June 12, 2025 • 45 mins
Collateralized loan obligations are a credit safe haven as highly-indebted companies get dragged down by economic slowdown, according to PGIM Fixed Income. “These structures are bulletproof,” Greg Peters, the $860 billion asset manager’s co-chief investment officer, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Matthew Geudtner in the latest Credit Edge podcast. “The loan market could really come upon hard times and these structures will be fine,” says Peters, referring to higher-rated CLO tranches. Peters and Geudtner also discuss how to profit from liability management exercises, private debt relative value and growing default risk in the consumer and hospitality sectors.
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Episode Transcript
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Speaker 1 (00:17):
Hello, and welcome to the Credit Edge, a Wiki markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm MATC.
Speaker 3 (00:24):
Woyner, a credit analyst covering industrials with Bloomberg Intelligence. This week,
we're very pleased to welcome Gregory Peters, co, Chief Investment
Officer of PGM Fixed Income.
Speaker 2 (00:32):
Are you Greg, I'm great, Thanks for having me. PGM
is one.
Speaker 3 (00:35):
Of the world's largest investment managers, with one point fortullion
in asset center management, of which fixed income AUM totals
over inn billion, and so Greg is one of the
co heads of the multisector team. Before joining PGM in
twenty fourteen, he was Morgan Stanley's Global Director of Fixed
Income and Economic Research and chief Global cross Asset Strategist,
responsible for the firm's macro research and asset allocation strategies.
(00:58):
And before that he was at Solomon as well as
the US Treasury. So I think that's sort of a
long way of saying I think when Greg speaks, we
should all listen. So do you want to kick us off?
Speaker 1 (01:07):
James, Yeah, we have tons of questions for Greg, but
first we will set the scene. Markets have rallied on
hopes of trade deals, but there's still a huge amount
of worry, not least about tariffs, but also about the
budget deficit, the FED, riots in la and global geopolitical concerns.
Despite this wall of angst and uncertainty, credit markets are
projecting an air of complacency, with debt sbreads back below
(01:29):
long term averages and likely to go tighter as demand
for yield rises and net new supply of corporate bonds
and loans remains muted, unless, of course, there's a big
m and a comeback. Public credit markets are performing well,
leading some to question the value proposition of private markets,
and most people seem confident about the strength of corporate
balance sheets. The end of American exceptionalism is another big theme.
(01:50):
Global investors say they're looking more at Europe and at
Asia as alternatives, but there are clear limitations when it
comes to scale and liquidity there. So, Greg, what's your
take our credit mark? It's fairly valued.
Speaker 2 (02:00):
Where do we go from here? Boy?
Speaker 4 (02:02):
That was a great intro. I found myself nodding to
everything that you said. I think it is a valuation story.
Heading into this year, we had a more optimistic view
of the global economy of the US economy, and we.
Speaker 2 (02:18):
Were still cautious.
Speaker 4 (02:20):
And the reason why we were simply cautious is because
risk reward.
Speaker 2 (02:24):
Was quite poor.
Speaker 4 (02:26):
You know, spreads are top kind of richest death style
that we've seen over the past just call it thirty years.
If you just oversimplify, spreads are you know, well below
the average. And it feels to me, just based on
your intro, that we have above average type of risk environment.
(02:47):
So I do think credit spreads are too tight. I
think this is a market where you're induced to take
less risk. Button down your risk profile, roll and carry,
don't go out the curve, don't necessarily go down the
credit curve. But we can talk more about it because
(03:08):
that's where the kind of the idiosyncratic opportunities lie. But yeah,
I think you have to be cautious in here.
Speaker 2 (03:16):
Talking about the risk profile.
Speaker 3 (03:17):
So what sort of the house of you at PGM
in terms of the big beautiful bill. Is it going
to trigger a sort of net reduction to the deficit?
I think President Trump has called out one point four
one point five trillion lower or do you think it's
going to push us further into the red to the
tune of two and a half million. I wouldn't exactly
call a four trillion dollar delta a small figure. So
(03:38):
how do you see that playing out. What's the impact
on demand for treasuries.
Speaker 2 (03:42):
Well, I have yet to see.
Speaker 4 (03:45):
Any think tank or independent study to suggest that this
is a deficit reducer, so I'd be curious to see
the math on that. So all roads lead to a
greater amount of debt, a larger deficit, and I think
the markets care a lot about it. This is one
(04:06):
of these things. As we entered this year, tax reform,
let's just call it.
Speaker 2 (04:11):
I'm doing air quotes.
Speaker 4 (04:12):
A tax reform was viewed as a market positive, you know,
balancing out immigration and tariffs. But I think what you're
realizing is that this comes out of cost, and the
markets are the bond market is increasingly worried about that
cost and the payback. And I think this is a
situation where this bill will get passed in one way,
(04:36):
shape or form, and I think the bond market is
going to dislike it.
Speaker 1 (04:42):
So it means high yields at the long end, But
it presumably doesn't make or it makes a recession less likely,
does it? Because it's very supportive.
Speaker 2 (04:52):
It does.
Speaker 4 (04:52):
There's a decent amount of fiscal stimulus coming in now.
