June 26, 2025 • 47 mins
Barings Sees Global Credit Investor Pivot to Europe (Podcast)Demand for European corporate debt is rising as global investors seek to diversify out of US markets, according to Barings, the $442 billion asset manager. “US exceptionalism is a little bit more questioned, investors are increasingly concerned about US economic policy,” Mike Best, a high-yield and senior loan portfolio manager at the firm, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Stephen Flynn in the latest Credit Edge podcast. “That will probably in the near term, create a very strong technical demand for European assets,” says Best, who’s taking more calls from investors seeking exposure to non-US markets. Best and Flynn also discuss risks and constraints in European credit, retail distress, communication sector winners and loser, plus how to trade liability-management exercises.
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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 Crumby. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Steve Lunn, a senior credit analyst with Bloomberg Intelligence.
This week, we're very pleased to welcome Mike Best, who
runs the senior secured loan and multi ASSEID credit strategies
at Barings.
Speaker 3 (00:33):
How are you, Mike? Doing well? Thank you?
Speaker 2 (00:35):
Mikes a member of Barrings US high Field Investments Group
responsible for portfolio management for senior secured loan and multi
ASCID credit strategies. Mike has been in the leverage credit
business since two thousand and three, and prior to Barings,
he was in the leverage finance group at Bank of America.
Speaker 1 (00:52):
Great to see Mike and leverage finance, that's our favorite topic.
Just to get the bull rolling credit markets looking a
bit can place at this point, with debt spreads back
below long term averages and most likely to go tighter
as demand for yield rises and net new supply of
corporate bonds and loans is capped unless there's a big
m and a comeback. Public credit markets are performing well,
leading some to question the value proposition of private markets,
(01:15):
and most people sound quite confident about the resilience of
corporate balance sheets. The end of American exceptionalism is a
big theme. Global investors say they're looking more at Europe
and Asia as alternatives, but there are clear limitations when
it comes to scale and liquidity there. Over All, though,
there's a huge amount of uncertainty and headline risks, not
just on tariffs, but also around the budget deficit, inflation,
(01:36):
the Fed's next move, taxes, immigration reform, and global geopolitics. So, Mike,
what's your take? Is credit risk fairly valued at these levels?
Do you think where do we go from here?
Speaker 3 (01:47):
Yeah, it's a difficult time when you just if you
solely look at spreads right now in the markets, you
might think, you know, certainly that there's a lot of
complacency in the market. I think the market's been remarkably firm,
you know, despite all of the geoplical headlines we've thrown
at it, the economic headlines we've thrown at it. Indexes
sort of shrug everything off, and you know, you look
at obviously the most recent bit of news over the
(02:09):
weekend with with missiles and bombs being exchanged between you
know over in the Middle East, in Iran, and that
certainly should have you know, theoretically spiked some level of
spreads and equities should have traded off, and the market
shrugging those things off. I do think at the margin,
you know, when you look underlying some of the data,
(02:29):
there are spots where people are reacting to the news flow.
There are people, there are spots where investors are looking
at you know, more risk in those sectors and are
pricing that in. And you know, some high level examples
are you know, for example, retail bonds, chemical leverage, loans
this year, consumer products as well as another sector where
(02:50):
those those sectors are underperforming. There's a lot of wide
spreads on offer in those sectors. But you know, investors
are being quite cautious right now, and I think they have,
you know, sort of all the hallmarks of places where
people are looking with some level of concern right now.
Speaker 2 (03:05):
So is retail in the sector that you're most worried about.
Speaker 3 (03:08):
I think it's retail and the consumer and I put
them together because it's not just pure retailers where you know,
you know, there are a lot of quality names within
the retail sector where I'm not too concerned about their
ability to repay their debt on time, make coupon payments,
invest in the business to stay competitive, which is a
key theme in retail. On the other end of the
(03:29):
bar bell, you do have a lot of places within
the retail sector where you know, it's a challenge, right
You've got, you know, changing ways that consumers are purchasing
their goods. You've got some very leverage balance sheets in
that sector, and those are spots where where we do
have a lot of concern. But I think the consumer
more broadly is a concern, and that's where you think
(03:51):
about it from a perspective of household balance sheets have
been in remarkably good shape and kept the spending going
for the last few years, but at some level inflation
starts to bite. Rates have not fallen, so the affordability
of housing starts to become an issue the household. You know,
the household calculus can only work but so well when
(04:13):
wages are not at a rising at a rapid clip.
And so the automotive sector, the housing sector, these are
all consumer products sectors. To some degree. It's just a
question of, you know, how acutely they bite. So I
think we're concerned about all the consumer related sectors. We
have less concern if you will, on the industrial sectors particularly,
(04:35):
you know, when you think about utilities, when you think
about some of the investment that is going into AI
infrastructure is certainly thematic and everybody wants to talk about
it all the time, but there are I think there
is going to be a lot of capital investment that's
going to go into those sectors and that will provide
some tailwind for them, much more so than the consumer
(04:55):
can weather. Right now, no word about the consumer.
Speaker 2 (04:58):
What's interesting is the jobs of actually help out relatively well.
Right So, I guess what happens if that was to
roll over, that would be a big fear that's probably
not price in the market today.
Speaker 3 (05:08):
I think you're right. I think it's you know, certainly,
you know, I think that the from a macroeconomic perspective,
certainly that is not priced into the market that we're
going to see a big rising unemployment rate or anything
along those lines. Obviously, that is the one spot in
the one lever the FED can pull. If they see
start to see that rollover, that does give them, you know,
(05:31):
they can take a little bit of pressure off the
economy from a macro perspective with rates, because what's sort
of holding them in right now is the employment sector
is remarkably resilient, Inflation is quite high, and obviously Chairman
Pal doesn't have a lot of places he can go
in that type of environment. So there is a little
bit of a relief valve if we see some level
(05:52):
of softness there. But you know, it's certainly I think
it's going to be a choppy ride getting from point
A to point.
Speaker 1 (05:57):
B on consumer credit. And I've fel like we've been
talking about that for years and the strain that that
sector has been under, but the amounts of actual distress.
You know, there has been some bankruptcy, there has been
some default, but not a huge amount. And those have
been sort of smaller companies that are maybe more leveraged
that we've kind of known about. They've been in trouble,
they got some cheap money during COVID and they survived
a bit longer then now they're hitting the wall. How
(06:20):
far does it go though? Is it is it widespread?
Is it is it all over the map, or what
kind of winners and losers within consumer can you see?
Speaker 3 (06:28):
Yeah, well, I think that you know, you're certainly your
point is quite well taken that I think a lot
of people have been concerned about the consumer for quite
some time. I think that there are and continue to be,
some you know, haves and have nots. And when you
look at spread dispersion, for example, within some of these markets,
you do see a lot of things on the very
(06:48):
wide end that are obvious default candidates and they're going
to become bankruptcies here in the near future, and some
of them have recently become so. But I do think what,
you know, what you you mix that with is a
lot of these products consumer products businesses. They do have
maturities coming up. They do have some things that they
need to navigate, and when you run out of you know,
(07:10):
it's hard to kill a retailer, but when they die,
they die very quickly. You know. From my perspective, as
I look at that, it's going to be very tough
for some of these guys to refinance refinance their debt.
That means it may maybe a slower bleed out, but
it will take some time and it will sort of
appear there. In our opinion, is.
Speaker 1 (07:28):
It mostly smaller companies. I mean, I just looked at
the kind of dispersion everyone keeps talking about, and it
seems that the smaller companies are underperforming and the larger
balance sheets, you know, they're more liquid, they've got more buffer,
they've got more ability to maybe past some of these
costs on they you know, is that where the biases
in terms of defensive stuff in this sector, the bigger companies.
Speaker 3 (07:49):
I think that's certainly the bias. It certainly helps. Obviously,
size and scale always help. Just if you think about
a retailer being a small retailer, there's a lot of
things you need to be doing right in order to
you know, reach your customers and do things. But look,
there are large businesses that exist in the leverage finance
market that are large retailers, that are name brand retailers
(08:10):
that have you know, locations that all of us have
probably been to, even you know given up in New
York City for example, And you know, those companies are
struggling as well and have the potential to struggle a
lot in this kind of an environment. And so you know,
from our perspective, it may take some time, but it's
not necessarily just going to be the small niche retail
(08:33):
consumer products company who's you know, for lack of a
better term, their buggy whip is no longer needed. It's
going to be you know, it can be possibly much
more widespread to sort of general retailers and things of
that nature.
Speaker 2 (08:46):
So in your seat, you do you've spent a lot
of time both, it sounds like, in the loan and
the high old bomb markets. So when looking at leverage
loans versus high held bonds, what do you think about
the re releative value dynamic between those two assa classes.
Obviously they're related, right, A lot of comple these are
in both markets. But what are you seeing out there
as far as relative value and leven loan versus highal bonds?
Speaker 3 (09:06):
Yeah, absolutely, and I think it's you know, statistics are
one thing, and you can look at the oas d
M ratio of the indexes and things like that and
sort of draw some conclusions. But I think very broadly speaking,
you know, the high yield bond market is about fifty
five percent double be rated, and it's a much higher
quality market than the leverage loan market, where that is
(09:27):
about sixty seven percent single be rated. Predominantly sponsored driven
companies that are you know, looking to generate higher returns
to the equity investors there, and so you do need
to account for differences in just credit quality, sheer credit quality.
And when you look at it, over the last several years,
(09:48):
last three or four years, we've been as wide as
getting an extra two hundred and fifty to three hundred
basis points of extra spread to be in the loan
market versus the bond market, and we've been as tight
as you know, sort of one hundred basis points, give
or take. And that one hundred basis points level to
me is which is about where we are right now today,
especially when you exclude the distressed portion of the US
(10:11):
leverage loan market, which I think is its own animal
and deserves, you know, probably its own podcast, frankly. But
when you exclude those things, you're really down to that
hundred basis points level, and that's when you're getting, in
my opinion and in our opinion, it's a coin toss
between the two right now in terms of spread returns
for the next few years on a risk adjusted basis,
(10:34):
if all else is equal, and obviously spreads, you know, rally,
we're in a risk on market for a lot longer,
holding on to carry for dear life, and it is
a strategy to win. But I think as you sort
of think a step back and try to put your
macroeconomic hat on, there's a lot of directions. You know,
the tails are fat, there's a lot of directions in
which these markets can go and preserving sort of that
(10:56):
maximum amount of flexibility. There is really war weird positioned
right now and we're how we're looking at the market.
