens.
Speaker 2 (07:21):
Of the borrowers.
Speaker 4 (07:23):
And by the borrowers, I mean both the companies as
well as the predominantly private equity sponsors that own them.
These borrowers are sophisticated, and they're looking for a combination
of the lowest cost of borrowing they can get, as
well as in some instances certainty of execution or flexibility
in their debt. And when the broadly syndicated market is strong,
typically it's pricing at a lower yield and therefore a
(07:46):
lower borrowing costs for these companies relative to private credit providers.
Speaker 2 (07:50):
If you look at a year.
Speaker 4 (07:51):
Like twenty twenty three and even twenty two to some extent,
when the broadly syndicated market was not really fully functioning,
in underwriters, we're not openly looking to take a lot
of risk.
Speaker 2 (08:02):
Private credit really has.
Speaker 4 (08:03):
A key advantage in that it can provide that certainty
of execution and it can provide flexibility and financing. But
that's a pendulum that swings back and forth. So in short,
I do think the strength in the broadly syndicated market
will lead to a situation where broadly syndicated takes market
share from private credit in LBO financings. I don't think
either goes to zero. I think the private credit financing
(08:26):
for these megacap deals will continue to exist, but I
think the competitive dynamic has started to have that pendulum
swing back toward broadly syndicated and.
Speaker 5 (08:36):
Part of you, as you noted, part of the reason
why the pendulum is swinging back is because COLO activity
has increased really on the backs of TRIPLEA prices tightening
a huge contrast from this year to even to the
end of last year, and I'm hearing that managers want
to press it down even lower. So where do you
think spresigo right now is about one point fifty? In
(08:57):
December it was one seventy. Where do you think how
low could it go and what would it take to
really bring the market back?
Speaker 2 (09:04):
Yeah? Sure.
Speaker 4 (09:05):
I mean the tightening that we've seen for COLO triple
a's over the last I would say two months has
been pretty significant. As you mentioned, we're now seeing triple
A spreads on some deals that are being talked even
below so for plus one hundred and fifty basis points.
That's a meaningful move from where we were for most
of twenty twenty three, and so I think in many
(09:26):
ways we are back. We're to a functioning market, We're
to a place where COLO formation is quite robust. January
has had a significant amount of new COLO formation, and
I think that's the result of two things. One is
a recognition that one hundred and fifty basis points for
that COLO triple A risk is still very attractive to
those triple A investors. And secondly, I think there's some
(09:49):
structural changes around bank appetite for COLO triple a's as
an asset class, and as they return to the market,
that's helping drive those spreads tighter. COLO managers are or
are going to want to try to drive borrowing costs
as low as possible, or ultimately COL equity investors are
going to want to do that.
Speaker 2 (10:05):
But I think we're I think we are back.
Speaker 4 (10:07):
I think they could go further tighter from here, but
the pace of that tightening very recently has been has
been notable.
Speaker 1 (10:14):
And what about issuance volume, John, does it increase substantially
but compared to last year, I.
Speaker 4 (10:19):
Do think there will be more issuance this year than
last year. You know, if you look at the dynamics
in the COLO market, the things that drive issuance activity
are number one.
Speaker 2 (10:30):
Liability levels.
Speaker 4 (10:31):
Because as liabilities tighten, you have not only organic new
issuance for clos but you also have deals that are
in the money to be refinanced or restructured, but also
as borrowing costs are lower, those who take a long
term view of colos want to lock in those spreads
for a long time. And so if you're an episodic issuer,
(10:52):
if you want to come to market when liability costs
are low, those are the types of deals that are
coming to market now. So I expect if liability spreads
stay where there are or tightened further, we will continue
to see a significant amount of issuance activity.
Speaker 1 (11:05):
Okay, and so on the on the investor side, what
is the pitch right now to invest this because you
can get a you know, a high grade US bond
with a lot of liquidity, with a pretty fat yield
compared to history right now, Why do all the work?
Why bother? Why why get all fancy with a CLO
when you don't already have to?
Speaker 3 (11:22):
Well?
Speaker 4 (11:23):
I think colos as an as an asset class, you know,
have lived through varying degrees of investor adoption and understanding.
I do think over time, more and more institutional investors
appreciate the asset class and differentiate it from other structured
products that haven't had as strong an historical performance track record.
(11:43):
I think if you look at valuations today, there's a
couple of things to think about across fixed incoming credit markets.
Number one, yes, interest rates are higher across the board,
but the curve is inverted, and so being able to
own floating rate product at a higher yield than fixed
rate product because of that inversion is attractive to many investors.
And then you have to think about what your view
is on the pace of rate cuts as it relates
(12:06):
to spreads. If you look across fixed incoming credit markets today,
we've seen a lot of those spreads tightened to a
place where they're now either in the range of medium
spread levels or tighter than historical spreads. And what's true
for COLO debt, especially junior colo debt, is it's still
actually quite wide relative to its historic spread. And so
(12:27):
while your common is true you can get high grade
bonds at a higher yield than you've been able to
for a long time, you could also get colo debt
not only at a much higher yield than you typically can,
but also at a wider spread.
Speaker 2 (12:39):
And so for those.
Speaker 4 (12:40):
Investors that are comfortable with the acid class, that are
willing to go through the complexity of the asset class
and are willing to think through manager performance and all
those dynamics.
Speaker 2 (12:51):
We think it's actually a compelling opportunity.
Speaker 1 (12:54):
That on the complexity side, A lot of people have
kind of made the analogy just purely by association of
you know CLO cdo therefore you know complexity equals risk,
therefore you know financial crisis, et cetera. What do you
say to that one? I mean, how do you how
do you convince them that this is actually quite safe?
Speaker 2 (13:13):
Sure?
Speaker 4 (13:13):
I think to start with, if you look at the
historic track record, there is a stark difference between abs,
CDOs and clos. If you look at the historic default
rates of COLO debt, it's it's virtually zero across different
tranches of COLO debt. And so I think there is
the proof is in the putting from an historic performance perspective,
and then secondly, just going through and thinking about the
(13:36):
dynamics of a senior secured portfolio that includes a cross
section of the economy, both from an industry and company
diversity perspective, and you go through that level of detail
and understand some of the cash traps and the features
that exist in clos.
Speaker 2 (13:49):
That protect debt investors.
Speaker 4 (13:52):
For those investors that are willing to go through that analysis,
typically they get comfortable with the product.
Speaker 2 (13:57):
I do think there are some.
Speaker 4 (13:58):
Investors who just choose to to to not bother with
that level of detail, and those are the ones who stay,
stay away.
Speaker 1 (14:03):
And yet we still do it top more defaults and
much lower recoveries right compared to history. So there is
possibly a much high level of risk on the on
the loan level. But are you saying that when you
package them and diversify then you're not exposed to that.
Speaker 4 (14:20):
Yeah, I think you're exposed to it to varying degrees
depending on how deep in the capital structure you are.
For clos I think historic default rates are applicable in
my opinion. I think historic recovery rates is where we're
seeing a difference versus today. Some of the dynamics around
the restructuring process, some of the inter creditor dynamics and
(14:41):
flexibility that lives within the underlying loan documents. Today presents
a situation where we have seen a deterioration in loan
recoveries as well as a higher dispersion of loan recoveries.
So the outcomes are much broader now, not just across
different companies, but across a single restructuring for different lenders,
(15:01):
and so I think the risk really presents itself in
the recovery rate.
Speaker 5 (15:05):
Johnson, is you're the global head, I'm going to move
the discussion over to Europe, where I'm based and ask
what do you think about credit spreads and valuation here?
Given that economic outlook isn't as bright as in the US,
but the nature of the market is a little bit
less deep, less liquid, and to your point what you
just made about recovery levels, recovery levels probably might not
(15:25):
be as bad as those in Europe when you weigh
all those things together. What's your outlook for Europe?