I think that's lost on a lot of folks. So
this will can continue to push the fiscal that I
believe averts a recession. It's hard to it's hard to
forecast the course because there's you know, so much in
the way of unknowns and uncertainties. We have yet to
(05:15):
see the impact of the tariffing strategy or shall I say,
the change in the strategy that makes it really difficult
for companies to plan. So the truth is we don't know.
But the fiscal side, you know, does help. But the
flip side of that is it's an ultimate curve steepener.
(05:37):
Borrowing costs are going to go up. I think it
keeps the FED on hold as well, and that puts
more pressure on you know, a lot of these cap stacks.
Speaker 1 (05:48):
That most of the companies have shown that they can
live with these high rates for quite a long time
and they've done okay. And then on the other side,
you know, there isn't a lot of supply, there's a
lot of demand. So the sets up the credit, I mean,
at least the consensus shows is pretty bullish, pretty optimistic.
You're you're somewhat against that in terms of your well
courtious view, but you know you're fighting against some pretty
(06:11):
strong technicals there. How do you play that?
Speaker 4 (06:13):
I think technicals are ephemeral there, they'll they'll switch when
you know, as soon as you count on technicals to
save the day, a bad trade is not going to
be rescued by bad technicals. I just don't think that
as a fundamental analysis, and as an analyst, I'm just
(06:35):
not sure that's a real part of the calculus. I'm
not a trading desk, right, we are investors. That's different.
I mean it helps on the margin, But you know
what's different you talked about Obviously companies have.
Speaker 2 (06:51):
Been through a lot.
Speaker 4 (06:52):
There's a lot more resiliency in corporate America than I
think initially perceived. But keep in mind revenues, cash flows,
however you want to define it, we're pretty good, right. So, yeah,
the cost of capital really jumped up. That cost of
capital is not going down, So the delta the operating
(07:14):
leverage around future cash flows is really quite high. And
what we're seeing in the market is just tremendous differentiation
based on that. So these highly levered capital structures haven't
really been put to the test. Yet, if you see
just economic activities slow, it doesn't even have to be
zero or negative. That puts a lot of pressure on
(07:37):
these companies, and I don't think that story has yet
to unfold.
Speaker 3 (07:41):
I think going back to sort of maybe a little
bit higher levels. So I think when the FED d
first institute a QE back in two thousand and eight,
if I pull up the HI function on the terminal
and sort of regress the Fed's expanding balance, sheeversus returns
for the SMP. It's almost a perfect corollary, which I
think gave rise to the cloqualism don't fight the FED. Right, So,
Treasury Secretary Prestident has said that he wants a ten
(08:03):
year at four percent. He says he has tools available
to him. We're at four and a half percent right
now in the ten year. Do you think that that's
possible to get there? Can he limit the auction size
for the ten year or cut spending somewhere? Do you
regulate or do we get there? You know, basically for
the wrong reason, being that we're moving into an economic recession.
Speaker 4 (08:22):
There's a lot to kind of unpack there. You know,
each of those are really quite different. I think it's
very difficult for the US Treasury Department to have influence
on kind of rate levels. I think rates are driven
by fundamentals economic activity. You know, obviously growth and inflation.
(08:43):
So one can kind of tweak the auction sizes schedule,
but that doesn't change the fundamental fact that there's a
tremendous amount of debt that needs to be refinanced, particularly
as we enter twenty twenty six, that really are still
ramp So I think it's really hard to do anything
(09:05):
about that necessarily, And what you're also fighting is just
an increase in term slash risk premium. I think it's
a really hard task. I think the only way you
really get base rates lower is through a recession, unfortunately,
or fiscal prudence. If the markets had a better feeling
(09:27):
around the fiscal sustainability, then I think rates would move lower.
But we're seeing the opposite, and this bill isn't allaying
any of those fiscal concerns.
Speaker 1 (09:39):
Can we talk a bit more about the dispersion you
mentioned in terms of things all over the mat when
you look at the problems you mentioned with high rates
and the companies with worse economy, doesn't have to go
into recession, but just the earnings start to suffer. I
think the assumption broadly is that there is this liver
small piece of the market like triple c's, which we
all kind of know about. It's been this dumpsify that's
(10:01):
been going on forever, and those things will blow up potentially,
or they'll do Lem's, or they'll be some kind of restructuring,
whereas the rest of the market will be fine. Is
that too simplistic assumption?
Speaker 4 (10:13):
A little too simplistic if you throw in single bees,
which is kind of the catch all right, you know
a single bee can be two times levered and fourteen
times levered, so you know there's a lot there's not
a lot of informational content by just looking at kind
of the credit rating.
Speaker 1 (10:27):
Then that's a big chunk of the market, right it
is single bee It is what twenty thirty percent or
something like that.
Speaker 4 (10:31):
That's the point. So yeah, so it's a big chunk.
I think it's fascinating what's going on. So at the
top line level, credit spreads are exceedingly tight, but underneath
the surface, you're seeing dispersion in the triple C double
single bee space.
Speaker 2 (10:49):
The widest in decades.