Speaker 1 (11:02):
How much of rates view comes into that, given you know,
loans is floating and and everyone's hoping that the FED
might start cutting soon.
Speaker 3 (11:10):
Yeah, I think to some degree, rates is a portion
of that. I think at Bearings we try to be
you know, a credit shop first and foremost that focuses
on sort of you know, relative spreads, relative value of
all of our underlying credits. And I will you know,
I won't say that we ignore rates, but we certainly
don't want to be making big macroeconomic rape bets ats
a firm, but to us, I think it is much more.
(11:34):
We did spend a lot of call it twenty two,
twenty three, twenty four with a with a very strong
bias to being overweight floating rates. We didn't see any
paths to the FED to be cutting and so you know,
keep calm and carry on. Kind of kind of market
was was the theme for a while. I think right now,
as we look at it, we do see that that
rates are a natural buffer if we hit a downturn,
(11:57):
and you know, break evens are certainly much more at
attractive now than they've ever been. Hypothetically, if you want
to say that high yield market isn't attractive in an
off market until it's at ten percent, well, guess what,
You're going to get some level of spread widening. But
you're also a market in which high yield trades at
ten percent. Guess what, rates are also going down as well.
So those break evens look a lot more compelling now
(12:18):
in fixed income, in non floating rate assets. So it
is a much more of a coin toss. But I
don't think we're willing to make a call that rates
are going to come crashing in anytime soon.
Speaker 1 (12:28):
And then the third leg of the whole equation is
private credit, you know, which is increasingly converging with leverage loans.
How does that factor into your relative value?
Speaker 3 (12:40):
Yeah, certainly, I think you know, obviously I sit on
the public credit side here at bearings, but we do
an increasingly our investor base. We predominantly manage institutional investments,
and institutional investors I think are certainly well attuned and
understanding of differences between public and private credit, but also
(13:01):
the gray area that exists between those two markets, which
is I think where you know, to some degree, there
are some investors who are still very much looking at
this as credit as credit and I just want you
to find me the best relative value and at bearings.
We've sort of positioned ourselves to be very cross functional
with our private credit group, with our with our public
(13:22):
credit group, but I do think there will be over
time more convergence between those two sectors. We see more
their companies outgrowing their market to some degree and coming
up into our market. And we've certainly seen I think
a decent amount of chipping away. You know, for example,
in the credits we Seleverage Loan Index, which is our
UBS Leverage Loan Index. Now, you know a lot of
(13:44):
the smaller companies are gone from that index. They've moved
on into being private credit issuers. You know, when I started,
it was it was sort of nothing to think about
having a four hundred million dollar term loan b that
was placed amongst you know, ten to fifteen lend and
that was considered a broadly syndicated loan back then, and
now obviously that's you know, there's three people that hold that,
(14:07):
and it's a private credit loan, and it might be
the exact same company it was back then. So I
do think we're going to see more convergence. I do
think that you know, certainly the institutions that are well
prepared to capitalize on that will do very well.
Speaker 1 (14:21):
And if you don't need the liquidity, is there enough
of a pickup over public in private?
Speaker 3 (14:26):
Right now?
Speaker 1 (14:27):
We've talked over the last let's say, almost a year
now about the differential and I think the end of
end of last year it was around one fifty to
two hundred base points more for leverage credit that you'd
want to go into private, and now that seems to
have kind of been eroded to about one hundred. And
you know, again people are asking is that enough? Some
people say no, some people say yes. It's wondering what
(14:48):
your view is of the differentials into or the arbitrage,
you know.
Speaker 3 (14:53):
To us right now, we think it's a little snug
from you know, our multi asset credit process, and we're
not looking to go down too many rabbit holes and
find too many liquid assets that only give us that
hundred basis points spread premium that you're talking about. I
think that you know, depending on your time horizon, and
that is a very important factor in this, as we're
discovering right now with lots of investors who are in
(15:16):
private equity, for example, trying to find new ways to
generate liquidity from their private equity investments. Depending on your
time horizon, one hundred basis points might be plenty if
you trust the manager to pick what they're doing and
pick the credits the right way. One hundred basis points
may be fine. But to us, as we sort of
get to look across both of them, we're not really
(15:38):
finding a lot of value in those things that are
only picking up an extra hundred basis points. We're looking
for that one hundred and fifty two hundred, and to
be fair, there's not as many opportunities right now to
find those things that meet our credit risk profile sort
of objectives, and so yeah, we are passing on more
of them, which which does lean a little more public
than private in that sort of framework.
Speaker 1 (15:58):
But ultimately, though, take away supply that would have gone
to leverage and then just keep those spreads tight because
you know, net issuance.
Speaker 3 (16:07):
Is very low. Yeah, I think there's naturally going to
be some area of that that compresses. Is it's just
new issue has been anemic. To say the least, M
and A is quite low. Traditionally, that's how the private
credit you know community filled their coffers and found their
deals was financial sponsors buying companies, appreciating the quick execution
(16:29):
of only going to two or three institutions getting something done.
And now you know, we're in a market where they
quite frankly aren't making as many acquisitions, aren't doing as
many things, and that means that you know, the relative
animal spirits and competition is heated up, and you know,
we're taking just as much market share as they're taking
from us. And some of the stats would tell you
(16:50):
that the essay we be the public credit market are
are certainly you know, I think some of the stats
would have told you that twenty two to twenty three
we certainly lost a lot of market share. You know,
those were tough times to get broadly syndicated deals done.
I think it's it's come back to an even split.
And I think you know, certainly some of the transactions
that we're looking at right now in the last month
(17:12):
or so would would probably have still fit into the
private credit market a while ago. But they're able to
get reasonably good execution, much better pricing, good terms, and
all you have to do is get it publicly rated
and go through a bank.
Speaker 2 (17:26):
Mike, you were recently on Bloomberg TV's Real Yield program
and you talked about know the risk with consumer discretion,
which you talked about earlier today, and then you also
mentioned idiosyncratic risk, particularly in the communications sector. Now I
covered the communications sector. We have plenty of stuff going
on right We have Warner Brothers bonds falling into high yield.
We have EchoStar, you know, in a fight with the
(17:49):
FCC and entering the grace period for the coupon payments.
Speaker 3 (17:54):
We have all.
Speaker 2 (17:54):
TCUSA, which you know has a ton of debt. The
lower rated notes trading the forty to fifty cents on
the dollar screams a candidate for possible LMA. I was
just wondering, you know, is that still a sector where
you see a lot of single name risk.
Speaker 3 (18:11):
It is, and I think that the reason why we say,
you know, idiosyncratic risk in that sector is because it
would be too broad of a brush to just say,
you know, for example, hearkening back to the Great Financial Crisis,
the auto sector is in trouble, so all of them
are in trouble. It's too broad of a brush to
paint the communications sector that way, because there are winners
and there are losers. There are companies that are winning
(18:34):
right now by being tied into the AI infrastructure framework,
being tied into fiber to the home, where you know,
as consumers are changing their preferences and consuming more streaming content,
they need a better pipe in order to get better
internet into their home. So that's the sort of haves.
And on the havent side of things, there are big
legacy institutions that have not changed their ways. They have
(18:57):
not you know, invested appropriately in the infrastructure they need
to compete in the next twenty years. And the infrastructure
that they invested in was great twenty years ago. And
those types of businesses, and you just rattled off a
few of them that fit into that mold, there's probably
more risk that they don't go right than that there's
(19:17):
upside that they do go right. And I think that's
the sector where and again I think all sectors are
this way, but certainly within the communification sector, active management
is you know a very important part of it, where
you know, you can either avoid these sectors or frankly
pick the right parts of these capital structures to win.
So yeah, well it's interesting.
Speaker 2 (19:37):
We've seen the Charter right Charter unsecured, it's the biggest
name in high yield, and they had some very positive
news with the Cox acquisition. Or even though they're making
a major acquisition, they've lowered their preferred leverage target and
received you know, positive review from a positive reactions so
far from the rating agencies. But that's clearly a big
positive deal for the sector and the higal market.
Speaker 3 (19:59):
Yeah, absolutely, and I think we'll see there's other spots
of positivity that are out there. For example, consolidation within
some of the broadcasting sector can in fact be a
very big positive thing. There's some you know, quite frankly
over levered capital structures, but there are attractive assets that
are over levered and and they if they can find
their way into to the right merger situations. I think
(20:20):
there's there's lots of spots where even some of those
businesses that are a little more on the cuspier legacy
side can find their way towards towards that. But yeah,
obviously the one you mentioned is certainly quite topical in
the market. You received that news quite well.
Speaker 2 (20:33):
So and then just dig a little deeper on this
h in this sector. So we've seen quite a lot
of liability management exercises over the past year, right, Luhmann
obviously did a very large one, Echo Star did one,
iHeart did one. So we've seen plenty of companies do them.
Your viewing, you know, some people say, hey, you're just
you know, kicking the can down the road if you're
(20:54):
just doing an LME with regard to restructuring the debt
and there's nothing going on with restraint ucturing the business.
At the same time, just wondering what your views are
on LEM transactions.
Speaker 3 (21:06):
Yeah, that's a that's a broad, broad topic there and
certainly one that I think you're hitting on a lot
of the themes of you know, what we're seeing right
now in that that sector, is that that particular part
of the market and that activity is that there are
to your point, I think you mentioned a few of them.
There are quite a lot of legacy businesses that are
you know, for more or less rearranging the deck chairs
(21:27):
on the Titanic. And you know, the business is not growing.
They're not going to be turning around anytime soon. They're
not going to get you know, magical ad spending coming
in from from from somewhere. And those businesses are doing
lemes and they're you know, playing lender fears off of
each other and getting some level of of kick the
(21:47):
can down the road. Ultimately, you know, the the sort
of stats that we've looked at, it it's sort of
a coin flip. They're mostly within a year to eighteen
months seeming to be right back in conventional chapter of
them now. And I think, you know, for those businesses
that do not have you know, any solution if you will,
(22:07):
to growth to to that, we're going to see more
and more of that. Certainly a lot of the push
at the end of twenty twenty four to getting some
of these lemies done, I think there will be a
higher probability of a lot of those re entering. But
that being said, you know, there are successful ones. There
are some that are you know, for example, you know,
(22:29):
in the healthcare sector. There have been a few of
them that managed to you know, kick the can and
you know, their revenue problems. Eventually, you know, they didn't
they didn't have revenue problems. They are cash generation problems.