Speaker 2 (15:32):
Yeah? Sure, I think Europe versus the US.
Speaker 4 (15:35):
To start with, from a macro standpoint, I think the
constructive dynamics we see around the economy.
Speaker 2 (15:41):
Of the US is.
Speaker 4 (15:44):
Slightly in favor from an underlying macro perspective relative to
the countries in Europe in aggregate. That said, I think
from a valuation perspective, our underlying view evaluations of the
credit market in Europe versus the US right now is
there about a fair fight, with the benefit in Europe
being you haven't seen quite as rapid or repricing on
(16:04):
the loan side that you've seen in the US.
Speaker 2 (16:07):
You are correct.
Speaker 4 (16:08):
Europe generally is is more concentrated, less liquid. It's not
as deep or as large a market as the US,
but that presents some interesting opportunities.
Speaker 2 (16:16):
And I think.
Speaker 4 (16:18):
Across traded credit as well as structured credit, we continue
to find opportunities from you know, single be and.
Speaker 2 (16:25):
Up across the capital structure.
Speaker 4 (16:28):
So I'd say right now, on a relative value basis,
even though we think the macro favors the US from
evaluations perspective, we don't have so negative a view of
Europe that we think credit is risking going wider. So
we think it's a fair fight on a relative value basis.
Speaker 5 (16:43):
And so you mentioned the repricings and as they've been
wild in the US, and that's so in Europe is
still substantial. When you look at the repricings, could those
actually stop the party? And with the r guests so
back the CLO creation, will that stopped because own spreads
get too tight, because we sealers have just come back
(17:05):
and just become the normal market as it was.
Speaker 4 (17:08):
Yeah, absolutely, Again, you know, I think the question is
to what degree and when that happens, you know, When
we look at the context of repricings this year, as
I mentioned in the US, I think we're about seventy billion.
I think last year it was about eighty billion for
the full year. So we're here on the last day
of January and you know, we've almost already exceeded last year.
(17:28):
So the pace of repricings has been has been significant
to start the year. When we think about spread coming
out of the market, ultimately the driver of COLO Ishman's
activity is how attractive that equity is and whether it's
attractive enough to invest in the equity, and that's going
to be a function of the relationship between the asset
yield and the liability spread. And if you see that
asset yield coming down because of rampant repricings, that will
(17:51):
slow COLO formation, which will in turn decrease the demand
for loans, and therefore you'll see a decrease in the repricings.
That said, I think in the US, for as much
as we've seen on the repricing side, I think the
average spread decrease this year is still in the single digits,
something like eight basis points across the market. So while
it feels painful, to see that spread leaving the market.
(18:13):
I don't think that we've seen enough repricing that it's
really going to change the rate at which clos are
being issued.
Speaker 3 (18:20):
Hey, John, Mike Collins, your quick question on sector biases.
As a healthcare credit analy CFPI, we've seen a lot
of loan issues in the healthcare sector. I wonder you
know also on the telcoatside, obviously, do you have a
bias right now and what you're out looked for the
troubled sectors? Maybe what do you see maybe blossoming or
getting a little better in twenty twenty four.
Speaker 2 (18:41):
Sure.
Speaker 4 (18:42):
One of the things that I think is most interesting
about what we've seen developed from an industry and sector
basis across the loan market in the US is industries
that traditionally were identified as defensive versus industries that typically
were defined as cyclical. If you think about commodities, if
you think about metals and mining. When you go through
(19:03):
the loan market today and you parse dispersion, and by dispersion,
I mean kind of the range of spreads that you
see between the widest spread names and the tightest spread names,
dispersion is the least pronounced in those industries that are cyclical,
and it's most pronounced in industries where they were typically
thought of as being defensive, things like healthcare and telecom
(19:23):
and software. What we like about that is I think
that plays to our strengths in credit selection. So as
we think about our industry overweights and underweights, I'd say
we tend to be overweight things that are relatively defensive
industries like aerospace and defense. Healthcare and telcolor are the
two largest industries in the loan market, so we obviously
(19:45):
have a lot of exposure there, and we then sub
segment that into sub sectors. But ultimately, I think we
appreciate and are happy that we're in a situation where
dispersion is wide in those sectors, so we have opportunities
to go through and pick our spots on a company
by company basis.
Speaker 5 (19:59):
You mentioned when these struggling companies go into distress and
default recoveries have been just horrifying, like ten cents twenty
cents versus a historical of seventy eighty. Do you think
that's the secular change. I know people are expecting lower recoveries,
but not this low. Do you think it's just just
a first batch they're a poor or are you braced
(20:20):
for really poor recoveries and more lender and under violence,
which has been one of the real drivers of low
recoveries this go around.
Speaker 4 (20:29):
Sure, I think there are two related but different points
on this. The first is I do think low recoveries
are lower, and I think that's a function of weaker
documentation and you know, abilities for different participants to extract
value in different ways. But the second thing I would
(20:50):
say about that is for a given company, I don't
think there is a single recovery anymore. And the reason
for that is that if you are a holder of
prepetition and you go through restructure, and whether or not
you're participating in subsequent fundings has a meaningful impact in
what your recovery value is. And so I think, yes,
(21:10):
the average recovery rate will be lower and loans and I
think we've already seen that, right, We've seen recoveries average
somewhere between forty and fifty five sixty cents as opposed
to the historic seventy five to eighty. But the dispersion
around that is relevant, as well as the fact that
for a given restructuring, not all creditors are having the
same outcome. It depends whether you're in the group and
whether you're participating in these additional fundings.
Speaker 1 (21:32):
So, John, you mentioned earlier private credit, which is what
everyone wants to talk about on this show, and it's
just growing so quickly. At what point do we see
private credit clos Yeah, I mean.
Speaker 4 (21:44):
We do see private credit colos today as a part
of the market. And one of the interesting and I
think very constructive evolutions of the middle market or private
credit COLO space is you know, traditionally middle markets we're
done as a financing tool for holders of private credit
(22:04):
or middle market loans, things like BDCs or funds that
owned the underlying loans, and this was just a mechanism
for for going out and in financing those portfolios. What
we're seeing now is is much more proactive still some
of that using the COLO market as a financing but
more creation for the sake of owning a part of
the capital structure in a private credit or middle market COLO.
(22:26):
More demand for middle market COLO equity as an asset
class as opposed to just owning the assets in various
forms of financing. And so I think we're going to
continue to see that private credit middle market COLO market
share grow and I think it's a I think it's
a healthy thing.
Speaker 1 (22:42):
And what about the big private credit deals that are
getting done. I mean it's becoming ever more mainstream. Does
that mean that you're, you know, going beyond the middle
market in terms of clos.
Speaker 2 (22:52):
We have ban capital are not.
Speaker 4 (22:54):
You know, we've seen the private credit space, in the
direct lending space evolve a lot, as many of our
public competitors have moved moved into you know, really megacap
private credit and direct lending deals where you know, they're
multi billion dollar sub you know, sub syndicates almost where
you're just dis intermediating the broadly syndicated market. We're active
(23:16):
in the core mintal market where these companies are for
the most part still private equity and sponsor backed, but
they're twenty five to seventy five million dollars EBADOC companies
and so the size of the financings are are smaller. Uh,
And we typically are in a control position in those
and we feel as though we get better structure in
(23:38):
the documents, better covenants, and we think better relative value there.
Speaker 2 (23:41):
So we have not moved up market.
Speaker 4 (23:44):
I do think to Lisa's question earlier, as you see
the recovery in the broadly syndicated market. And as you
think about the inherent kind of cost of a private
credit strategy relative to broadly syndicated it does you know,
I think pose the question how do you compete with
a broadly syndicated market on a cost basis? And I
think those lenders are going to really have to differentiate
(24:06):
more in terms of flexibility or providing more leverage or
lending to risk your companies that broadly syndicated market is
unwilling to finance in order to continue to see the
same levels of deal activity for those megacap deals.