Speaker 4 (10:51):
So I use this analogy that always goes over poorly,
but I'm going to use it anyway. Which is the
high your market is like, or the levered finance market
is like a duck. Right on top, it's very placid,
but underneath the surface there's a tremendous amount of churn
in activity. So what you're seeing on the high YULD
side and dispersion front is this manifestation of companies with
(11:17):
overlevered or levered cap structures that are very sensitive to
changes in the revenue or cashlow profile that are getting
really penalized.
Speaker 2 (11:27):
By the marketplace.
Speaker 4 (11:29):
What you're also seeing you mentioned the LME side, is
a security price hits eighty and it just is in
a vacuum. It just falls because the structure of the
market is such where there's not a lot of players
who are willing.
Speaker 2 (11:44):
To go through that process. Right.
Speaker 4 (11:46):
It's a long, arduous, costly process, legal fees, time, you know,
you name it. So there's not a lot of willingness
or appetite to kind of go through that process.
Speaker 2 (11:57):
So are you winning to go through that? Yeah?
Speaker 4 (12:00):
I mean we're we're a very big player, but in
that space, you know, we think we have a competitive
advantage in that space. It's something that we've been very
involved in.
Speaker 1 (12:12):
What's the advantage of though, is at scale scale you need.
Speaker 2 (12:15):
Size and scale. Yep.
Speaker 4 (12:16):
You know, a lot of the distress players have been
taken out kind of early and they've folded just because
you know, the investments didn't go well.
Speaker 2 (12:26):
So there's not a lot of players.
Speaker 4 (12:27):
But you need size and scale, and we have size
and scale at PGM. We have one hundred and fifty
six credit analysts, which is enormous. We have the distress
capabilities illegal all this stuff. But there's not a lot
of players that do it. But if you can do it,
the potential is really quite good.
Speaker 1 (12:47):
But the problem with these transactions, according to some analysis
that we've seen, is that half these deals don't work out.
You know, they end up going bankrupt anyway. So you know,
how do you kind of look ahead, particularly in these
times of very uncertain macro markets, you know, how do
you look ahead and see this one's going to make it,
this one isn't, and position yourself a quidity.
Speaker 2 (13:06):
Yeah, no, that's a good quote.
Speaker 4 (13:07):
We were just quoting that yesterday actually, So it's been
a coin flip. Yes, you know, whether it works out,
but I think it goes to asset value and looking
at businesses that are good businesses, good assets that are
over levered. So it's not a one hundred percent opportunity
(13:27):
obviously based on your fifty percent hit rate quote, but
if you're focused on certain elements of a business, namely
asset rich, solid, you know, operating kind of environment that
just has too much leverage, then those are the names
that we like to play in.
Speaker 1 (13:46):
You don't be hunded the keys, So how do you
avoid that situation? I mean, being the owner, you don't
have to run a company.
Speaker 4 (13:53):
Well, you know it's about the exit, right, So no,
we don't want to run the company. We tried that
at Morgan Sally and didn't go so well. No, it's
about refitting the capital structure to put this company in
a better position to succeed, not taking the keys and
running it right. So it's just kind of working through
(14:14):
just from a pure.
Speaker 2 (14:15):
Capital structure standpoint.
Speaker 3 (14:17):
We've retraced back to pre tariff levels on both the
IG and High Yield Corporates index, so I think we're
eighty five over right now for IG and about three
hundred over for high yield which to your point, is
very tight historically. So are you guys embedding any quote
sort of you know, potential left tail risk into your
guys base case for twenty twenty five because we're in
(14:37):
this nice window here where we have a moratorium on
ninety day tariffs here, so you know what happens when
this stuff potentially rolls out, or do we get a
bunch of bilateral deals and having is going to be
okay in two h Yeah.
Speaker 4 (14:50):
I've been surprised at how comfortable the market's been on
the idea of a deal, right, A true trade deal
is not a kind of a memoranda of understanding. So
I've I've been shocked that the markets have just been
this is great, We'll take it and move on. So
I don't think this story has ended yet. The devil's
(15:14):
into details. I think the market has been too swift
and quick to just declare victory.
Speaker 2 (15:22):
And then you know, who knows.
Speaker 4 (15:23):
You know, maybe the whole point of April second was
to make anything after that point, you know, completely consumable
and digestible and acceptable. Right, So I don't know, but
you have to follow the numbers, and you know, we
don't have enough data yet to follow those numbers. But
I've been, you know, surprised that the the the acceptance.
(15:44):
But I think the tail risk is still quite quite pronounced.
Our base case is one of muddling through, but the.
Speaker 2 (15:51):
Tails are as fat as.
Speaker 4 (15:53):
We've ever seen them. It just makes it really, really difficult.
So I don't think you are getting paid for those
tail risks. If you look at the pricing of credit
just broadly defined, I think it's pricing in a model
throw and mortal throw is great for credit, right, that's
what you want. But you know, I would submit that
(16:14):
the tail risk is higher than normal, and I want
to get paid for that too.
Speaker 1 (16:19):
Credit also seems to be pricing in the idea that
the Trump administration will be more pragmatic ultimately than comforted confrontational,
and that you know, things do get very choppy, then
that they will be this put taco trade. Ye, things
will reverse and you know people are even putting levels
on it, let's say one thirty for the IG spread.