Basically eventually caught up with we have revenue growth, it's
not growing profitably. And then you know, some of those
have found their way out into either refinancings or obviously
(22:52):
the credits trading much tighter than they are now. But
it is a it is a time consuming process. Yes,
it is certainly I think something that investors, you know,
you need to be big to succeed in this. You know,
it's a scale game, if you will, you need to
bring you know a lot of institutional resources and it
(23:13):
takes a lot of our analysts time to to sort
of go through those. And so, you know, I think
that on balance, this year we're finding less relative value
in the LME sector and participating in in every LME
situation that we see out there in the world. Last
year was was a little bit more of a you know,
an opportunity there, and frankly it was driven by technicals
(23:36):
where you had so much of the CLO market that
was refinancing and resetting, and their investors were telling them,
I don't care about it, I just want less triple
cs in my portfolio. So they were willing to, you know,
shotgun approach everything out and really reduce their triple C buckets,
which meant that either people were over overestimating the possibil
(24:00):
of an LM, so that was one opportunity to pick
up some returns, but also just the technical factors of
some of those. There was just so much supply that
if you could build some scale, you know, affect a
good positive outcome in a in a fairly decent business,
you know, the price points were better back at then.
Speaker 1 (24:15):
Given that it's getting tough for those to play the
enemies there any are there any you just kind of
shake your head out and then sell out of before
it gets to that point. I mean, it seems like
it's getting tougher and more aggressive.
Speaker 3 (24:25):
Yeah, certainly, I think there are. You know. The good
news is that I think for us, we've been small
in those situations that you as you rightly said, I
shake my head at and go this is just time
to leave, you know, And so it's been quite easy
for us to extract ourselves from some of those situations.
(24:45):
But I do think that you know, being earlier on
and being proactive about what are the exact prospects, sort
of preparing yourself for, for LM. Not when the asset
trades at eighty, but when the asset trades at ninety,
and asking yourself, is this is this something that if
it found its way to eighty or seventy, that I
(25:07):
really want to own through the process. If it is,
then you know, you either build conviction or hold off
and build more conviction or more often than not. Right
now we're finding that ninety is the right exit point
for us, and you know we'll see where those those
go from here.
Speaker 1 (25:22):
Well, you keep your lawyer on speed done and grit
your teeth and write it out. But on on Leemies,
I found it interesting that one of our guests earlier
this year talked about the relative value in Europe against
the US. This was a someone who ran a portfolio
of loans and clos and finding that to be an
advantage that you know, they don't have this lem situation
(25:44):
in Europe. And since you know you you really are
a global credit player, and what is the relative value
proposition when you look across the world now, because so
many of our guests it's so focused on the US,
That's where all the liquidity is, that's where the scale is.
How do you diversify geographically this point?
Speaker 3 (26:00):
Yeah, I think so. For example, for US, we really
look at it globally. In our we call it the
Global High Yield Team for a very specific reason, and
we do really embrace the fact that the European leverage
loan market, in the European high yield bond market are
our key differentiators, especially in times like these where you know,
US exceptionalism is a little bit more questioned. Investors are
(26:24):
you know, increasingly concerned about you know US, you know,
economic policy or politics or anything of that nature, and
they're looking at what's the best way that I can
expand my funnel, and one of the best ways is
obviously to be in Europe. Now, Europe is not without
its risks, right, You've got you know, twenty some odd
(26:45):
countries that can compose Europe, and depending on you really
do need a big, a big research team, local presence
on the ground, and a lot of years of experience
to participate in that market. But we do find that
the relative value is usually a lot more compelling in Europe,
and you know, there's extra spread that's sort of embedded
(27:06):
in almost every situation when you know a company is
coming to issue in the US dollar market. In the
euro market, you generally speaking get a little bit of
extra carry. Certainly for US investors, you get a little
bit of extra carry on hedging that back into usd
and that's that's always nice money to find between the
couch cushions. But as we sort of look at it right,
(27:27):
that market is less liquid and you do need to
be compensated somewhat for that that illiquidity. You also need
to be compensated for the fact that when you know
there's some sort of hiccup in that market for any
number of reasons, and we can go back to the
sort of Eurozone crisis of twenty thirteen area, it is
tough to get liquidity in that sector. And that's also
(27:50):
an opportunity, frankly, in times when you know, for example,
the US dollar loan can trade at you know, ninety
seven ninety eight in an off market, and that you're
a loan will trade at ninety three ninety four and
offer you a little bit of extra carry. So we
always position it with our investors that you know, while
it's easy to just want to grab on and hold
(28:10):
on to that little incremental extra yield out of Europe
as much as you possibly can, you know, being able
to rotate freely between those those groups is very important.
I think one other point that I also make in
that is just you know, especially and this comes across
more when I'm talking to US investors, is US credit
risk in the high yield market Generally speaking, you're getting
(28:33):
big global companies, and I think it's underappreciated how globally oriented,
particularly as private credit has taken a lot of smaller issuers,
with a lot of US centric issuers out of our market.
We're getting into bigger and more global companies. And so
if you're going to be you're you're already going to
be invested in the globe, whether you know, whether you
(28:54):
think you're just buying US highyeld bonds, which is buying
US high heel loans or not. And so if you
are going to be invested in that, why not broaden
your funnel out as wide as possible and pick up
the extra you know, the companies that are located in Germany,
the currency opportunities that exist between you know, great British
pound euro dollar US dollar securities that are out there.
(29:16):
So that's that's sort of our take right now. I
think we do see, you know, spreads on are very
much on a heads up basis us to Europe loans
and bonds right now, and and you know, we don't
particularly find a reason to be massively overweight Europe right now,
but we are, you know, we are, we are. We
are certainly cognizant that that you know, there's lots of
(29:38):
opportunities and so broadening the funnel really helps for investors.
Speaker 1 (29:42):
Can you give us a sense of the opportunity in
terms of you know, sector to country currency even I mean,
if you could sort of narrow it down a bit,
as you say, it is quite complex.
Speaker 3 (29:54):
Yeah, it is quite complex, you know, country wise, you know,
the largest countries that are issuing are predominantly the UK, France,
Germany as you would expect. The largest you know sort
of countries that are that are over in Europe Italy
to a smaller degree, and then obviously the Nordics there
are some issuers there as well. So you do want
to be very cognizant of you know, we certainly like
(30:16):
to to joke around with investors about its wine and
beer economies. But but to some degree, you know, there
is I think some value to be had in that analogy.
But to be fair, I think there are there are
some very some very big, you know, geographical differences. The
way way they treat bankruptcies, for example, in France is
very different than the UK, and so you know, all
(30:39):
of those things, I think investors need to be, you know,
very cognizant and very very understanding of the predominance of
issue comes in Euros. As you can imagine, most of
the country operates on that currency block, and so that's
the reason why they're issuing there. But there are selected
opportunities that exist in the Great British Pound in some
sterling to nominated assets that have significantly less liquidity, but
(31:04):
you also get a lot of extra spread and carry
for those, and so investors who are willing to be
in what I would call a little bit of a
less liquid market within Europe can also pick up a
lot of additional yield there as well. Sector Wise, the
differences to the US I think are pretty important to
think about, particularly on the eurobond side. For example, in
(31:27):
the US we have a very heavy reliance on energy.
It's the largest sector in the USI yield benchmark. In Europe,
it's hardly anything to talk about over in Europe right
there's not a lot of oil exporting countries. There are
a couple of services related business in the Nordics, but
not a lot to talk about there. However, they do
have a large auto sector obviously, as you can think about,
(31:48):
the French auto sectors is large. The UK has a
smaller degree in the German auto sector and related parts
and services businesses all exist in that sector, so it's
a larger percentage of that sector. The other option is
the other sector that's also well a little more more
well represented in Europe is real estate, particularly some of
(32:09):
the commercial real estate businesses and some of the building
businesses that are over there. And so you know, for
us right now, that's not necessarily a spot we're leaning into.
Those two sectors that I just mentioned are squarely in
the crosshairs of sort of concerns in the European economy.
But that being said, there are still lots of things
and lots of differences where you can play those sectors
(32:30):
off of each other. Over time and ad attractive attractive
returns for investors globally.
Speaker 2 (32:34):
Mike, you talked a little bit about issuance. If we
think about US issuance, both high yield and US levered loans,
a year to date, we're trailing pretty far behind the
levels of the past year. Things a little bit better
over the past two months, but year to date we're
still down compared to what we did last year. Are
you guys seeing enough deals to look at? Is there
(32:54):
enough paper out there to buy?
Speaker 3 (32:56):
Yeah? Well, what I would say is we're still under support,
but we're not as chronically undersupplied as we were about
a year ago. If I will rewind about a year ago,
where you know, the loan market was pushing about forty
or forty to fifty percent of it was trading up
and over par, indicating that you know, clos and investors
(33:17):
are trying to fill fill out portfolios and not able
to find enough supply. Right now, we've got a market
in which you know, probably about twenty percent of our
market is up and over par right now, indicating that
you know, there's there's still not that dynamic quite yet
where where we're under supplied. But your point is, well
taken Steven that if you think back to the you know,
(33:38):
sort of beginning of this year, we got off to
a little bit of a start with new issue. We
then spent most of March fearful about what was going
to happen at the beginning of April, so not a
lot of people were issuing. You know, we obviously had
quite the hiccup, if you will, in April in terms
of tariff related volatility, yield spiked, things of that nature,
(33:59):
and so we just we took two months off right there.
It took some time for that volatility come back down.
It took a little bit of time for the COLO market,
for example, to sort of ramp back up and really
have that demand for discounted paper. We're in that period
now where you know, we are busier than we've ever been,
and to be fair, we're creeping towards that undersupplied market
(34:23):
again right now. I do think, you know, there's been
a lot of full forward. There are certainly deals that
have come forward for refise refinancing much sooner than we
probably expected them to, and they're trying to hit the
market right now. While while things are open, while spreads
look relatively cheap, to them, and you know, as we
(34:45):
sort of look at it, I think that that we
don't see enough of an M and a calendar to
really build a back half of the year that is
going to be oversupplied by any stretch of the imagination.