Speaker 1 (24:19):
Yeah, I was you seeing a lot of competition between
the two sides at this point In terms of opportunities
globally or you know, global credit position, you probably look
at a lot of different things. What do you think
the best opportunity is in credit for this year when
you look at everything.
Speaker 4 (24:33):
Yeah, there are a lot of really compelling opportunities in credit.
And maybe i'll start with your comment about global One
of the areas where we haven't seen a lot of
growth in traditional either private credit or or other kind
of corporate lending is in Asia, and we have been
capital have a large presence in Asia in private equity.
(24:55):
We have a large presence presence in Asia in special sits,
and we have a lot charge presence and credit and
have been lending to companies through our special sets funds
as well as we have some dedicated investments in Australia
where we're doing direct lending. And then away from that,
I'd say the opportunity across private credit continues to be
(25:15):
quite robust. We think the freeze and activity on the
M and A and private equity sponsor side is thawing.
We're seeing pipelines build and activity starting to come to market,
and I think that will beget a really attractive vintage
of senior and potentially junior capital transactions on the private
(25:35):
on the private credit side, as well as some capital
solution oriented investments. We recently closed a strategy that focuses
on junior capital investments in private companies and we expect
that with evaluation changes over the last few years, as
well as the increase in interest rates, there are a
number of capital structures that need to get refinanced where
(25:57):
there will be a shortfall from the senior lender that's
stepping in versus the one who's being repaid and I
think that will get some really interesting opportunities for junior capital.
That and again where we started on the liquid credit
market side, we think both the dispersion in the liquid market,
even though the liquid market has tightened significantly, presents some
(26:17):
good idiosyncratic opportunities. And we think the COLO opportunity is
going to stay with us for the better part of
this year.
Speaker 1 (26:24):
But when you say Asia, I mean other than Australia,
Which countries and what sectors are you specifically thinking about there?
Speaker 5 (26:30):
Yeah?
Speaker 4 (26:31):
Sure, So, as I mentioned, we do have a dedicated
lending platform in Australia that has been operating for years.
I think that's one of the strongest bankruptcy regimes in
the world, and so there are a lot of great
kind of creditor aspects to that geography as well as
you know, a strong developed underlying economy. I think India
(26:53):
is a very interesting region as it relates to the
robustness of the underlying of me. It's obviously not as
developed as a place like Australia, but I think India
is one of the largest geographies we expect.
Speaker 2 (27:07):
To have activity.
Speaker 4 (27:08):
And then again, given we have such a large team
across different regions within Asia. We do expect that we're
going to have opportunities across different countries beyond India and Australia,
but I think those two will be the largest.
Speaker 1 (27:21):
Great So before we talk to Mike Holland, Bloombong Towns
is a bit more detail about healthcare. I just wanted
to kind of get you to sum up the risks
because obviously everybody's everyone in credit is worried about stuff generally,
and there's seems to be a lot of stuff to
worry about. But what do you what keeps you up
at night?
Speaker 4 (27:38):
Sure, I think the the recovery rates in the loan
market has been topical and for good reason. You know,
the question you mentioned earlier, Lisa is one that that
we think a lot about, which is when you're looking
at a company that's a performing company, when you're doing
the analysis of thinking what a structuring would look like,
(27:58):
you know, we've we we really have to get creative
in terms of thinking about downside cases and thinking about
how bad that could be. And I think you can't
take comfort from being a senior secured lender in the
way that historically you could. And so that's something that
we do spend a lot of time on We have
an existing restructuring group here at being capital Credit that
(28:19):
we've beefed up over the last couple of years, and
I think we're just very actively thinking about how to
manage those situations. Another comment I'd make about that is
I do think that's a case where being a scale
player matters. We've seen instances where if you're a small lender,
you're not part of a group, but if you're a
larger lender, you're really you have to be a part
(28:40):
of the equation, and so you can really do everything
you can to make sure you're looking out on behalf
of your investors in a way that's differentiated relative to
some of the smaller managers in the market. So I
think that's an example of scale helping to drive better outcomes.
So that's one I'd say, and the other is just
(29:01):
broadly macro risk and thinking about positioning in liquidity and
how markets respond to different interest rates interest rate environments.
And I'd say the last one fundamentally is if we're
right about our economic outlook, that the economy is strong
and that rates are going to stay higher for longer
than the market expects, there is a question of for
(29:23):
how long can these borrowers continue to make their interest
payments at elevated levels. And we do stress analysis on
our portfolio very regularly, and what we've seen happen over
the last couple of years with higher interest rates is
that interest covers has held in better than expected, but
that's generally been covered by dipping into liquidity, and so
that liquidity will cover you for a period of time.
(29:46):
But the longer high rates last, the more you deplete
that liquidity. And so I think that's a counter to
a relatively constructive economic outlook that we think about pretty
regularly and we stress in the portfolio stuff.
Speaker 1 (30:00):
John Right, Global head of credit at Baine Capital, thank
you so much for being on the show.
Speaker 2 (30:04):
Thank you very much for having me.
Speaker 1 (30:05):
Also want to say a big thanks to Lisa Lee
with Bloomberg News in London. Great to see you on
the show.
Speaker 5 (30:09):
Great, thank you for having me again.
Speaker 1 (30:11):
Read all of Lisa's great scoops on the Bloomberg terminal
and of course at Bloomberg dot com. So Mike Holland
at Bloomberg Intelligence. You look at healthcare, which is a
very broad area and for some reason full of distress
when it comes to the debt, your coverage extends all
the way to weight Watchers, which is having a tough
time in the debt markets. Their bonds when I last
looked were below fifty cents on the dollar. When I
(30:34):
looked in October they were up at seventy. They're now
yielding twenty percent, which is a pretty high implied risk
of default. What's going on, Mike's what's the problem with
weight Watchers?
Speaker 3 (30:45):
Yeah, so, you know, this is when we spoke about
together a couple of months ago, and as you said,
the bonds were about twenty points higher. One of the
challenges that weight Watchers has today under its new leadership
is pivoting from you know, behavioral based sort of treatment
(31:05):
opportunity to one in which these new GLP ones we
go these and manjarros are are dispensed and through telehealth
and prior authorizations through the sequence business, which is now
called weight Watchers Clinic. And I think one of the
challenges the company had was not alienating their existing customer
(31:29):
base for you know, what has really been a sixty
year old institution weight Watchers has, and pivoting that company
to something that sort of goes against its original foundations
of behavioral change absence, you know, medically assisted treatment. What
we're seeing today anecdotally and through some of the alternative
(31:51):
data that Bloomberg has on the terminal is the existing
business seems to be suffering, meaning the membership base seems
to be churning faster and not growing, and the company
is sort of put all of its eggs in this
Weight Watchers clinic basket. And we're, you know, while we
can see a little bit of that data on the
(32:12):
terminal of the Sequence sales, so that rather than the
twenty dollars a month or twenty dollars subscription, you go
into a ninety nine dollars a month subscription for Sequence.
We haven't seen the uptake really kick off yet. Now
earnings for weight Watchers will will hit in early March
(32:32):
and we'll have a good read through on Sequence growth.
And so I guess the question really is is will
the new business take off fast enough before the existing
business runs out of cash? And I think that's what
investor concerns are right now. I think a lot of
I get a lot of calls by equity options traders
on this one, and you've seen a lot of equity volatility,
(32:55):
but you've also seen a lot of volatility on the
bonds as well. The company's levered, you know, earnings around
you know, one hundred and thirty million probably for twenty
twenty three. The company's leveraged over ten times, and without
a growth catalyst that's exhibiting itself. I mean, we're still
waiting to see if sequence will we'll launch. If it
(33:15):
does launch and it grows, then this company could be
a It could be a real big return for equity
holders today and bond holders who get in around fifty
cents on the dollar. But there's certainly some real questions
that remain in risks that are out there.