In terms of that, that's where you you know, stop
because the administration does something differently to reverse that. So
(16:42):
do you believe that you know there is limited downside
in this market because of the way that the administration
is watching the bond market.
Speaker 4 (16:49):
The market is in eternal search of free puts, right,
so you know the Fed put, now the Trump put.
I just don't know enough. I would not bank on
that at no point intended. There's definitely this de escalation
strategy at place, So I do think there's some element
of it for sure. But you know, we haven't yet
(17:10):
seen the data around the uncertainty feeding into the economics
shet right. You know the economy is going to show
some signs of strength because it pulled forward. I think
that's more of a mirage than a reality. So I
think there's going to be some headfakes along the way.
But I just think that, you know, declaring like I
(17:32):
changed my mind and swipe of a pen, I don't
think that's a strategy.
Speaker 2 (17:37):
To allay those fears necessarily.
Speaker 1 (17:40):
So, I mean, this all makes absolute sense on a
fundamental basis. But I go back to the point about technicals,
which just every time there is a widening out, it
snaps right back because there's so much cash out there
looking to buy, regardless of all the problems that we
are facing, and I am often puzzled by it. But again,
it just thinks you can't fight the technicals.
Speaker 2 (18:00):
No, I think that's right for now. Could it go on?
Speaker 1 (18:02):
It's been going on for saving the years.
Speaker 4 (18:04):
Well, I've been a different macro environment too, but there's
a lot of cash in the system.
Speaker 2 (18:09):
Absolutely.
Speaker 4 (18:10):
But if your thesis, not yours, but kind of like
the generic you thesis, is that I'll be rescued by
the technicals, I just have a hard time with that.
And if I'm wrong, then I'm okay with that. Actually,
things have a tendency of going on longer than I
think we you know, anticipate oftentimes. I think this is
(18:31):
one of those times. But given the TEL risk and
everything else we mentioned, I'm not sure technicals what I
would hang my hat on as an investment thesis. If
I was a trading desk could be a different story.
Speaker 3 (18:44):
So for the PM's listening today, you know, what's your
guys pre election for portfolio positioning? You guys EU over
the US, are you short data? There is longer data
paper to help temper those fiscal risks relating to those
deficits and structure products? What does that what does that
bias look like for you guys?
Speaker 4 (19:00):
Yeah, so we've been very button up on the risk side.
So we love credit, so we have a a natural
tendency of playing in credit. We think we're very good
at it. But you think about from a scaling standpoint,
we have the ability to you know, run one hundred
(19:21):
percent of our risk threshold.
Speaker 2 (19:22):
E's actually we can go up.
Speaker 4 (19:23):
To one twenty if we really like it, you know,
kind of spinal tap esque. We're at thirty now, so
we're at the lower end of the range, and so
how are we getting there? So it's a short maturity
roll and carry and high yield fits that built too,
So this is not an up and quality trade necessarily.
Speaker 2 (19:45):
You know, high yield.
Speaker 4 (19:47):
Carry is attractive carry, so we still like that, and
then the structure product piece really fits in. So structure
product is an area where you know, we feel in
a portfolio construct, but it allows you to move up
and out the efficient frontier.
Speaker 2 (20:04):
And they're the quintessential carry trades.
Speaker 4 (20:06):
You look at you know, double A, triple A colos,
it's carry safe carry, and so that's that's what we're doing.
I mean, Europe has been you know, slightly more cheap
than the US. You know, a lot of that has
to do with the proximity to what's going on in
Ukraine and Russia. But it's it's it's small to this point.
(20:27):
It was larger this time last year. That kind of
valuation gap has you know, someone closed.
Speaker 2 (20:32):
But it's a.
Speaker 4 (20:34):
Portfolio that's more defensively positioned, i'd say, And we have
more US treasuries in our portfolio than we've had in
a long time as a defensive measure, because I want
to be front footed, right, so I don't want to
be locked in my risk if the markets.
Speaker 2 (20:50):
Do blow up, if there's a period of dislocation.
Speaker 4 (20:55):
We want to have the cash and the ability to
kind of jump in.
Speaker 2 (20:58):
So we're biding our time.
Speaker 4 (21:00):
I'm laying in wait for that, and US kind of treasuries,
you know, allow for that. What's lost on I think
a lot of investors on the credit side is the
swap spread, right. So the cheapness the yield that credit
folks are so excited about really the byproduct of the
swap spread more than the credit spread, right, So treasuries
(21:22):
are cheap more than credit is cheap.
Speaker 1 (21:25):
And treasuries and thank you, by the way for being
the first credit edge guest to mention spinal tap. I'm
very happy to hear that reference, you'll get the short
end of the treasury curve, are you you're not going
out long on mean, we've told you talk about the
long end being somewhat more Yeah.
Speaker 4 (21:39):
Yeah, so we want to be closer to FED policy
than further away. The back end of the curve is
driven by you know, all these other uncontrollable type of factors,
and that manifests itself in that risk turm premium. So yeah,
it's uh, it's more kind of ten years and in
so it's not taking a duration bet as much much
(22:00):
as it is taking a liquidity stance.