Speaker 1 (34:55):
So just on your point about Europe, I mean, it's
obviously no better there in terms of issue vants and
it's very tight crosspod. But in terms of the value
proposition that you mentioned that that you know, there is
more value in Europe, I think a lot of people
work up to that fact on April second over here
that you know they should start looking and suddenly started
you know, you know, bringing their broken and find out
(35:15):
what value. How has that changed over the last couple
of months. It has it compressed at all?
Speaker 3 (35:20):
It has compressed a little bit. Yeah, I think that,
you know, europe European loan market, for example, was offering
fifty to seventy five basis points of extra spread on
a headline basis. Right now they look exactly equal. So
so yes, that has compressed a little bit. I think
more broadly than that, you know, investors are I think
(35:42):
and we see it just because almost all of our
investors are globally oriented by their very nature, by being
part of our our global high yield bond franchise, our
bond and loan franchise. But we have been getting more
calls about, hey, I am interested in a globally oriented strategy,
or hey, hey, you know we we for example, you know,
(36:02):
have a lot of US centric managers and we have
you guys that do global Hey, we'd like to talk
about expanding the opportunity set or expanding the mandate. And
I think that that will probably in the near term,
create a very strong technical demand for European assets. People
want to diversify out of the US to some degree.
(36:22):
You know, the question will be over time and again,
does supply meet the demand and their supply. You know,
if you think our supply has been quiet and anemic,
theirs has been even more so. And you know, the
question will be to some degree it'll be sponsored the driven,
or it will be public you know, large public corporates driven.
(36:43):
But will they also see the same value in Europe
in diversifying their portfolios, in moving their investor base. And
if they do, and if they lead the way, then
I think the credit market will sort of be able
to follow them. A little bit more easily, you know,
out of the US and into Europe, and emerging markets
just tend not to be as big of an opportunity
(37:05):
set because there's a whole different set of you know,
sovereign issues that go on there. So the investors we're
speaking with are predominantly looking at diversifying themselves by sort
of looking into the US and then adding the European
angle as well, not Asia. Not Asia so much. I
think a large portion of that is because they just
don't have very sophisticated capital markets for leverage loans and
(37:28):
hig yield bonds and things of that nature. It tends
to be more bank centric in that market, and so
we haven't seen that as much. You do see some
marginal issuance that comes out of Australia occasionally into the
broadly syndicated markets, but even there they tend to be
a little bit more of a private credit oriented market.
Speaker 1 (37:44):
So does that over time push European and US spreads
closer together as a convergence between those two regions.
Speaker 3 (37:50):
I think I think it will, But you have to
go back to the fact that they're you know, they
are roughly a quarter of the size of the US market,
and so there's a lot of catching up to do,
if you will, in terms of liquidity, and so, you know,
the tide doesn't always just come in. Sometimes it goes
out as well. And that's where where we think we'll
add a lot of value is when when the tide
(38:14):
goes out, we can switch from US to Europe quite easily,
and when things look quite compressed, we can can keep
a more neutral allocation between the two.
Speaker 1 (38:22):
In terms of stretch of products as well. I mean,
we talked a lot about loans, but CLOS comes up
very often on this show as a defensive asset in
a in a somewhat turbulent world. How do you feel
about CLOS right now?
Speaker 3 (38:37):
Well, you know, I think that we certainly felt really
great about CLOS when they were trading at very widespreads
in sort of the panicked periods of twenty two and
twenty three, and that's when we, you know, really put
in our sort of maximum weightings in that asset class.
But as we get down into a tight spread environment,
we do think that the relative value between underlying collateral,
(39:01):
which is the US leverage loan market for example, and
double B or triple B rated leverage loans is quite
squeezed and compressed. Now. One of the only reasons we're
not necessarily at a point where we say, well, we
want to just avoid that entirely because I don't believe
that at all, is that those portfolios, in particular in
(39:22):
the COLO market have really cleaned up their act if
you will. They're carrying fewer B three and B mins
assets they are, they are carrying much less triple C risk,
and particularly every refinancing and reset that happens, those investors
are going to the managers and saying, hey, you are
at six percent, I need JET three percent triple c's,
(39:43):
or you're at three percent, I need JET one percent
triple cs. And so that does back to your point
of those are portfolios that can weather any storm, even
if we go through a recession. You're getting extra spread,
You're getting extra complexity premium associated with that. And as
long as you picked good managers who don't do anything
you know, bad during during any of those periods, you
(40:05):
should be able to really enjoy that carry. But again,
time horizon matters, and and for our investors in our
multi asset credit process, we want that relative spread between
double b's and double B rated clos single be rated
loans to be a little bit wider before we sort
of load the boat, if you will, But we are
closer to neutrally allocated, and you know, if things tighten
(40:26):
up a good bit there, you know, we're certainly not
afraid to be completely out of the asset class entirely.
But but it does seem quite balanced. And and that's
the reason why it's it's, you know, my opinion, an
easy asset class to defend, at least owning some of
right now.
Speaker 1 (40:41):
Right but you don't worry about the defaults picking up
in loans and the recoveries being very very low. And
you know, there seems to be you know, it's quite
a lot of strain generally on the on the loan market,
and maybe maybe people are buying or mispricing the risk
because it's there's not enough supply.
Speaker 3 (40:56):
Yeah, I think that I harken back to the fact
of just the B three and B minus and lower
rated portions being much smaller parts of these portfolios. I
think that they're designed to have defaults. They're designed to
have losses. Yes, if you estimate that, you know, defaults
average two percent to three percent a year and recoveries
(41:18):
are fifty cents on the dollar for every single one
of those years. Then you know, you still make you
still get all your all your at the at the
mes level, you still get all of your all of
your principle back and you get a really nice carry
along the way. And so for us, we think that
the portfolios are being set up for that level of
success right now. But it hasn't always been the case.
(41:40):
Right If you look back into twenty twenty one vintage
clos for example, they weren't all set up for success.
They were carrying some of them were carrying a lot
of B three and B minus rated risk. They were
stretching on the margin to get some triple C risk.
You know, they've certainly had a tougher time navigating this environment.
And so we do see the portfolio is being set
up much more so cessfully than they were in some
(42:01):
of the heyday periods of the years past.
Speaker 2 (42:04):
What are you most worried about for the rest of the.
Speaker 3 (42:06):
Year, You know, I don't really see a lot of
other major risks in the second half of the year.
I think what we are looking for is over the
next few months of the year, and that will judge
how the back half of the year is is what
of the impacts from tariffs spen. We just simply haven't
seen the goods arrived to the shore with the tariffs
seen the consumers have to spend their money on on
(42:27):
these more expensive goods. So we simply we haven't felt
the impact of what happened in April yet on the
consumer budget. And as we sort of you know, I
think look out for the next you know, twelve months.
That is the spot where you know, they're the tail
risks are the largest. And if you know, if all
(42:48):
the tariffs come in and it's twenty five percent here
and seventy percent from this country and thirty percent on
this product over here, those are going to have meaningful impacts.
If if it turns out that that the as things
come through and that they're passed along, then you know,
we can you know, sort of keep grinding on from
here for quite a bit of time. Outside of that,
(43:08):
you know, I think some of the biggest risks, frankly,
have been sort of shrugged off by the market. I
think one of the biggest risks that we were quite
concerned about was just escalating tensions in the Middle East,
and does that cause oil prices to spike two one
hundred and thirty dollars a barrel or something like that,
and that's that's going to take a big bite out
of consumers. Obviously, we've been been exchanging missiles with Iran
(43:30):
in Israel and the United States over the last few days,
and oil prices have gone down and there's been relative
calm in that market, and so you know, each successive
sort of risk point sort of goes away, and it
certainly you know, I think obviously the US tax bill
will also fit into that as well, which you know,
(43:51):
all signs are pointing to something getting done. But that's
also a bit of a spot of concern for investors there.
But I think that you know, we've been shrugging a
lot of these things off, and so it's it's really
just about about the data as it sort of comes
through the through the readings over the next couple of
weeks months.
Speaker 1 (44:09):
Okay, But you do sound, you know, despite all these
challenges and risks and all this uncertainty, you do sound
fairly optimistic. What is the biggest opportunity do you think,
min where's the best relative value?
Speaker 3 (44:19):
Yeah? For us, I think it's in you know, what
I would call single bee leverage loans. I think additionally,
it's some of the crossover opportunities that exist in the
senior secured bond market, for example, where there's some smaller
issuers that are out there where investors can really get
paid to roll up their sleeves. I think that's the
most you know, sort of target rich environment out there.
(44:42):
I think certainly, you know, while on the surface, I
think investors would would probably love to tell you that,
and certainly the data bears this out that triple C
rated bonds are at their widest level to single bees
as they've been in a while, and that that should
quote unquote be a target rich environment. I think, you know,
for us, as we're sort of looking through through that
(45:03):
that opportunity set, there are fewer options that exist at
the good end of that spectrum and more problems. But
I will say that there are some good things in
that sector that are improving credits. Improving stories likely take
out candidates in the very near term, and so we
think that that's really good relative value. We just don't
see as much you know what I would call opportunity
(45:24):
in credit spreads in the double B rated sectors. Those
are very technically driven, you know, and certainly spreads are
very very tight there, so you know, we're sort of
avoiding that, continuing with our sort of single b views
of the world. And then you know, I think there's
still a lot of opportunity within the CLO landscape to
(45:44):
sort of particularly on mezzanine and even colo equity for
some investors in some strategies.
Speaker 1 (45:51):
And just to be clear, Mike, because we've talked about
the whole world, do these comments relate to europe US both?
Speaker 3 (45:57):
Is there both? Yeah? Right now, I think it's very
much of a both comment. You know, there certainly have
been periods over the time where you know, Bearings has
pounded the table over that the European loan single b
asset class is a greatest opportunity in the world. Right now,
I think we're pretty neutral in thoughts about those sectors
right now, and so I think my comment is pretty
(46:19):
global in nature right now.
Speaker 1 (46:20):
Great stuff, Mike, best from Bearings. Many thanks for joining.
Speaker 3 (46:23):
Us on the Credit Edge, Thanks for having me, and.
Speaker 1 (46:25):
Of course very grateful to Steve Flynn from Bloomberg Intelligence.
Thank you for joining us today.
Speaker 2 (46:29):
Thank you for having me for more.