Speaker 1 (33:30):
But the yield would suggest it should be rated much lower,
right I mean, it's single B right now. It should
be triple C based on that yields, isn't it?
Speaker 3 (33:37):
Yes? I think you know this company has been triple
C before, and I would imagine if you know, according
to raiders targets on this company. You know, we put
out in our notes that Moody's and S and P
basically say if leverage is over eight times for Moody's
and over seven times for S ANDP, that there will
(33:59):
trigger it down raid, We're we're right in that wheelhouse
right now, So it would it would look like the
agencies might might not sus over time. But you know,
with the bonds training where they are already, I wouldn't
imagine it would have that much of a you know,
a negative impact to price, given we're already below fifty
(34:22):
cents on the dollar for the bonds. Mind you, the
term loan is also six and cents on the dollar,
and the bond, as we're talking earlier with John Wright,
is technically senior secured along with the term loan, just
but you know, really in name only. But I thought
i'd highlight that.
Speaker 1 (34:39):
So if you have to bet either way, do you
think they'll make it?
Speaker 3 (34:44):
Oh? Wow, it's a great question. My My my bias
is as a credit analyst is more of a cynic
and a realist. And you know, hopes and dreams don't
make a great credit investor, so, uh, you know, I'm
conditioned to say it is probably not. But you know,
if they are able to get a small uptake on sequence,
(35:06):
meaning you know, fifty to one hundred thousand new new
subscriptions to that new initiative, it could really change the game,
right it's it could really add liquidity to the picture.
It could to drive earning's growth, and so you know,
it's a wait and see story right now. And again
as a credit as a credit investor or credit analyst,
(35:28):
I'm I'm biased to the negative and you know, looking
the condition down to cushion downside, So I would not
be betting all my cards.
Speaker 1 (35:37):
On this one. They're really so pessimistic on me. Is
there any read through, Mike for the for the sector though,
or is it very specific to this one name?
Speaker 3 (35:45):
Oh, I think this is very specific, right, But to
weight Watchers it's the idiosyncratic risk curios is meaningful. I
think it does provide a read through in a sense
to the uptake on GLP ones more broad Oddly, you know,
what WeightWatchers is trying to do is to you know,
(36:06):
in a sense, almost become a specialty pharmacy that drives
prior authorizations and distributes or manages the distribution of GLP
ones to a new customer base. And I think that
it's a big jump for what they from what they
were before. And it remains to be seen really at
this point whether or not that trajectory will We'll launch and.
Speaker 1 (36:29):
I'd say, my dumb question for us, what are GLP ones?
Can you explain that to me?
Speaker 3 (36:34):
These really exciting new drugs that are out there that
were previously drugs prescribed for diabetes have been known to
reduce weight loss by about twenty percent. You could reduce
your by twenty percent if you take these drugs weekly injections.
But they're very expensive, predominantly cash pay for wealthy folks.
(36:57):
It's not generally covered by commercial and insurance or Medicare
or really that there are some states I believe they
covered on Medicaid, but for diabetes mainly. So the question
is whether or not insurance companies will pay for weight loss,
but is something they haven't really done previously, And I
think Weight Watchers is leading the charge really in trying
to modify perceptions about weight launched drugs and really drive coverage.
(37:24):
So we'll see over time if their initiatives pay off.
Speaker 1 (37:27):
And they have the brand name, they've been around for
a long time. Everyone knows that it's a household name,
so maybe there's something there. But Mike Colin at Bloomberg Intelligence,
thank you again for joining us.
Speaker 3 (37:36):
Thank you, James.
Speaker 1 (37:37):
Check out all of Mike's research on the Bloomberg Terminal.
It's great stuff, or do contact him directly if you
need more information. And thanks again to John right Over
at Benkcapsule and to Lisa Ly from Bloomberg News. Read
all of Lisa's great scoops on the terminal and at
Bloomberg dot com. And please do subscribe wherever you get
your podcasts. We're on Apple, Google and Spotify. Give us
a review, tell your friends, or email me directly at
(37:59):
j Crumby at Bloomberg dot net. I'm James Crombie. 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 Crumbie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome John Wright, global
head of credit at Bain Capital.
Speaker 2 (00:28):
How are you, John, I'm great, Thanks for having me, James,
Thanks so.
Speaker 1 (00:31):
Much for joining today. We're excited to dig into your
market views and the outlook. We're also delighted to welcome
back Bloomberg's very own Lisa Lee covering credit markets from London.
Great to see you again, Lisa, to be here again,
and from Bloomberg Intelligence. Excellent, see Mike Holland again. Welcome back, Mike.
Speaker 3 (00:46):
Thank you, James. Great to be here.
Speaker 1 (00:47):
So let's start with you, John. It's great to have
you on the Credit Edge. Credit markets are trading at
very tight levels. There's more demand than suppliers. Investors race
to lock in these relatively high yields while they still
can before the Fed starts easing. But meanwhile we're seeing
record levels of issuance. Companies have a lot more refinanced
to do this year, and they're taking advantage of a
(01:07):
window to sell bonds and loans. But there's a lot
of debate also about how much and how soon the
FED will cut rates, which will also have a big
impact on credit. And at the same time, the economy
is expected to slow, which will have an impact on earnings.
Let's start there, John, In this environment, how do you
view valuations our investors being compensated enough for the corporate
(01:29):
credit risks, I mean all of the you know, the
likelihood of downgrades, defaults, and bankruptcies.
Speaker 4 (01:36):
Yeah, sure, Well, I think to start with, i'd say
what a difference a year makes if we think about
the market outlook last year, at the beginning of the year,
consensus was very much focused on in imminent recession and
I think it was one of the most well predicted
recessions across the macro community. And clearly that recession recession
hasn't come to take place. And if anything, I think
(01:57):
our macro view is actually still pretty construct of the
on the back of what is very strong fiscal stimulus
from from the government, and so overall, i'd say the
economy has done much better than certainly we expected and
I think the market expected. How that translates into the
COLO market and what we're seeing happening in the COLO
market today at the end of last year into this year,
(02:20):
I'd say we finally are seeing some rationalization for what
has been very.
Speaker 2 (02:25):
Widespread for COLO liabilities.
Speaker 4 (02:27):
Part of that is driven by increased demand from banks
as well as just a recognition that the spread on
the COLO liability side has been much wider than the
underlying loan market relative to history, and so that's driving
a lot of activity, that's driving demand for loans, that's
driving COLO creation, and that's led to a place where
in the loan market we're seeing a lot of refinance activity.
(02:49):
I think we've seen close to seventy billion dollars of
repricings this year in the loan market. So taking that
all into context, I think now we're at a place
where loan valuations are really close to fair relative to historicals,
and I think from a macro perspective, we feel like
default rates have come up from sub one percent to
somewhere around two to three percent, and I think they're
(03:11):
likely to stay in that range. That's not a problematic
range for the COLO market of the market. I think
that's actually an area where firms like ours, where we're
credit pickers, where there is a good amount of dispersion
within the loan market, we feel like we can drive
differentiated return. So overall, I think valuations are fair and
I think the tightening and liability spreads for the COLO
(03:32):
market has been healthy. I do think as we roll
the clock forward for the next few months, we'd expect
to see some new.
Speaker 2 (03:39):
Organic supply of loans.
Speaker 4 (03:41):
The lack of supply of loans is partly driving that
technical support, and as that supply comes online, I think
we'll see some easing of this tightening pressure.