Speaker 1 (22:04):
I don't see that's you know, leverage loans, repackaged floating rate.
Does that mean that you don't expect any rate cuts
this year?
Speaker 4 (22:11):
Well, so we penciled in from you know, god, it's
been forever now kind of two two, maybe three now
maybe it's one to two. Uh, you know, our view
all along has been kind of higher for longer. I
don't see the same scope and capacity for FED cutting rates.
Speaker 2 (22:30):
Uh.
Speaker 4 (22:30):
You know, if you look at the market reaction for
you know, any swoon up until recently, it was the
instantaneous rate cuts, right, So you look at kind of
what happened when we had the regional bank situation. I
think within you know, six hours, eight cuts were priced in.
You know, this is a time when I think the
inflation rate was over six percent. You know, I think,
(22:53):
so this this muscle memory, this this outdated playbook, whatever
you want to call you know, I think investors are
not really thinking about what they fed objective function is,
and that's being an inflation fighter. So I think it's
hard to be aggressive on the rate cut side or
at all when inflation is, you know, well above their
(23:14):
target and mandate.
Speaker 1 (23:16):
You also got the president and Smett said the treasury sector,
you're talking about pushing rates down somehow. We'll see how
that goes.
Speaker 3 (23:22):
But so obviously the theme is obviously very defensive. So
within at least the corporate credit portion of the portfolio,
are you guys under overweight any particular sectors? And given
the defensive nature of the posturing, and do you guys
like single a's like a GI aerospace or defense names
or are you guys wanting to go down to something
that looks like a Boeing at a sort of low
(23:44):
low ig Like how do you guys, how you guys
positioning that I.
Speaker 2 (23:48):
Love how you snuck in Boeing there very smooth. I
like that.
Speaker 4 (23:53):
I would say this cycle, if you can call a cycle,
is less kind of sector sectorial driven than previous cycles.
What we're seeing is just real differentiation by leverage. I
think the consumer segment is a fascinating segment to evaluate.
(24:14):
So what we're seeing is the you know, the larger
public kind of consumer retailers. They're obviously concerned and talking
about tariffs, but they are eating that, so to speak,
in their margin, and margins are quite skinny to begin
with to build market share. If you look at more
(24:37):
of the levered operators, namely kind of LBO type of names,
they're telling us that they're actually passing that through. And
why are they passing it through because they have no choice, right,
they have to cover their capital costs, right, which are
pre substantial. I'm not sure how that's going to play
(24:58):
out necessarily, but I think the consumer is smart enough
to realize, you know, I'm going to go here versus there.
Speaker 2 (25:06):
The fact that you.
Speaker 4 (25:06):
Have you know, X amount of leverage more than you
know this institution. I don't care. I care about the price.
And so this case shaped type of experience that we're
seeing on the consumer side. So this is a long
winded way of saying, I don't know if it's so
sector specific. Obviously we have biases around you know, you know,
(25:29):
different sectors, of course, But I just find it fascinating
that the differentiation across all these different you know, views
of the credit market is by leverage, not by sector,
which is very different.
Speaker 2 (25:42):
Right.
Speaker 4 (25:42):
You look at twenty fifteen, it was all about energy.
You look at kind of late nineties, two thousand, it
was all about tech and telecom. Now it's really about
how much leverage do you have, and it's indiscriminate.
Speaker 2 (25:56):
Years and years and years of really.
Speaker 4 (25:58):
Low rates, it just kind of lifted, you know, across
It was indiscriminate, right, didn't matter what segment of the
economy you're in. You know, you got cheap costs of capital,
and you know that's that's wor it's playing out.
Speaker 1 (26:12):
I'd say, so you expect more defaults in the consumers,
that's to whether it have been LBOs.
Speaker 2 (26:17):
I would expect that to be the case.
Speaker 4 (26:19):
Yeah, I think, you know, retail is kind of fickle
in the best of times, very exposed to consumer behaviors,
you know, of course, and so I would expect, you know,
higher than what we've seen before.
Speaker 1 (26:32):
Any other sectors that stick out in terms of high
leverage and getting penalized by the market.
Speaker 4 (26:37):
Well, you know, I think the other sector that we're
focused on, well well too, I guess one is the
chemical sector. So the chemical sector is you know, under pressure.
You know, it's been dominated by China. You know over
the past n number of years. There's lots of chatter
if it's a structural shift, and you know, will these
(26:59):
chemical companies suffer through it like they have in the past.
Our view is you know, much more kind of negative
around that, you know, just some kind of see the
same same ability to operate. So that's an area that
we're concerned about.
Speaker 2 (27:14):
You know. The other is the hospitality space.
Speaker 4 (27:16):
Right if you think about immigration as an example that
you know, as a very targeted part of the market
where immigration is quite important and as as that turns,
not only are they running out of workers, but they
have to pass those costs along and once again consumers
are very sensitive. Right, So you know, those are you
(27:40):
know areas that we're you know, we're quite focused on.