Speaker 1 (46:30):
Credit market analysis and insights. Read all of Steve's great
work on the Bloomberg Terminal. Bloomberg Intelligence is part of
our research department, with five hundred analysts and strategists working
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(46:51):
the Credit Edge wherever you get your podcasts. We're on Apple,
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Terminal at bpod Go. Give us a review, tell your friends,
or email me directly at jcrombieight 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 Crumby. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Steve Lunn, a senior credit analyst with Bloomberg Intelligence.
This week, we're very pleased to welcome Mike Best, who
runs the senior secured loan and multi ASSEID credit strategies
at Barings.
Speaker 3 (00:33):
How are you, Mike? Doing well? Thank you?
Speaker 2 (00:35):
Mikes a member of Barrings US high Field Investments Group
responsible for portfolio management for senior secured loan and multi
ASCID credit strategies. Mike has been in the leverage credit
business since two thousand and three, and prior to Barings,
he was in the leverage finance group at Bank of America.
Speaker 1 (00:52):
Great to see Mike and leverage finance, that's our favorite topic.
Just to get the bull rolling credit markets looking a
bit can place at this point, with debt spreads back
below long term averages and most likely to go tighter
as demand for yield rises and net new supply of
corporate bonds and loans is capped unless there's a big
m and a comeback. Public credit markets are performing well,
leading some to question the value proposition of private markets,
(01:15):
and most people sound quite confident about the resilience of
corporate balance sheets. The end of American exceptionalism is a
big theme. Global investors say they're looking more at Europe
and Asia as alternatives, but there are clear limitations when
it comes to scale and liquidity there. Over All, though,
there's a huge amount of uncertainty and headline risks, not
just on tariffs, but also around the budget deficit, inflation,
(01:36):
the Fed's next move, taxes, immigration reform, and global geopolitics. So, Mike,
what's your take? Is credit risk fairly valued at these levels?
Do you think where do we go from here?
Speaker 3 (01:47):
Yeah, it's a difficult time when you just if you
solely look at spreads right now in the markets, you
might think, you know, certainly that there's a lot of
complacency in the market. I think the market's been remarkably firm,
you know, despite all of the geoplical headlines we've thrown
at it, the economic headlines we've thrown at it. Indexes
sort of shrug everything off, and you know, you look
at obviously the most recent bit of news over the
(02:09):
weekend with with missiles and bombs being exchanged between you
know over in the Middle East, in Iran, and that
certainly should have you know, theoretically spiked some level of
spreads and equities should have traded off, and the market
shrugging those things off. I do think at the margin,
you know, when you look underlying some of the data,
(02:29):
there are spots where people are reacting to the news flow.
There are people, there are spots where investors are looking
at you know, more risk in those sectors and are
pricing that in. And you know, some high level examples
are you know, for example, retail bonds, chemical leverage, loans
this year, consumer products as well as another sector where
(02:50):
those those sectors are underperforming. There's a lot of wide
spreads on offer in those sectors. But you know, investors
are being quite cautious right now, and I think they have,
you know, sort of all the hallmarks of places where
people are looking with some level of concern right now.
Speaker 2 (03:05):
So is retail in the sector that you're most worried about.
Speaker 3 (03:08):
I think it's retail and the consumer and I put
them together because it's not just pure retailers where you know,
you know, there are a lot of quality names within
the retail sector where I'm not too concerned about their
ability to repay their debt on time, make coupon payments,
invest in the business to stay competitive, which is a
key theme in retail. On the other end of the
(03:29):
bar bell, you do have a lot of places within
the retail sector where you know, it's a challenge, right
You've got, you know, changing ways that consumers are purchasing
their goods. You've got some very leverage balance sheets in
that sector, and those are spots where where we do
have a lot of concern. But I think the consumer
more broadly is a concern, and that's where you think
(03:51):
about it from a perspective of household balance sheets have
been in remarkably good shape and kept the spending going
for the last few years, but at some level inflation
starts to bite. Rates have not fallen, so the affordability
of housing starts to become an issue the household. You know,
the household calculus can only work but so well when
(04:13):
wages are not at a rising at a rapid clip.
And so the automotive sector, the housing sector, these are
all consumer products sectors. To some degree. It's just a
question of, you know, how acutely they bite. So I
think we're concerned about all the consumer related sectors. We
have less concern if you will, on the industrial sectors particularly,
(04:35):
you know, when you think about utilities, when you think
about some of the investment that is going into AI
infrastructure is certainly thematic and everybody wants to talk about
it all the time, but there are I think there
is going to be a lot of capital investment that's
going to go into those sectors and that will provide
some tailwind for them, much more so than the consumer
(04:55):
can weather. Right now, no word about the consumer.
Speaker 2 (04:58):
What's interesting is the jobs of actually help out relatively well.
Right So, I guess what happens if that was to
roll over, that would be a big fear that's probably
not price in the market today.
Speaker 3 (05:08):
I think you're right. I think it's you know, certainly,
you know, I think that the from a macroeconomic perspective,
certainly that is not priced into the market that we're
going to see a big rising unemployment rate or anything
along those lines. Obviously, that is the one spot in
the one lever the FED can pull. If they see
start to see that rollover, that does give them, you know,
(05:31):
they can take a little bit of pressure off the
economy from a macro perspective with rates, because what's sort
of holding them in right now is the employment sector
is remarkably resilient, Inflation is quite high, and obviously Chairman
Pal doesn't have a lot of places he can go
in that type of environment. So there is a little
bit of a relief valve if we see some level
(05:52):
of softness there. But you know, it's certainly I think
it's going to be a choppy ride getting from point
A to point.
Speaker 1 (05:57):
B on consumer credit. And I've fel like we've been
talking about that for years and the strain that that
sector has been under, but the amounts of actual distress.
You know, there has been some bankruptcy, there has been
some default, but not a huge amount. And those have
been sort of smaller companies that are maybe more leveraged
that we've kind of known about. They've been in trouble,
they got some cheap money during COVID and they survived
a bit longer then now they're hitting the wall. How
(06:20):
far does it go though? Is it is it widespread?
Is it is it all over the map, or what
kind of winners and losers within consumer can you see?
Speaker 3 (06:28):
Yeah, well, I think that you know, you're certainly your
point is quite well taken that I think a lot
of people have been concerned about the consumer for quite
some time. I think that there are and continue to be,
some you know, haves and have nots. And when you
look at spread dispersion, for example, within some of these markets,
you do see a lot of things on the very
(06:48):
wide end that are obvious default candidates and they're going
to become bankruptcies here in the near future, and some
of them have recently become so. But I do think what,
you know, what you you mix that with is a
lot of these products consumer products businesses. They do have
maturities coming up. They do have some things that they
need to navigate, and when you run out of you know,
(07:10):
it's hard to kill a retailer, but when they die,
they die very quickly. You know. From my perspective, as
I look at that, it's going to be very tough
for some of these guys to refinance refinance their debt.
That means it may maybe a slower bleed out, but
it will take some time and it will sort of
appear there. In our opinion, is.
Speaker 1 (07:28):
It mostly smaller companies. I mean, I just looked at
the kind of dispersion everyone keeps talking about, and it
seems that the smaller companies are underperforming and the larger
balance sheets, you know, they're more liquid, they've got more buffer,
they've got more ability to maybe past some of these
costs on they you know, is that where the biases
in terms of defensive stuff in this sector, the bigger companies.
Speaker 3 (07:49):
I think that's certainly the bias. It certainly helps. Obviously,
size and scale always help. Just if you think about
a retailer being a small retailer, there's a lot of
things you need to be doing right in order to
you know, reach your customers and do things. But look,
there are large businesses that exist in the leverage finance
market that are large retailers, that are name brand retailers
(08:10):
that have you know, locations that all of us have
probably been to, even you know given up in New
York City for example, And you know, those companies are
struggling as well and have the potential to struggle a
lot in this kind of an environment. And so you know,
from our perspective, it may take some time, but it's
not necessarily just going to be the small niche retail
(08:33):
consumer products company who's you know, for lack of a
better term, their buggy whip is no longer needed. It's
going to be you know, it can be possibly much
more widespread to sort of general retailers and things of
that nature.
Speaker 2 (08:46):
So in your seat, you do you've spent a lot
of time both, it sounds like, in the loan and
the high old bomb markets. So when looking at leverage
loans versus high held bonds, what do you think about
the re releative value dynamic between those two assa classes.
Obviously they're related, right, A lot of comple these are
in both markets. But what are you seeing out there
as far as relative value and leven loan versus highal bonds?
Speaker 3 (09:06):
Yeah, absolutely, and I think it's you know, statistics are
one thing, and you can look at the oas d
M ratio of the indexes and things like that and
sort of draw some conclusions. But I think very broadly speaking,
you know, the high yield bond market is about fifty
five percent double be rated, and it's a much higher
quality market than the leverage loan market, where that is
(09:27):
about sixty seven percent single be rated. Predominantly sponsored driven
companies that are you know, looking to generate higher returns
to the equity investors there, and so you do need
to account for differences in just credit quality, sheer credit quality.
And when you look at it, over the last several years,
(09:48):
last three or four years, we've been as wide as
getting an extra two hundred and fifty to three hundred
basis points of extra spread to be in the loan
market versus the bond market, and we've been as tight
as you know, sort of one hundred basis points, give
or take. And that one hundred basis points level to
me is which is about where we are right now today,
especially when you exclude the distressed portion of the US
(10:11):
leverage loan market, which I think is its own animal
and deserves, you know, probably its own podcast, frankly. But
when you exclude those things, you're really down to that
hundred basis points level, and that's when you're getting, in
my opinion and in our opinion, it's a coin toss
between the two right now in terms of spread returns
for the next few years on a risk adjusted basis,
(10:34):
if all else is equal, and obviously spreads, you know, rally,
we're in a risk on market for a lot longer,
holding on to carry for dear life, and it is
a strategy to win. But I think as you sort
of think a step back and try to put your
macroeconomic hat on, there's a lot of directions. You know,
the tails are fat, there's a lot of directions in
which these markets can go and preserving sort of that
(10:56):
maximum amount of flexibility. There is really war weird positioned
right now and we're how we're looking at the market.
Speaker 1 (11:02):
How much of rates view comes into that, given you know,
loans is floating and and everyone's hoping that the FED
might start cutting soon.
Speaker 3 (11:10):
Yeah, I think to some degree, rates is a portion
of that. I think at Bearings we try to be
you know, a credit shop first and foremost that focuses
on sort of you know, relative spreads, relative value of
all of our underlying credits. And I will you know,
I won't say that we ignore rates, but we certainly
don't want to be making big macroeconomic rape bets ats
a firm, but to us, I think it is much more.