Speaker 1 (03:49):
So a huge amount to unpack there, John, You've gone
right down the rabbit hole of colos. But I just
want to back up a little bit on your macro
view in terms of you know, first of all, recession,
do you expect one to be this year in the US?
Speaker 2 (04:00):
We don't.
Speaker 4 (04:01):
We don't expect a recession. I know you asked the
question about rates, and I think we've been surprised to
the upside. We as a market have been surprised to
the upside by how well the economy has done, and
we think there's still a lot of real support.
Speaker 2 (04:15):
For economic activity.
Speaker 4 (04:17):
As I mentioned, I think the piece that a lot
of economists miss was the impact of the deficit spending
the government's doing and how that's having an impact on
the economy. So I think on the margin, our view
is the economy is relatively robust in the short term,
that inflation is something that the FED is going to
be focused on containing, And while inflation has come down
(04:38):
a bunch, that doesn't mean that it can't go back up.
And that that means the cuts are probably not going
to come as quickly as the market expects.
Speaker 2 (04:46):
So not much, I think, less than what the market expects.
Speaker 4 (04:49):
You know, clearly, if the economy does slow down faster
than our expectations, they could come faster. But I think
our base case is that the markets expecting and almost
hoping for more cuts than than what's likely.
Speaker 1 (05:00):
Okay, so you've gone into clos very quickly. That for
all our listeners out there who don't know about it,
it's collateralized loan obligations. That's kind of repackaging of leverage
loans into securities of different risk levels. That market has
been a bit of a tough one because there hasn't
been a lot of supply of leverage loans. The leverage
(05:21):
loan market seems to be a bit challenged on the
one hand because of defaults. I think people expect there's
be more defaults in leverage loans, and also because the
proposition for floating rate investments is somewhat diminished by the
fact that the FED is going to start an easy campaign,
so you won't get that upside of rates. How does
that all fit into your assessment of the outlook for clos.
Speaker 4 (05:41):
John, Sure, we'll see alos in credit markets more broadly,
especially on the leverage loan side, our floating rate in nature,
and so they've benefited from higher rates. I think in
some ways as credit investors were looking at risks as
rates go higher, meaning the pressure that puts on companies
in terms of their interest bridge and their ability.
Speaker 2 (06:00):
To pay their debts.
Speaker 4 (06:02):
The flip side of that is, in a tougher economic environment,
if you do see those rate cuts come through, that
is actually a day one benefit to these floating rate borrowers.
So overall, I'd say we're still very constructive on the
opportunity and the credit market. And I think the COLO
market is one that is inherently, very closely linked to
the loan market because COLO is on about two thirds
(06:24):
of the underlying loan market and is really the largest
buyer of leverage loans, and the relationship between the borrowing
costs and the COLO market and the yields at which
you can buy loans is a relationship that tends to
drive what amount.
Speaker 2 (06:38):
Of activity that there is.
Speaker 4 (06:40):
So all of those things I think present some really
interesting opportunities, both on the COLO liability side as well
as the valuations in the loan market.
Speaker 5 (06:47):
Talking about leverage loan suppli it's one of the reasons
why supply has been so low is that M and
A activity has been reduced. In addition, when there is
LBOs and M and A, a lot of those financings
have gone to what's now the emergent private credit space.
With clos improving, with the market improving, do you expect
some of that market share to come back? And what
(07:10):
will it take for us to see robust supply again.
Speaker 4 (07:13):
Sure, that's a great question to address private credit versus
the broadly syndicated market. I think it's it makes the
most sense to look at it through the lens.
Speaker 2 (07:21):
Of the borrowers.
Speaker 4 (07:23):
And by the borrowers, I mean both the companies as
well as the predominantly private equity sponsors that own them.
These borrowers are sophisticated, and they're looking for a combination
of the lowest cost of borrowing they can get, as
well as in some instances certainty of execution or flexibility
in their debt. And when the broadly syndicated market is strong,
typically it's pricing at a lower yield and therefore a
(07:46):
lower borrowing costs for these companies relative to private credit providers.
Speaker 2 (07:50):
If you look at a year.
Speaker 4 (07:51):
Like twenty twenty three and even twenty two to some extent,
when the broadly syndicated market was not really fully functioning,
in underwriters, we're not openly looking to take a lot
of risk.
Speaker 2 (08:02):
Private credit really has.
Speaker 4 (08:03):
A key advantage in that it can provide that certainty
of execution and it can provide flexibility and financing. But
that's a pendulum that swings back and forth. So in short,
I do think the strength in the broadly syndicated market
will lead to a situation where broadly syndicated takes market
share from private credit in LBO financings. I don't think
either goes to zero. I think the private credit financing
(08:26):
for these megacap deals will continue to exist, but I
think the competitive dynamic has started to have that pendulum
swing back toward broadly syndicated and.
Speaker 5 (08:36):
Part of you, as you noted, part of the reason
why the pendulum is swinging back is because COLO activity
has increased really on the backs of TRIPLEA prices tightening
a huge contrast from this year to even to the
end of last year, and I'm hearing that managers want
to press it down even lower. So where do you
think spresigo right now is about one point fifty? In
(08:57):
December it was one seventy. Where do you think how
low could it go and what would it take to
really bring the market back?
Speaker 2 (09:04):
Yeah? Sure.
Speaker 4 (09:05):
I mean the tightening that we've seen for COLO triple
a's over the last I would say two months has
been pretty significant. As you mentioned, we're now seeing triple
A spreads on some deals that are being talked even
below so for plus one hundred and fifty basis points.
That's a meaningful move from where we were for most
of twenty twenty three, and so I think in many
(09:26):
ways we are back. We're to a functioning market, We're
to a place where COLO formation is quite robust. January
has had a significant amount of new COLO formation, and
I think that's the result of two things. One is
a recognition that one hundred and fifty basis points for
that COLO triple A risk is still very attractive to
those triple A investors. And secondly, I think there's some
(09:49):
structural changes around bank appetite for COLO triple a's as
an asset class, and as they return to the market,
that's helping drive those spreads tighter. COLO managers are or
are going to want to try to drive borrowing costs
as low as possible, or ultimately COL equity investors are
going to want to do that.
Speaker 2 (10:05):
But I think we're I think we are back.
Speaker 4 (10:07):
I think they could go further tighter from here, but
the pace of that tightening very recently has been has
been notable.
Speaker 1 (10:14):
And what about issuance volume, John, does it increase substantially
but compared to last year, I.
Speaker 4 (10:19):
Do think there will be more issuance this year than
last year. You know, if you look at the dynamics
in the COLO market, the things that drive issuance activity
are number one.
Speaker 2 (10:30):
Liability levels.
Speaker 4 (10:31):
Because as liabilities tighten, you have not only organic new
issuance for clos but you also have deals that are
in the money to be refinanced or restructured, but also
as borrowing costs are lower, those who take a long
term view of colos want to lock in those spreads
for a long time. And so if you're an episodic issuer,
(10:52):
if you want to come to market when liability costs
are low, those are the types of deals that are
coming to market now. So I expect if liability spreads
stay where there are or tightened further, we will continue
to see a significant amount of issuance activity.
Speaker 1 (11:05):
Okay, and so on the on the investor side, what
is the pitch right now to invest this because you
can get a you know, a high grade US bond
with a lot of liquidity, with a pretty fat yield
compared to history right now, Why do all the work?
Why bother? Why why get all fancy with a CLO
when you don't already have to?
Speaker 3 (11:22):
Well?
Speaker 4 (11:23):
I think colos as an as an asset class, you know,
have lived through varying degrees of investor adoption and understanding.
I do think over time, more and more institutional investors
appreciate the asset class and differentiate it from other structured
products that haven't had as strong an historical performance track record.
(11:43):
I think if you look at valuations today, there's a
couple of things to think about across fixed incoming credit markets.