But there's you know, there's positives too, right, I mean
there's all this talk around you know, AI investment. You know,
we're on the bond side, so we you know, don't
have the same kind of sexy story so to speak,
you know, but it manifests in a couple of ways.
The way that I think is really interesting is the
power you know, the merchant power space is is a
(28:03):
space that we like a lot. The regulated utilities is
going to take more time, right because they have to
go through and pass that along. But the demand for electricity,
you know is you know, plus one percent for the
first time in decades.
Speaker 2 (28:19):
Right, that's not.
Speaker 4 (28:20):
Going to you know, move lower anytime soon. And just
think that's a real opportunity.
Speaker 3 (28:27):
Does that include like themes about the energy transition. I
think you've had Caterpillars tilted some pretty bullish views for
their mining business over the next five to ten years,
whether it's copper, li theum, all of these important metals
that are needed to facilitate this huge transition. Is that
something you guys are expressing in the portfolio or are
you not necessarily.
Speaker 4 (28:46):
Is not necessarily it's a more complicated story, yeah, right.
You know, these are high cyclical type of commodities, So
I think that's a very different story. You know, ultimately
you're taking cyclical risk there structural things that you mentioned,
but I think, you know, the sickle aspect is still
quite pronounced.
Speaker 1 (29:06):
I'm interested in your Vie's also on private credit because
a lot of people we've had on this show have
just talked about it endlessly, and you know, it's seemingly
this great, very safe, very high return product that everybody's
piling into at the moment. The guests we've had have
talked about equity like returns, although we kind of saw
a shift later last year where we had one large
asset manager on talking about the relative value between public
(29:29):
and private and talking about, you know, there should be
about two hundred basis points on the leverage side difference,
you know, in terms of pick up for the illiquidity
that seems to be going away. So what's your view
in terms of, you know, the value between the two markets.
Speaker 4 (29:41):
Yeah, so, I you know, would start out by saying,
I think over time it's going to be a single market.
You know, this demarcation between public and private will fade.
I go back to my experience when I was you know,
in lever finance high yield at the time and you know,
loans were the new shiny thing, and why were they
(30:04):
so popular, Well, they had great sharp ratios because they
didn't get marked and they were senior in the cap.
Speaker 1 (30:11):
Structure pretty much how private credit is today pretty.
Speaker 4 (30:14):
Much and loans, to be fair, loans aren't even considered
as security. So it's more complicated, right, just structurally contracts
right then, yeah, yeah, yeah, so so so I think
over time that that'll just continue to fade. I'll tell
you that we get refinanced out of our public deals
(30:34):
into privates and privates in the public, so it's already
being blurred.
Speaker 2 (30:38):
So you have to have a view.
Speaker 4 (30:40):
But I think there's been you know, maybe a little
too much excitement on the private side. You know, I
think there's real value in pockets, but you know, the
value that I see is more on the below investment
grade side it syncratically, of course, and then on the
ass the asset base an ant side, which is where
(31:02):
I think there's more opportunities. You know, at this point
in time on.
Speaker 1 (31:06):
How I mean, you have to wonder that about the
sustainability of the capital structure when you know, those borrowers
that are going to that market because they have to
paying you know, substantially high rates. How much longer can
they fold? And it's floating as well, So are we
not instead of setting them up for failure?
Speaker 2 (31:23):
Well, time will tell.
Speaker 4 (31:25):
If you look at leverage in the system, there's a
lot more leverage, you know, in the levered loan market
and in the private credit market. I think the trap
that acid allocators are falling into is that they're looking
at the empiricals and the empiricals.
Speaker 2 (31:43):
Are way out of date.
Speaker 4 (31:44):
Right, So the history around both lever loans and private
credit is they have a lower incidence of default and
higher recoveries. I'm not convinced that's going to be the
case going forward. If you look at kind of distressed activity,
default activity, you know, you've been seeing the private space running.
Speaker 2 (32:07):
Higher rate than the public space. You know.
Speaker 4 (32:10):
The issue on the private side is that it's not
until you experience an impairment.
Speaker 2 (32:15):
That you have to recognize it.
Speaker 4 (32:17):
So it just takes longer kind of inherently to to
play out. But you know, we're seeing these companies struggle
just based on you know, their higher costs of capital
and a little little hit to their cash flows. They
can't afford that hit. The cash flows, So you know,
we'll see about the wherewithal of the industry to you know,
(32:39):
put more money into these you know situations. But you know,
not all the sponsors of these different private credits have
that wherewithal.
Speaker 1 (32:48):
Is there enough of a pickup though to justify the
lack of liquidity, lack of transparency, all of the other
things you can't see, is that is there enough in
private when you when you're shown a deal, could you
don't just get a broady syndicated leverage loan that pays
you just as much and you know has a transparency.
Why wouldn't you just say, say, in the public market.
Speaker 4 (33:06):
It depends on your liability and your liquidity needs. So
if you have just kind of in theory ten years
locked up capital, then you're less worried about the liquidity
aspect of it.
Speaker 1 (33:21):
If you had, are you getting the pickup over the
private even to justify that?
Speaker 4 (33:26):
Well, right, if you're not worried about liquidity, then yes.
If you are, then maybe not. But you know, there
is a trade off when you go into private credit.