(11:34):
We did spend a lot of call it twenty two,
twenty three, twenty four with a with a very strong
bias to being overweight floating rates. We didn't see any
paths to the FED to be cutting and so you know,
keep calm and carry on. Kind of kind of market
was was the theme for a while. I think right now,
as we look at it, we do see that that
rates are a natural buffer if we hit a downturn,
(11:57):
and you know, break evens are certainly much more at
attractive now than they've ever been. Hypothetically, if you want
to say that high yield market isn't attractive in an
off market until it's at ten percent, well, guess what,
You're going to get some level of spread widening. But
you're also a market in which high yield trades at
ten percent. Guess what, rates are also going down as well.
So those break evens look a lot more compelling now
(12:18):
in fixed income, in non floating rate assets. So it
is a much more of a coin toss. But I
don't think we're willing to make a call that rates
are going to come crashing in anytime soon.
Speaker 1 (12:28):
And then the third leg of the whole equation is
private credit, you know, which is increasingly converging with leverage loans.
How does that factor into your relative value?
Speaker 3 (12:40):
Yeah, certainly, I think you know, obviously I sit on
the public credit side here at bearings, but we do
an increasingly our investor base. We predominantly manage institutional investments,
and institutional investors I think are certainly well attuned and
understanding of differences between public and private credit, but also
(13:01):
the gray area that exists between those two markets, which
is I think where you know, to some degree, there
are some investors who are still very much looking at
this as credit as credit and I just want you
to find me the best relative value and at bearings.
We've sort of positioned ourselves to be very cross functional
with our private credit group, with our with our public
(13:22):
credit group, but I do think there will be over
time more convergence between those two sectors. We see more
their companies outgrowing their market to some degree and coming
up into our market. And we've certainly seen I think
a decent amount of chipping away. You know, for example,
in the credits we Seleverage Loan Index, which is our
UBS Leverage Loan Index. Now, you know a lot of
(13:44):
the smaller companies are gone from that index. They've moved
on into being private credit issuers. You know, when I started,
it was it was sort of nothing to think about
having a four hundred million dollar term loan b that
was placed amongst you know, ten to fifteen lend and
that was considered a broadly syndicated loan back then, and
now obviously that's you know, there's three people that hold that,
(14:07):
and it's a private credit loan, and it might be
the exact same company it was back then. So I
do think we're going to see more convergence. I do
think that you know, certainly the institutions that are well
prepared to capitalize on that will do very well.
Speaker 1 (14:21):
And if you don't need the liquidity, is there enough
of a pickup over public in private?
Speaker 3 (14:26):
Right now?
Speaker 1 (14:27):
We've talked over the last let's say, almost a year
now about the differential and I think the end of
end of last year it was around one fifty to
two hundred base points more for leverage credit that you'd
want to go into private, and now that seems to
have kind of been eroded to about one hundred. And
you know, again people are asking is that enough? Some
people say no, some people say yes. It's wondering what
(14:48):
your view is of the differentials into or the arbitrage,
you know.
Speaker 3 (14:53):
To us right now, we think it's a little snug
from you know, our multi asset credit process, and we're
not looking to go down too many rabbit holes and
find too many liquid assets that only give us that
hundred basis points spread premium that you're talking about. I
think that you know, depending on your time horizon, and
that is a very important factor in this, as we're
discovering right now with lots of investors who are in
(15:16):
private equity, for example, trying to find new ways to
generate liquidity from their private equity investments. Depending on your
time horizon, one hundred basis points might be plenty if
you trust the manager to pick what they're doing and
pick the credits the right way. One hundred basis points
may be fine. But to us, as we sort of
get to look across both of them, we're not really
(15:38):
finding a lot of value in those things that are
only picking up an extra hundred basis points. We're looking
for that one hundred and fifty two hundred, and to
be fair, there's not as many opportunities right now to
find those things that meet our credit risk profile sort
of objectives, and so yeah, we are passing on more
of them, which which does lean a little more public
than private in that sort of framework.
Speaker 1 (15:58):
But ultimately, though, take away supply that would have gone
to leverage and then just keep those spreads tight because
you know, net issuance.
Speaker 3 (16:07):
Is very low. Yeah, I think there's naturally going to
be some area of that that compresses. Is it's just
new issue has been anemic. To say the least, M
and A is quite low. Traditionally, that's how the private
credit you know community filled their coffers and found their
deals was financial sponsors buying companies, appreciating the quick execution
(16:29):
of only going to two or three institutions getting something done.
And now you know, we're in a market where they
quite frankly aren't making as many acquisitions, aren't doing as
many things, and that means that you know, the relative
animal spirits and competition is heated up, and you know,
we're taking just as much market share as they're taking
from us. And some of the stats would tell you
(16:50):
that the essay we be the public credit market are
are certainly you know, I think some of the stats
would have told you that twenty two to twenty three
we certainly lost a lot of market share. You know,
those were tough times to get broadly syndicated deals done.
I think it's it's come back to an even split.
And I think you know, certainly some of the transactions
that we're looking at right now in the last month
(17:12):
or so would would probably have still fit into the
private credit market a while ago. But they're able to
get reasonably good execution, much better pricing, good terms, and
all you have to do is get it publicly rated
and go through a bank.
Speaker 2 (17:26):
Mike, you were recently on Bloomberg TV's Real Yield program
and you talked about know the risk with consumer discretion,
which you talked about earlier today, and then you also
mentioned idiosyncratic risk, particularly in the communications sector. Now I
covered the communications sector. We have plenty of stuff going
on right We have Warner Brothers bonds falling into high yield.
We have EchoStar, you know, in a fight with the
(17:49):
FCC and entering the grace period for the coupon payments.
Speaker 3 (17:54):
We have all.
Speaker 2 (17:54):
TCUSA, which you know has a ton of debt. The
lower rated notes trading the forty to fifty cents on
the dollar screams a candidate for possible LMA. I was
just wondering, you know, is that still a sector where
you see a lot of single name risk.
Speaker 3 (18:11):
It is, and I think that the reason why we say,
you know, idiosyncratic risk in that sector is because it
would be too broad of a brush to just say,
you know, for example, hearkening back to the Great Financial Crisis,
the auto sector is in trouble, so all of them
are in trouble. It's too broad of a brush to
paint the communications sector that way, because there are winners
and there are losers. There are companies that are winning
(18:34):
right now by being tied into the AI infrastructure framework,
being tied into fiber to the home, where you know,
as consumers are changing their preferences and consuming more streaming content,
they need a better pipe in order to get better
internet into their home. So that's the sort of haves.
And on the havent side of things, there are big
legacy institutions that have not changed their ways. They have
(18:57):
not you know, invested appropriately in the infrastructure they need
to compete in the next twenty years. And the infrastructure
that they invested in was great twenty years ago. And
those types of businesses, and you just rattled off a
few of them that fit into that mold, there's probably
more risk that they don't go right than that there's
(19:17):
upside that they do go right. And I think that's
the sector where and again I think all sectors are
this way, but certainly within the communification sector, active management
is you know a very important part of it, where
you know, you can either avoid these sectors or frankly
pick the right parts of these capital structures to win.
So yeah, well it's interesting.
Speaker 2 (19:37):
We've seen the Charter right Charter unsecured, it's the biggest
name in high yield, and they had some very positive
news with the Cox acquisition. Or even though they're making
a major acquisition, they've lowered their preferred leverage target and
received you know, positive review from a positive reactions so
far from the rating agencies. But that's clearly a big
positive deal for the sector and the higal market.
Speaker 3 (19:59):
Yeah, absolutely, and I think we'll see there's other spots
of positivity that are out there. For example, consolidation within
some of the broadcasting sector can in fact be a
very big positive thing. There's some you know, quite frankly
over levered capital structures, but there are attractive assets that
are over levered and and they if they can find
their way into to the right merger situations. I think
(20:20):
there's there's lots of spots where even some of those
businesses that are a little more on the cuspier legacy
side can find their way towards towards that. But yeah,
obviously the one you mentioned is certainly quite topical in
the market. You received that news quite well.
Speaker 2 (20:33):
So and then just dig a little deeper on this
h in this sector. So we've seen quite a lot
of liability management exercises over the past year, right, Luhmann
obviously did a very large one, Echo Star did one,
iHeart did one. So we've seen plenty of companies do them.
Your viewing, you know, some people say, hey, you're just
you know, kicking the can down the road if you're
(20:54):
just doing an LME with regard to restructuring the debt
and there's nothing going on with restraint ucturing the business.
At the same time, just wondering what your views are
on LEM transactions.
Speaker 3 (21:06):
Yeah, that's a that's a broad, broad topic there and
certainly one that I think you're hitting on a lot
of the themes of you know, what we're seeing right
now in that that sector, is that that particular part
of the market and that activity is that there are
to your point, I think you mentioned a few of them.
There are quite a lot of legacy businesses that are
you know, for more or less rearranging the deck chairs
(21:27):
on the Titanic. And you know, the business is not growing.
They're not going to be turning around anytime soon. They're
not going to get you know, magical ad spending coming
in from from from somewhere. And those businesses are doing
lemes and they're you know, playing lender fears off of
each other and getting some level of of kick the
(21:47):
can down the road. Ultimately, you know, the the sort
of stats that we've looked at, it it's sort of
a coin flip. They're mostly within a year to eighteen
months seeming to be right back in conventional chapter of
them now. And I think, you know, for those businesses
that do not have you know, any solution if you will,
(22:07):
to growth to to that, we're going to see more
and more of that. Certainly a lot of the push
at the end of twenty twenty four to getting some
of these lemies done, I think there will be a
higher probability of a lot of those re entering. But
that being said, you know, there are successful ones. There
are some that are you know, for example, you know,
(22:29):
in the healthcare sector. There have been a few of
them that managed to you know, kick the can and
you know, their revenue problems. Eventually, you know, they didn't
they didn't have revenue problems. They are cash generation problems.