Number one, yes, interest rates are higher across the board,
but the curve is inverted, and so being able to
own floating rate product at a higher yield than fixed
rate product because of that inversion is attractive to many investors.
And then you have to think about what your view
is on the pace of rate cuts as it relates
(12:06):
to spreads. If you look across fixed incoming credit markets today,
we've seen a lot of those spreads tightened to a
place where they're now either in the range of medium
spread levels or tighter than historical spreads. And what's true
for COLO debt, especially junior colo debt, is it's still
actually quite wide relative to its historic spread. And so
(12:27):
while your common is true you can get high grade
bonds at a higher yield than you've been able to
for a long time, you could also get colo debt
not only at a much higher yield than you typically can,
but also at a wider spread.
Speaker 2 (12:39):
And so for those.
Speaker 4 (12:40):
Investors that are comfortable with the acid class, that are
willing to go through the complexity of the asset class
and are willing to think through manager performance and all
those dynamics.
Speaker 2 (12:51):
We think it's actually a compelling opportunity.
Speaker 1 (12:54):
That on the complexity side, A lot of people have
kind of made the analogy just purely by association of
you know CLO cdo therefore you know complexity equals risk,
therefore you know financial crisis, et cetera. What do you
say to that one? I mean, how do you how
do you convince them that this is actually quite safe?
Speaker 2 (13:13):
Sure?
Speaker 4 (13:13):
I think to start with, if you look at the
historic track record, there is a stark difference between abs,
CDOs and clos. If you look at the historic default
rates of COLO debt, it's it's virtually zero across different
tranches of COLO debt. And so I think there is
the proof is in the putting from an historic performance perspective,
and then secondly, just going through and thinking about the
(13:36):
dynamics of a senior secured portfolio that includes a cross
section of the economy, both from an industry and company
diversity perspective, and you go through that level of detail
and understand some of the cash traps and the features
that exist in clos.
Speaker 2 (13:49):
That protect debt investors.
Speaker 4 (13:52):
For those investors that are willing to go through that analysis,
typically they get comfortable with the product.
Speaker 2 (13:57):
I do think there are some.
Speaker 4 (13:58):
Investors who just choose to to to not bother with
that level of detail, and those are the ones who stay,
stay away.
Speaker 1 (14:03):
And yet we still do it top more defaults and
much lower recoveries right compared to history. So there is
possibly a much high level of risk on the on
the loan level. But are you saying that when you
package them and diversify then you're not exposed to that.
Speaker 4 (14:20):
Yeah, I think you're exposed to it to varying degrees
depending on how deep in the capital structure you are.
For clos I think historic default rates are applicable in
my opinion. I think historic recovery rates is where we're
seeing a difference versus today. Some of the dynamics around
the restructuring process, some of the inter creditor dynamics and
(14:41):
flexibility that lives within the underlying loan documents. Today presents
a situation where we have seen a deterioration in loan
recoveries as well as a higher dispersion of loan recoveries.
So the outcomes are much broader now, not just across
different companies, but across a single restructuring for different lenders,
(15:01):
and so I think the risk really presents itself in
the recovery rate.
Speaker 5 (15:05):
Johnson, is you're the global head, I'm going to move
the discussion over to Europe, where I'm based and ask
what do you think about credit spreads and valuation here?
Given that economic outlook isn't as bright as in the US,
but the nature of the market is a little bit
less deep, less liquid, and to your point what you
just made about recovery levels, recovery levels probably might not
(15:25):
be as bad as those in Europe when you weigh
all those things together. What's your outlook for Europe?
Speaker 2 (15:32):
Yeah? Sure, I think Europe versus the US.
Speaker 4 (15:35):
To start with, from a macro standpoint, I think the
constructive dynamics we see around the economy.
Speaker 2 (15:41):
Of the US is.
Speaker 4 (15:44):
Slightly in favor from an underlying macro perspective relative to
the countries in Europe in aggregate. That said, I think
from a valuation perspective, our underlying view evaluations of the
credit market in Europe versus the US right now is
there about a fair fight, with the benefit in Europe
being you haven't seen quite as rapid or repricing on
(16:04):
the loan side that you've seen in the US.
Speaker 2 (16:07):
You are correct.
Speaker 4 (16:08):
Europe generally is is more concentrated, less liquid. It's not
as deep or as large a market as the US,
but that presents some interesting opportunities.
Speaker 2 (16:16):
And I think.
Speaker 4 (16:18):
Across traded credit as well as structured credit, we continue
to find opportunities from you know, single be and.
Speaker 2 (16:25):
Up across the capital structure.
Speaker 4 (16:28):
So I'd say right now, on a relative value basis,
even though we think the macro favors the US from
evaluations perspective, we don't have so negative a view of
Europe that we think credit is risking going wider. So
we think it's a fair fight on a relative value basis.
Speaker 5 (16:43):
And so you mentioned the repricings and as they've been
wild in the US, and that's so in Europe is
still substantial. When you look at the repricings, could those
actually stop the party? And with the r guests so
back the CLO creation, will that stopped because own spreads
get too tight, because we sealers have just come back
(17:05):
and just become the normal market as it was.
Speaker 4 (17:08):
Yeah, absolutely, Again, you know, I think the question is
to what degree and when that happens, you know, When
we look at the context of repricings this year, as
I mentioned in the US, I think we're about seventy billion.
I think last year it was about eighty billion for
the full year. So we're here on the last day
of January and you know, we've almost already exceeded last year.
(17:28):
So the pace of repricings has been has been significant
to start the year. When we think about spread coming
out of the market, ultimately the driver of COLO Ishman's
activity is how attractive that equity is and whether it's
attractive enough to invest in the equity, and that's going
to be a function of the relationship between the asset
yield and the liability spread. And if you see that
asset yield coming down because of rampant repricings, that will
(17:51):
slow COLO formation, which will in turn decrease the demand
for loans, and therefore you'll see a decrease in the repricings.
That said, I think in the US, for as much
as we've seen on the repricing side, I think the
average spread decrease this year is still in the single digits,
something like eight basis points across the market. So while
it feels painful, to see that spread leaving the market.
(18:13):
I don't think that we've seen enough repricing that it's
really going to change the rate at which clos are
being issued.
Speaker 3 (18:20):
Hey, John, Mike Collins, your quick question on sector biases.
As a healthcare credit analy CFPI, we've seen a lot
of loan issues in the healthcare sector. I wonder you
know also on the telcoatside, obviously, do you have a
bias right now and what you're out looked for the
troubled sectors? Maybe what do you see maybe blossoming or
getting a little better in twenty twenty four.
Speaker 2 (18:41):
Sure.
Speaker 4 (18:42):
One of the things that I think is most interesting
about what we've seen developed from an industry and sector
basis across the loan market in the US is industries
that traditionally were identified as defensive versus industries that typically
were defined as cyclical. If you think about commodities, if
you think about metals and mining. When you go through
(19:03):
the loan market today and you parse dispersion, and by dispersion,
I mean kind of the range of spreads that you
see between the widest spread names and the tightest spread names,
dispersion is the least pronounced in those industries that are cyclical,
and it's most pronounced in industries where they were typically
thought of as being defensive, things like healthcare and telecom
(19:23):
and software. What we like about that is I think
that plays to our strengths in credit selection. So as
we think about our industry overweights and underweights, I'd say
we tend to be overweight things that are relatively defensive
industries like aerospace and defense. Healthcare and telcolor are the
two largest industries in the loan market, so we obviously
(19:45):
have a lot of exposure there, and we then sub
segment that into sub sectors. But ultimately, I think we
appreciate and are happy that we're in a situation where
dispersion is wide in those sectors, so we have opportunities
to go through and pick our spots on a company
by company basis.