You know, even with less and inappropriate pickup, there's other things
that go away, like acid allocation or relative value. You
(33:48):
you're not as front footed, right, You're you're kind of
stuck in that allocation. Whereas if you're in the public market,
you know, let's say kind of a single asset barrower
deal looks cheap to one corporate credit deal that you have,
you can swap out and take advantage, right, you have
that ability. But on the private side, you're just stuck.
(34:11):
You can't take advantage of that. So I think that's
something that is often lost from an acid allocation standpoint.
But I also think, you know, a lot of these
acid allocation models need to change, right, you know, you know,
everything is a form of a mean variance model, which
is to say, you know, it's volatility based, right, And
(34:34):
I mean I've seen private credit presentations, not from USC
of course, with like sharp ratios of eight x, pretty impressive,
like come on, like you know, like you know, that's
obviously not the case. But there's some version of that
gets placed into these these acid allocation mean variance models
and they look good, right, And so I think there
(34:57):
needs to be kind of a future adjustment to adequately
understand what the asset allocation and thus the spread should be.
Speaker 2 (35:05):
Is two hundred enough? Is it one fifty is it,
you know, so on and so forth.
Speaker 1 (35:09):
And when you say convergence that the two will converge,
how long does it take and what does it look like?
Does it mean that it's just exactly the same as
leverage loans on now? Ultimately, I just.
Speaker 4 (35:18):
Think they'll they'll there'll be differences, of course, like there's
a difference between you know, lever loan, HI you bond.
But players think of that as one big sandbox. Right
when we look at deals, we look at it versus
loans and bonds. Companies issue oftentimes and loans and bonds.
(35:39):
So I just think it's it'll be a single leve
fin market, not a very separated private credit.
Speaker 1 (35:48):
But will the private credit be more broady, syndicated and
traded with muks and you know all of that stuff
that you get in the leverage loan market.
Speaker 4 (35:55):
I think it's going that way. You know, the push
tour words ETFs in this space is you know, pushing
it along.
Speaker 2 (36:05):
Now.
Speaker 4 (36:06):
I think this is a good news bad news story
as well as any time you get retail involved in
a niche market, you know, the emphasis and onus changes.
Right when private credit investors are just dealing with institutional
savvy investors. The hurdle is different. Once you push it
(36:27):
into the retail space. There's a much closer examination, and
it'll be curious to see how it holds off upon
closer examination.
Speaker 1 (36:37):
So all of the stuff you look at, Greg, globally,
we probably hadn't hits on it all. But I'm interested
in your idea of relative value right now?
Speaker 2 (36:46):
Where is the value?
Speaker 1 (36:47):
I mean, we've talked about how tight spreads are in
US credit, We've talked about a bit of the value
proposition in Europe. It's a big weld out there. There
are many other products. What do you what do you
think whe's the value?
Speaker 2 (37:00):
Yeah?
Speaker 4 (37:01):
My caveat is there's not a tremendous amount of value.
There's no real highly dislocated asset as far as I
can tell. So it's all on the margin and marginally
what I see is structure products is being dislocated and attractive.
Speaker 2 (37:22):
Most clos cnbs less.
Speaker 4 (37:26):
So I think you know that's changed unless you go
into the single assets single barwer space, which is basically
lending on property. There's some you know, interesting opportunities there,
but yeah, I would say, you know, clos broadly defined
anything structured still trades a little more cheaply because of
(37:49):
the time and effort it takes to explain it to someone, right,
you know, it's it's true, it's one of these things.
Speaker 1 (37:57):
Then people are still still thinking that cl those are
the same as CDOs that blew the world.
Speaker 4 (38:02):
Four letter words. Yeah, yeah, you know it was. Obviously
it's a very different market. And even then, to be fair,
the COLO space behave exactly as it was supposed to
in the global financial crisis, and now it is even
better protected more subordination, and so you know, we think
these structures are bold.
Speaker 1 (38:20):
But if you're worried about the loans though underlying it,
I mean, do you think there's enough diversity in the
basket to protect you against that?
Speaker 2 (38:26):
I do?
Speaker 4 (38:27):
I mean, to put it in perspective, if you own
a triple a colo you have, I'll just round up
because it doesn't matter forty percent subordination underneath you. So
a lot has to go wrong. I mean, the world
almost effectively has to end for that to be touched
at the top. I think the structure and the subordination
(38:49):
is what you're really participating.
Speaker 2 (38:52):
In, not the underlying loans itself.
Speaker 4 (38:54):
I know it sounds kind of funny to say, but
when you're that senior with that much protection, you know,
the loan market could really come upon hard times and
these structures will be fine as you go down less.
Speaker 2 (39:06):
So right, it's just kind of the lost absorption nature
of it.
Speaker 4 (39:09):
So triple b's not so much, uh, you know, even
single a's but you know, definitely triple as you're fine.
Speaker 1 (39:18):
Yeah, although we did see a triple A. I think
the c NBS that didn't make it. That was recently
so no old triple as.
Speaker 4 (39:26):
That was a savsby deal, right, so that didn't have
the diversification piece to it.