Basically eventually caught up with we have revenue growth, it's
not growing profitably. And then you know, some of those
have found their way out into either refinancings or obviously
(22:52):
the credits trading much tighter than they are now. But
it is a it is a time consuming process. Yes,
it is certainly I think something that investors, you know,
you need to be big to succeed in this. You know,
it's a scale game, if you will, you need to
bring you know a lot of institutional resources and it
(23:13):
takes a lot of our analysts time to to sort
of go through those. And so, you know, I think
that on balance, this year we're finding less relative value
in the LME sector and participating in in every LME
situation that we see out there in the world. Last
year was was a little bit more of a you know,
an opportunity there, and frankly it was driven by technicals
(23:36):
where you had so much of the CLO market that
was refinancing and resetting, and their investors were telling them,
I don't care about it, I just want less triple
cs in my portfolio. So they were willing to, you know,
shotgun approach everything out and really reduce their triple C buckets,
which meant that either people were over overestimating the possibil
(24:00):
of an LM, so that was one opportunity to pick
up some returns, but also just the technical factors of
some of those. There was just so much supply that
if you could build some scale, you know, affect a
good positive outcome in a in a fairly decent business,
you know, the price points were better back at then.
Speaker 1 (24:15):
Given that it's getting tough for those to play the
enemies there any are there any you just kind of
shake your head out and then sell out of before
it gets to that point. I mean, it seems like
it's getting tougher and more aggressive.
Speaker 3 (24:25):
Yeah, certainly, I think there are. You know. The good
news is that I think for us, we've been small
in those situations that you as you rightly said, I
shake my head at and go this is just time
to leave, you know, And so it's been quite easy
for us to extract ourselves from some of those situations.
(24:45):
But I do think that you know, being earlier on
and being proactive about what are the exact prospects, sort
of preparing yourself for, for LM. Not when the asset
trades at eighty, but when the asset trades at ninety,
and asking yourself, is this is this something that if
it found its way to eighty or seventy, that I
(25:07):
really want to own through the process. If it is,
then you know, you either build conviction or hold off
and build more conviction or more often than not. Right
now we're finding that ninety is the right exit point
for us, and you know we'll see where those those
go from here.
Speaker 1 (25:22):
Well, you keep your lawyer on speed done and grit
your teeth and write it out. But on on Leemies,
I found it interesting that one of our guests earlier
this year talked about the relative value in Europe against
the US. This was a someone who ran a portfolio
of loans and clos and finding that to be an
advantage that you know, they don't have this lem situation
(25:44):
in Europe. And since you know you you really are
a global credit player, and what is the relative value
proposition when you look across the world now, because so
many of our guests it's so focused on the US,
That's where all the liquidity is, that's where the scale is.
How do you diversify geographically this point?
Speaker 3 (26:00):
Yeah, I think so. For example, for US, we really
look at it globally. In our we call it the
Global High Yield Team for a very specific reason, and
we do really embrace the fact that the European leverage
loan market, in the European high yield bond market are
our key differentiators, especially in times like these where you know,
US exceptionalism is a little bit more questioned. Investors are
(26:24):
you know, increasingly concerned about you know US, you know,
economic policy or politics or anything of that nature, and
they're looking at what's the best way that I can
expand my funnel, and one of the best ways is
obviously to be in Europe. Now, Europe is not without
its risks, right, You've got you know, twenty some odd
(26:45):
countries that can compose Europe, and depending on you really
do need a big, a big research team, local presence
on the ground, and a lot of years of experience
to participate in that market. But we do find that
the relative value is usually a lot more compelling in Europe,
and you know, there's extra spread that's sort of embedded
(27:06):
in almost every situation when you know a company is
coming to issue in the US dollar market. In the
euro market, you generally speaking get a little bit of
extra carry. Certainly for US investors, you get a little
bit of extra carry on hedging that back into usd
and that's that's always nice money to find between the
couch cushions. But as we sort of look at it right,
(27:27):
that market is less liquid and you do need to
be compensated somewhat for that that illiquidity. You also need
to be compensated for the fact that when you know
there's some sort of hiccup in that market for any
number of reasons, and we can go back to the
sort of Eurozone crisis of twenty thirteen area, it is
tough to get liquidity in that sector. And that's also
(27:50):
an opportunity, frankly, in times when you know, for example,
the US dollar loan can trade at you know, ninety
seven ninety eight in an off market, and that you're
a loan will trade at ninety three ninety four and
offer you a little bit of extra carry. So we
always position it with our investors that you know, while
it's easy to just want to grab on and hold
(28:10):
on to that little incremental extra yield out of Europe
as much as you possibly can, you know, being able
to rotate freely between those those groups is very important.
I think one other point that I also make in
that is just you know, especially and this comes across
more when I'm talking to US investors, is US credit
risk in the high yield market Generally speaking, you're getting
(28:33):
big global companies, and I think it's underappreciated how globally oriented,
particularly as private credit has taken a lot of smaller issuers,
with a lot of US centric issuers out of our market.
We're getting into bigger and more global companies. And so
if you're going to be you're you're already going to
be invested in the globe, whether you know, whether you
(28:54):
think you're just buying US highyeld bonds, which is buying
US high heel loans or not. And so if you
are going to be invested in that, why not broaden
your funnel out as wide as possible and pick up
the extra you know, the companies that are located in Germany,
the currency opportunities that exist between you know, great British
pound euro dollar US dollar securities that are out there.
(29:16):
So that's that's sort of our take right now. I
think we do see, you know, spreads on are very
much on a heads up basis us to Europe loans
and bonds right now, and and you know, we don't
particularly find a reason to be massively overweight Europe right now,
but we are, you know, we are, we are. We
are certainly cognizant that that you know, there's lots of
(29:38):
opportunities and so broadening the funnel really helps for investors.
Speaker 1 (29:42):
Can you give us a sense of the opportunity in
terms of you know, sector to country currency even I mean,
if you could sort of narrow it down a bit,
as you say, it is quite complex.
Speaker 3 (29:54):
Yeah, it is quite complex, you know, country wise, you know,
the largest countries that are issuing are predominantly the UK, France,
Germany as you would expect. The largest you know sort
of countries that are that are over in Europe Italy
to a smaller degree, and then obviously the Nordics there
are some issuers there as well. So you do want
to be very cognizant of you know, we certainly like
(30:16):
to to joke around with investors about its wine and
beer economies. But but to some degree, you know, there
is I think some value to be had in that analogy.
But to be fair, I think there are there are
some very some very big, you know, geographical differences. The
way way they treat bankruptcies, for example, in France is
very different than the UK, and so you know, all
(30:39):
of those things, I think investors need to be, you know,
very cognizant and very very understanding of the predominance of
issue comes in Euros. As you can imagine, most of
the country operates on that currency block, and so that's
the reason why they're issuing there. But there are selected
opportunities that exist in the Great British Pound in some
sterling to nominated assets that have significantly less liquidity, but
(31:04):
you also get a lot of extra spread and carry
for those, and so investors who are willing to be
in what I would call a little bit of a
less liquid market within Europe can also pick up a
lot of additional yield there as well. Sector Wise, the
differences to the US I think are pretty important to
think about, particularly on the eurobond side. For example, in
(31:27):
the US we have a very heavy reliance on energy.
It's the largest sector in the USI yield benchmark. In Europe,
it's hardly anything to talk about over in Europe right
there's not a lot of oil exporting countries. There are
a couple of services related business in the Nordics, but
not a lot to talk about there. However, they do
have a large auto sector obviously, as you can think about,
(31:48):
the French auto sectors is large. The UK has a
smaller degree in the German auto sector and related parts
and services businesses all exist in that sector, so it's
a larger percentage of that sector. The other option is
the other sector that's also well a little more more
well represented in Europe is real estate, particularly some of
(32:09):
the commercial real estate businesses and some of the building
businesses that are over there. And so you know, for
us right now, that's not necessarily a spot we're leaning into.
Those two sectors that I just mentioned are squarely in
the crosshairs of sort of concerns in the European economy.
But that being said, there are still lots of things
and lots of differences where you can play those sectors
(32:30):
off of each other. Over time and ad attractive attractive
returns for investors globally.
Speaker 2 (32:34):
Mike, you talked a little bit about issuance. If we
think about US issuance, both high yield and US levered loans,
a year to date, we're trailing pretty far behind the
levels of the past year. Things a little bit better
over the past two months, but year to date we're
still down compared to what we did last year. Are
you guys seeing enough deals to look at? Is there
(32:54):
enough paper out there to buy?
Speaker 3 (32:56):
Yeah? Well, what I would say is we're still under support,
but we're not as chronically undersupplied as we were about
a year ago. If I will rewind about a year ago,
where you know, the loan market was pushing about forty
or forty to fifty percent of it was trading up
and over par, indicating that you know, clos and investors
(33:17):
are trying to fill fill out portfolios and not able
to find enough supply. Right now, we've got a market
in which you know, probably about twenty percent of our
market is up and over par right now, indicating that
you know, there's there's still not that dynamic quite yet
where where we're under supplied. But your point is, well
taken Steven that if you think back to the you know,
(33:38):
sort of beginning of this year, we got off to
a little bit of a start with new issue. We
then spent most of March fearful about what was going
to happen at the beginning of April, so not a
lot of people were issuing. You know, we obviously had
quite the hiccup, if you will, in April in terms
of tariff related volatility, yield spiked, things of that nature,
(33:59):
and so we just we took two months off right there.
It took some time for that volatility come back down.
It took a little bit of time for the COLO market,
for example, to sort of ramp back up and really
have that demand for discounted paper. We're in that period
now where you know, we are busier than we've ever been,
and to be fair, we're creeping towards that undersupplied market
(34:23):
again right now. I do think, you know, there's been
a lot of full forward. There are certainly deals that
have come forward for refise refinancing much sooner than we
probably expected them to, and they're trying to hit the
market right now. While while things are open, while spreads
look relatively cheap, to them, and you know, as we
(34:45):
sort of look at it, I think that that we
don't see enough of an M and a calendar to
really build a back half of the year that is
going to be oversupplied by any stretch of the imagination.
Speaker 1 (34:55):
So just on your point about Europe, I mean, it's
obviously no better there in terms of issue vants and
it's very tight crosspod. But in terms of the value
proposition that you mentioned that that you know, there is
more value in Europe, I think a lot of people
work up to that fact on April second over here
that you know they should start looking and suddenly started
you know, you know, bringing their broken and find out
(35:15):
what value. How has that changed over the last couple
of months. It has it compressed at all?