Speaker 5 (19:59):
You mentioned when these struggling companies go into distress and
default recoveries have been just horrifying, like ten cents twenty
cents versus a historical of seventy eighty. Do you think
that's the secular change. I know people are expecting lower recoveries,
but not this low. Do you think it's just just
a first batch they're a poor or are you braced
(20:20):
for really poor recoveries and more lender and under violence,
which has been one of the real drivers of low
recoveries this go around.
Speaker 4 (20:29):
Sure, I think there are two related but different points
on this. The first is I do think low recoveries
are lower, and I think that's a function of weaker
documentation and you know, abilities for different participants to extract
value in different ways. But the second thing I would
(20:50):
say about that is for a given company, I don't
think there is a single recovery anymore. And the reason
for that is that if you are a holder of
prepetition and you go through restructure, and whether or not
you're participating in subsequent fundings has a meaningful impact in
what your recovery value is. And so I think, yes,
(21:10):
the average recovery rate will be lower and loans and I
think we've already seen that, right, We've seen recoveries average
somewhere between forty and fifty five sixty cents as opposed
to the historic seventy five to eighty. But the dispersion
around that is relevant, as well as the fact that
for a given restructuring, not all creditors are having the
same outcome. It depends whether you're in the group and
whether you're participating in these additional fundings.
Speaker 1 (21:32):
So, John, you mentioned earlier private credit, which is what
everyone wants to talk about on this show, and it's
just growing so quickly. At what point do we see
private credit clos Yeah, I mean.
Speaker 4 (21:44):
We do see private credit colos today as a part
of the market. And one of the interesting and I
think very constructive evolutions of the middle market or private
credit COLO space is you know, traditionally middle markets we're
done as a financing tool for holders of private credit
(22:04):
or middle market loans, things like BDCs or funds that
owned the underlying loans, and this was just a mechanism
for for going out and in financing those portfolios. What
we're seeing now is is much more proactive still some
of that using the COLO market as a financing but
more creation for the sake of owning a part of
the capital structure in a private credit or middle market COLO.
(22:26):
More demand for middle market COLO equity as an asset
class as opposed to just owning the assets in various
forms of financing. And so I think we're going to
continue to see that private credit middle market COLO market
share grow and I think it's a I think it's
a healthy thing.
Speaker 1 (22:42):
And what about the big private credit deals that are
getting done. I mean it's becoming ever more mainstream. Does
that mean that you're, you know, going beyond the middle
market in terms of clos.
Speaker 2 (22:52):
We have ban capital are not.
Speaker 4 (22:54):
You know, we've seen the private credit space, in the
direct lending space evolve a lot, as many of our
public competitors have moved moved into you know, really megacap
private credit and direct lending deals where you know, they're
multi billion dollar sub you know, sub syndicates almost where
you're just dis intermediating the broadly syndicated market. We're active
(23:16):
in the core mintal market where these companies are for
the most part still private equity and sponsor backed, but
they're twenty five to seventy five million dollars EBADOC companies
and so the size of the financings are are smaller. Uh,
And we typically are in a control position in those
and we feel as though we get better structure in
(23:38):
the documents, better covenants, and we think better relative value there.
Speaker 2 (23:41):
So we have not moved up market.
Speaker 4 (23:44):
I do think to Lisa's question earlier, as you see
the recovery in the broadly syndicated market. And as you
think about the inherent kind of cost of a private
credit strategy relative to broadly syndicated it does you know,
I think pose the question how do you compete with
a broadly syndicated market on a cost basis? And I
think those lenders are going to really have to differentiate
(24:06):
more in terms of flexibility or providing more leverage or
lending to risk your companies that broadly syndicated market is
unwilling to finance in order to continue to see the
same levels of deal activity for those megacap deals.
Speaker 1 (24:19):
Yeah, I was you seeing a lot of competition between
the two sides at this point In terms of opportunities
globally or you know, global credit position, you probably look
at a lot of different things. What do you think
the best opportunity is in credit for this year when
you look at everything.
Speaker 4 (24:33):
Yeah, there are a lot of really compelling opportunities in credit.
And maybe i'll start with your comment about global One
of the areas where we haven't seen a lot of
growth in traditional either private credit or or other kind
of corporate lending is in Asia, and we have been
capital have a large presence in Asia in private equity.
(24:55):
We have a large presence presence in Asia in special sits,
and we have a lot charge presence and credit and
have been lending to companies through our special sets funds
as well as we have some dedicated investments in Australia
where we're doing direct lending. And then away from that,
I'd say the opportunity across private credit continues to be
(25:15):
quite robust. We think the freeze and activity on the
M and A and private equity sponsor side is thawing.
We're seeing pipelines build and activity starting to come to market,
and I think that will beget a really attractive vintage
of senior and potentially junior capital transactions on the private
(25:35):
on the private credit side, as well as some capital
solution oriented investments. We recently closed a strategy that focuses
on junior capital investments in private companies and we expect
that with evaluation changes over the last few years, as
well as the increase in interest rates, there are a
number of capital structures that need to get refinanced where
(25:57):
there will be a shortfall from the senior lender that's
stepping in versus the one who's being repaid and I
think that will get some really interesting opportunities for junior capital.
That and again where we started on the liquid credit
market side, we think both the dispersion in the liquid market,
even though the liquid market has tightened significantly, presents some
(26:17):
good idiosyncratic opportunities. And we think the COLO opportunity is
going to stay with us for the better part of
this year.
Speaker 1 (26:24):
But when you say Asia, I mean other than Australia,
Which countries and what sectors are you specifically thinking about there?
Speaker 5 (26:30):
Yeah?
Speaker 4 (26:31):
Sure, So, as I mentioned, we do have a dedicated
lending platform in Australia that has been operating for years.
I think that's one of the strongest bankruptcy regimes in
the world, and so there are a lot of great
kind of creditor aspects to that geography as well as
you know, a strong developed underlying economy. I think India
(26:53):
is a very interesting region as it relates to the
robustness of the underlying of me. It's obviously not as
developed as a place like Australia, but I think India
is one of the largest geographies we expect.
Speaker 2 (27:07):
To have activity.
Speaker 4 (27:08):
And then again, given we have such a large team
across different regions within Asia. We do expect that we're
going to have opportunities across different countries beyond India and Australia,
but I think those two will be the largest.
Speaker 1 (27:21):
Great So before we talk to Mike Holland, Bloombong Towns
is a bit more detail about healthcare. I just wanted
to kind of get you to sum up the risks
because obviously everybody's everyone in credit is worried about stuff generally,
and there's seems to be a lot of stuff to
worry about. But what do you what keeps you up
at night?
Speaker 4 (27:38):
Sure, I think the the recovery rates in the loan
market has been topical and for good reason. You know,
the question you mentioned earlier, Lisa is one that that
we think a lot about, which is when you're looking
at a company that's a performing company, when you're doing
the analysis of thinking what a structuring would look like,
(27:58):
you know, we've we we really have to get creative
in terms of thinking about downside cases and thinking about
how bad that could be. And I think you can't
take comfort from being a senior secured lender in the
way that historically you could. And so that's something that
we do spend a lot of time on We have
an existing restructuring group here at being capital Credit that
(28:19):
we've beefed up over the last couple of years, and
I think we're just very actively thinking about how to
manage those situations. Another comment I'd make about that is
I do think that's a case where being a scale
player matters. We've seen instances where if you're a small lender,
you're not part of a group, but if you're a
larger lender, you're really you have to be a part
(28:40):
of the equation, and so you can really do everything
you can to make sure you're looking out on behalf
of your investors in a way that's differentiated relative to
some of the smaller managers in the market. So I
think that's an example of scale helping to drive better outcomes.
So that's one I'd say, and the other is just
(29:01):
broadly macro risk and thinking about positioning in liquidity and
how markets respond to different interest rates interest rate environments.
And I'd say the last one fundamentally is if we're
right about our economic outlook, that the economy is strong
and that rates are going to stay higher for longer
than the market expects, there is a question of for
(29:23):
how long can these borrowers continue to make their interest
payments at elevated levels. And we do stress analysis on
our portfolio very regularly, and what we've seen happen over
the last couple of years with higher interest rates is
that interest covers has held in better than expected, but
that's generally been covered by dipping into liquidity, and so
that liquidity will cover you for a period of time.
(29:46):
But the longer high rates last, the more you deplete
that liquidity. And so I think that's a counter to
a relatively constructive economic outlook that we think about pretty
regularly and we stress in the portfolio stuff.
Speaker 1 (30:00):
John Right, Global head of credit at Baine Capital, thank
you so much for being on the show.
Speaker 2 (30:04):
Thank you very much for having me.
Speaker 1 (30:05):
Also want to say a big thanks to Lisa Lee
with Bloomberg News in London. Great to see you on
the show.
Speaker 5 (30:09):
Great, thank you for having me again.
Speaker 1 (30:11):
Read all of Lisa's great scoops on the Bloomberg terminal
and of course at Bloomberg dot com. So Mike Holland
at Bloomberg Intelligence. You look at healthcare, which is a
very broad area and for some reason full of distress
when it comes to the debt, your coverage extends all
the way to weight Watchers, which is having a tough
time in the debt markets. Their bonds when I last
looked were below fifty cents on the dollar. When I
(30:34):
looked in October they were up at seventy. They're now
yielding twenty percent, which is a pretty high implied risk
of default. What's going on, Mike's what's the problem with
weight Watchers?
Speaker 3 (30:45):
Yeah, so, you know, this is when we spoke about
together a couple of months ago, and as you said,
the bonds were about twenty points higher. One of the
challenges that weight Watchers has today under its new leadership
is pivoting from you know, behavioral based sort of treatment
(31:05):
opportunity to one in which these new GLP ones we
go these and manjarros are are dispensed and through telehealth
and prior authorizations through the sequence business, which is now
called weight Watchers Clinic. And I think one of the
challenges the company had was not alienating their existing customer
(31:29):
base for you know, what has really been a sixty
year old institution weight Watchers has, and pivoting that company
to something that sort of goes against its original foundations
of behavioral change absence, you know, medically assisted treatment. What
we're seeing today anecdotally and through some of the alternative
(31:51):
data that Bloomberg has on the terminal is the existing
business seems to be suffering, meaning the membership base seems
to be churning faster and not growing, and the company
is sort of put all of its eggs in this
Weight Watchers clinic basket. And we're, you know, while we
can see a little bit of that data on the
(32:12):
terminal of the Sequence sales, so that rather than the
twenty dollars a month or twenty dollars subscription, you go
into a ninety nine dollars a month subscription for Sequence.
We haven't seen the uptake really kick off yet. Now
earnings for weight Watchers will will hit in early March
(32:32):
and we'll have a good read through on Sequence growth.
And so I guess the question really is is will
the new business take off fast enough before the existing
business runs out of cash? And I think that's what
investor concerns are right now. I think a lot of
I get a lot of calls by equity options traders
on this one, and you've seen a lot of equity volatility,
(32:55):
but you've also seen a lot of volatility on the
bonds as well. The company's levered, you know, earnings around
you know, one hundred and thirty million probably for twenty
twenty three. The company's leveraged over ten times, and without
a growth catalyst that's exhibiting itself. I mean, we're still
waiting to see if sequence will we'll launch. If it
(33:15):
does launch and it grows, then this company could be
a It could be a real big return for equity
holders today and bond holders who get in around fifty
cents on the dollar. But there's certainly some real questions
that remain in risks that are out there.
Speaker 1 (33:30):
But the yield would suggest it should be rated much lower,
right I mean, it's single B right now. It should
be triple C based on that yields, isn't it?
Speaker 3 (33:37):
Yes? I think you know this company has been triple
C before, and I would imagine if you know, according
to raiders targets on this company. You know, we put
out in our notes that Moody's and S and P
basically say if leverage is over eight times for Moody's
and over seven times for S ANDP, that there will
(33:59):
trigger it down raid, We're we're right in that wheelhouse
right now, So it would it would look like the
agencies might might not sus over time. But you know,
with the bonds training where they are already, I wouldn't
imagine it would have that much of a you know,
a negative impact to price, given we're already below fifty
(34:22):
cents on the dollar for the bonds. Mind you, the
term loan is also six and cents on the dollar,
and the bond, as we're talking earlier with John Wright,
is technically senior secured along with the term loan, just
but you know, really in name only. But I thought
i'd highlight that.
Speaker 1 (34:39):
So if you have to bet either way, do you
think they'll make it?
Speaker 3 (34:44):
Oh? Wow, it's a great question. My My my bias
is as a credit analyst is more of a cynic
and a realist. And you know, hopes and dreams don't
make a great credit investor, so, uh, you know, I'm
conditioned to say it is probably not. But you know,
if they are able to get a small uptake on sequence,
(35:06):
meaning you know, fifty to one hundred thousand new new
subscriptions to that new initiative, it could really change the game,
right it's it could really add liquidity to the picture.
It could to drive earning's growth, and so you know,
it's a wait and see story right now. And again
as a credit as a credit investor or credit analyst,
(35:28):
I'm I'm biased to the negative and you know, looking
the condition down to cushion downside, So I would not
be betting all my cards.
Speaker 1 (35:37):
On this one. They're really so pessimistic on me. Is
there any read through, Mike for the for the sector though,
or is it very specific to this one name?
Speaker 3 (35:45):
Oh, I think this is very specific, right, But to
weight Watchers it's the idiosyncratic risk curios is meaningful. I
think it does provide a read through in a sense
to the uptake on GLP ones more broad Oddly, you know,
what WeightWatchers is trying to do is to you know,
(36:06):
in a sense, almost become a specialty pharmacy that drives
prior authorizations and distributes or manages the distribution of GLP
ones to a new customer base. And I think that
it's a big jump for what they from what they
were before. And it remains to be seen really at
this point whether or not that trajectory will We'll launch and.
Speaker 1 (36:29):
I'd say, my dumb question for us, what are GLP ones?
Can you explain that to me?
Speaker 3 (36:34):
These really exciting new drugs that are out there that
were previously drugs prescribed for diabetes have been known to
reduce weight loss by about twenty percent. You could reduce
your by twenty percent if you take these drugs weekly injections.
But they're very expensive, predominantly cash pay for wealthy folks.
(36:57):
It's not generally covered by commercial and insurance or Medicare
or really that there are some states I believe they
covered on Medicaid, but for diabetes mainly. So the question
is whether or not insurance companies will pay for weight loss,
but is something they haven't really done previously, And I
think Weight Watchers is leading the charge really in trying
to modify perceptions about weight launched drugs and really drive coverage.
(37:24):
So we'll see over time if their initiatives pay off.
Speaker 1 (37:27):
And they have the brand name, they've been around for
a long time. Everyone knows that it's a household name,
so maybe there's something there. But Mike Colin at Bloomberg Intelligence,
thank you again for joining us.
Speaker 3 (37:36):
Thank you, James.
Speaker 1 (37:37):
Check out all of Mike's research on the Bloomberg Terminal.
It's great stuff, or do contact him directly if you
need more information. And thanks again to John right Over
at Benkcapsule and to Lisa Ly from Bloomberg News. Read
all of Lisa's great scoops on the terminal and at
Bloomberg dot com. And please do subscribe wherever you get
your podcasts. We're on Apple, Google and Spotify. Give us
a review, tell your friends, or email me directly at
(37:59):
j Crumby at Bloomberg dot net. I'm James Crombie. It's
been a pleasure having you join us again next week
on the Credit Edge
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