Speaker 3 (35:20):
It has compressed a little bit. Yeah, I think that,
you know, europe European loan market, for example, was offering
fifty to seventy five basis points of extra spread on
a headline basis. Right now they look exactly equal. So
so yes, that has compressed a little bit. I think
more broadly than that, you know, investors are I think
(35:42):
and we see it just because almost all of our
investors are globally oriented by their very nature, by being
part of our our global high yield bond franchise, our
bond and loan franchise. But we have been getting more
calls about, hey, I am interested in a globally oriented strategy,
or hey, hey, you know we we for example, you know,
(36:02):
have a lot of US centric managers and we have
you guys that do global Hey, we'd like to talk
about expanding the opportunity set or expanding the mandate. And
I think that that will probably in the near term,
create a very strong technical demand for European assets. People
want to diversify out of the US to some degree.
(36:22):
You know, the question will be over time and again,
does supply meet the demand and their supply. You know,
if you think our supply has been quiet and anemic,
theirs has been even more so. And you know, the
question will be to some degree it'll be sponsored the driven,
or it will be public you know, large public corporates driven.
(36:43):
But will they also see the same value in Europe
in diversifying their portfolios, in moving their investor base. And
if they do, and if they lead the way, then
I think the credit market will sort of be able
to follow them. A little bit more easily, you know,
out of the US and into Europe, and emerging markets
just tend not to be as big of an opportunity
(37:05):
set because there's a whole different set of you know,
sovereign issues that go on there. So the investors we're
speaking with are predominantly looking at diversifying themselves by sort
of looking into the US and then adding the European
angle as well, not Asia. Not Asia so much. I
think a large portion of that is because they just
don't have very sophisticated capital markets for leverage loans and
(37:28):
hig yield bonds and things of that nature. It tends
to be more bank centric in that market, and so
we haven't seen that as much. You do see some
marginal issuance that comes out of Australia occasionally into the
broadly syndicated markets, but even there they tend to be
a little bit more of a private credit oriented market.
Speaker 1 (37:44):
So does that over time push European and US spreads
closer together as a convergence between those two regions.
Speaker 3 (37:50):
I think I think it will, But you have to
go back to the fact that they're you know, they
are roughly a quarter of the size of the US market,
and so there's a lot of catching up to do,
if you will, in terms of liquidity, and so, you know,
the tide doesn't always just come in. Sometimes it goes
out as well. And that's where where we think we'll
add a lot of value is when when the tide
(38:14):
goes out, we can switch from US to Europe quite easily,
and when things look quite compressed, we can can keep
a more neutral allocation between the two.
Speaker 1 (38:22):
In terms of stretch of products as well. I mean,
we talked a lot about loans, but CLOS comes up
very often on this show as a defensive asset in
a in a somewhat turbulent world. How do you feel
about CLOS right now?
Speaker 3 (38:37):
Well, you know, I think that we certainly felt really
great about CLOS when they were trading at very widespreads
in sort of the panicked periods of twenty two and
twenty three, and that's when we, you know, really put
in our sort of maximum weightings in that asset class.
But as we get down into a tight spread environment,
we do think that the relative value between underlying collateral,
(39:01):
which is the US leverage loan market for example, and
double B or triple B rated leverage loans is quite
squeezed and compressed. Now. One of the only reasons we're
not necessarily at a point where we say, well, we
want to just avoid that entirely because I don't believe
that at all, is that those portfolios, in particular in
(39:22):
the COLO market have really cleaned up their act if
you will. They're carrying fewer B three and B mins
assets they are, they are carrying much less triple C risk,
and particularly every refinancing and reset that happens, those investors
are going to the managers and saying, hey, you are
at six percent, I need JET three percent triple c's,
(39:43):
or you're at three percent, I need JET one percent
triple cs. And so that does back to your point
of those are portfolios that can weather any storm, even
if we go through a recession. You're getting extra spread,
You're getting extra complexity premium associated with that. And as
long as you picked good managers who don't do anything
you know, bad during during any of those periods, you
(40:05):
should be able to really enjoy that carry. But again,
time horizon matters, and and for our investors in our
multi asset credit process, we want that relative spread between
double b's and double B rated clos single be rated
loans to be a little bit wider before we sort
of load the boat, if you will, But we are
closer to neutrally allocated, and you know, if things tighten
(40:26):
up a good bit there, you know, we're certainly not
afraid to be completely out of the asset class entirely.
But but it does seem quite balanced. And and that's
the reason why it's it's, you know, my opinion, an
easy asset class to defend, at least owning some of
right now.
Speaker 1 (40:41):
Right but you don't worry about the defaults picking up
in loans and the recoveries being very very low. And
you know, there seems to be you know, it's quite
a lot of strain generally on the on the loan market,
and maybe maybe people are buying or mispricing the risk
because it's there's not enough supply.
Speaker 3 (40:56):
Yeah, I think that I harken back to the fact
of just the B three and B minus and lower
rated portions being much smaller parts of these portfolios. I
think that they're designed to have defaults. They're designed to
have losses. Yes, if you estimate that, you know, defaults
average two percent to three percent a year and recoveries
(41:18):
are fifty cents on the dollar for every single one
of those years. Then you know, you still make you
still get all your all your at the at the
mes level, you still get all of your all of
your principle back and you get a really nice carry
along the way. And so for us, we think that
the portfolios are being set up for that level of
success right now. But it hasn't always been the case.
(41:40):
Right If you look back into twenty twenty one vintage
clos for example, they weren't all set up for success.
They were carrying some of them were carrying a lot
of B three and B minus rated risk. They were
stretching on the margin to get some triple C risk.
You know, they've certainly had a tougher time navigating this environment.
And so we do see the portfolio is being set
up much more so cessfully than they were in some
(42:01):
of the heyday periods of the years past.
Speaker 2 (42:04):
What are you most worried about for the rest of the.
Speaker 3 (42:06):
Year, You know, I don't really see a lot of
other major risks in the second half of the year.
I think what we are looking for is over the
next few months of the year, and that will judge
how the back half of the year is is what
of the impacts from tariffs spen. We just simply haven't
seen the goods arrived to the shore with the tariffs
seen the consumers have to spend their money on on
(42:27):
these more expensive goods. So we simply we haven't felt
the impact of what happened in April yet on the
consumer budget. And as we sort of you know, I
think look out for the next you know, twelve months.
That is the spot where you know, they're the tail
risks are the largest. And if you know, if all
(42:48):
the tariffs come in and it's twenty five percent here
and seventy percent from this country and thirty percent on
this product over here, those are going to have meaningful impacts.
If if it turns out that that the as things
come through and that they're passed along, then you know,
we can you know, sort of keep grinding on from
here for quite a bit of time. Outside of that,
(43:08):
you know, I think some of the biggest risks, frankly,
have been sort of shrugged off by the market. I
think one of the biggest risks that we were quite
concerned about was just escalating tensions in the Middle East,
and does that cause oil prices to spike two one
hundred and thirty dollars a barrel or something like that,
and that's that's going to take a big bite out
of consumers. Obviously, we've been been exchanging missiles with Iran
(43:30):
in Israel and the United States over the last few days,
and oil prices have gone down and there's been relative
calm in that market, and so you know, each successive
sort of risk point sort of goes away, and it
certainly you know, I think obviously the US tax bill
will also fit into that as well, which you know,
(43:51):
all signs are pointing to something getting done. But that's
also a bit of a spot of concern for investors there.
But I think that you know, we've been shrugging a
lot of these things off, and so it's it's really
just about about the data as it sort of comes
through the through the readings over the next couple of
weeks months.
Speaker 1 (44:09):
Okay, But you do sound, you know, despite all these
challenges and risks and all this uncertainty, you do sound
fairly optimistic. What is the biggest opportunity do you think,
min where's the best relative value?
Speaker 3 (44:19):
Yeah? For us, I think it's in you know, what
I would call single bee leverage loans. I think additionally,
it's some of the crossover opportunities that exist in the
senior secured bond market, for example, where there's some smaller
issuers that are out there where investors can really get
paid to roll up their sleeves. I think that's the
most you know, sort of target rich environment out there.
(44:42):
I think certainly, you know, while on the surface, I
think investors would would probably love to tell you that,
and certainly the data bears this out that triple C
rated bonds are at their widest level to single bees
as they've been in a while, and that that should
quote unquote be a target rich environment. I think, you know,
for us, as we're sort of looking through through that
(45:03):
that opportunity set, there are fewer options that exist at
the good end of that spectrum and more problems. But
I will say that there are some good things in
that sector that are improving credits. Improving stories likely take
out candidates in the very near term, and so we
think that that's really good relative value. We just don't
see as much you know what I would call opportunity
(45:24):
in credit spreads in the double B rated sectors. Those
are very technically driven, you know, and certainly spreads are
very very tight there, so you know, we're sort of
avoiding that, continuing with our sort of single b views
of the world. And then you know, I think there's
still a lot of opportunity within the CLO landscape to
(45:44):
sort of particularly on mezzanine and even colo equity for
some investors in some strategies.
Speaker 1 (45:51):
And just to be clear, Mike, because we've talked about
the whole world, do these comments relate to europe US both?
Speaker 3 (45:57):
Is there both? Yeah? Right now, I think it's very
much of a both comment. You know, there certainly have
been periods over the time where you know, Bearings has
pounded the table over that the European loan single b
asset class is a greatest opportunity in the world. Right now,
I think we're pretty neutral in thoughts about those sectors
right now, and so I think my comment is pretty
(46:19):
global in nature right now.
Speaker 1 (46:20):
Great stuff, Mike, best from Bearings. Many thanks for joining.
Speaker 3 (46:23):
Us on the Credit Edge, Thanks for having me, and.
Speaker 1 (46:25):
Of course very grateful to Steve Flynn from Bloomberg Intelligence.
Thank you for joining us today.
Speaker 2 (46:29):
Thank you for having me for more.
Speaker 1 (46:30):
Credit market analysis and insights. Read all of Steve's great
work on the Bloomberg Terminal. Bloomberg Intelligence is part of
our research department, with five hundred analysts and strategists working
across all markets. Coverage includes over two thousand equities and
credits and outlooks on more than ninety industries and one
hundred market industries, currencies and commodities. Please do subscribe to
(46:51):
the Credit Edge wherever you get your podcasts. We're on Apple,
Spotify and all other good podcast providers, including the Bloomberg
Terminal at bpod Go. Give us a review, tell your friends,
or email me directly at jcrombieight at Bloomberg dot net.
I'm James Crombie. It's been a pleasure having you join
us again next week on the Credit Edge
Host
James Crombie
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