Speaker 2 (39:30):
Yeah, But point well taken.
Speaker 4 (39:33):
This is why this is why it trades more, chiefly
because there's always a you know, you know, a story
about it.
Speaker 1 (39:40):
Yes, yes, yes, and it sounds you'll edge right, you've
been doing this for a long time. We've had a
great conversation. You've seen you've seen it all. How do
you differentiate your self?
Speaker 4 (39:49):
I think there's there's a few ways. One is just discipline.
I think being longer term focus is.
Speaker 2 (39:58):
A competitive advantage.
Speaker 4 (40:00):
You know, we talked about the technical side, and the
technical side helps on the margin for sure, But you know,
when you're running close to nine hundred billion of assets.
You know, you need to be fundamentally focused, and we're
very good on the fundamental focus side. So you know,
whether it's corporate credit, whether structure, products, it all starts,
(40:21):
you know, with fundamentals, and we have an extremely deep,
well resourced team to you know, allow us to do
that and allow us to do it you know pretty well.
So I think our competitive advantages is, you know, the
long term nature of it and the deep understanding of
credit and structure, and you put that together, it's a
pretty powerful duo.
Speaker 2 (40:42):
I think.
Speaker 1 (40:43):
Give them the new cycle that we have trouble seeing longer
than the end of the week. So what does long
term mean to you?
Speaker 4 (40:48):
It's definitely longer than the news cycle, which is I
don't know, twenty seconds now. I mean we take you know,
at least a twelve month few And you know that's
not to say, you know, we're blind to what's happening
around us, like we modulate and we take advantage, but
you know, we think about things and you know, longer
(41:09):
term increments, and that's particularly in the case of credit,
you know, credit, I try not we try not to
worry about the vagaries of of you know, the week
or the month and just you know, take a longer
term perspective, and that has a tendency of you know,
proving itself out.
Speaker 1 (41:28):
Do you worry about anything, particularly Greg, We've had people
worry about all sorts of things on the show, and
we are credit people, and you know that's over there
looking very worried. So what what keeps you up at night?
Speaker 4 (41:38):
Well, there's a lot that you know keeps me up.
But I think what keeps me up on the credit
side is there's not a lot of history recent history
of credit issues. Say that differently, you know, it's not
a well experienced market. There hasn't been a true credit
cycle since honestly, you know, thirty years. So you know,
(42:02):
I think there's a tendency for investors to be dismissive
around the downside of credit, you know, whether it's the
Taco put or the Fed put, whatever you want to
call it. You know, rescuing bad capital structures in bad position.
Speaker 1 (42:17):
Even in twenty twenty that barely lasted, it was.
Speaker 4 (42:20):
We have it was, yeah, it was not even three weeks, right,
so we have not seen a sustained downtrade and what
words me is when and if that does happen.
Speaker 2 (42:34):
I do think the next credit.
Speaker 4 (42:36):
Cycle will be a more classic one, whatever that means.
But it's not going to be you know, reinflated instantaneously
by the FED or by the fiscal. Right you put
those two things together. You have a FED that's constrained
by inflation. You have the fiscal constrained by you know,
the current state of the fiscal which suggests to me
(42:58):
that credit is you know, going to drift much lower
than what we've seen and when.
Speaker 2 (43:03):
If we do hit a patch here.
Speaker 4 (43:04):
So I worry about the behaviors of the market in that.
And you know, you talked about l E and you
know the knives are going to be much sharper in
the capacity to absorb the downgrades is going to be
much less, And so I worry about credit really becoming
dislocated in a meaningful way. The flip side of that,
I'm also excited about it.
Speaker 1 (43:25):
Well, plussibly could trigger the end of the cycle. I mean,
because as we've talked about, it goes on forever and
we've thrown everything else it and the bad news just
keeps coming, but spreads just keep getting tights of.
Speaker 4 (43:34):
No the doorability of the economy, and these companies are real.
But the trap is just because it didn't happen doesn't
mean it can't happen.
Speaker 2 (43:44):
And you know, we'll see.
Speaker 4 (43:46):
But these things take time, and it's important to remember that,
you know, these companies are financing themselves at a much
higher rate than they have in a long time, and
and it just takes time to play out, and so
that operating leverage piece, I think is missed. That cushion
to absorb those cash flows moving lower is not what
(44:07):
it once was.
Speaker 1 (44:08):
Great stuff. Greg Peters, co, Chief investment Officer at PGM
Fixed Income. Many thanks for joining us on the credit edge.
Thank you, and of course we're very grateful to Matt
Gooyner from Bloomberg Intelligence. Thanks for joining us today. Thanks
for having me back for more credit and market analysis
and insight. Read all of Matt'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.
(44:29):
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 The Credit Edge
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email me directly at Jcrombie eight at Bloomberg dot net.
(44:51):
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 Wiki markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm MATC.
Speaker 3 (00:24):
Woyner, a credit analyst covering industrials with Bloomberg Intelligence. This week,
we're very pleased to welcome Gregory Peters, co, Chief Investment
Officer of PGM Fixed Income.
Speaker 2 (00:32):
Are you Greg, I'm great, Thanks for having me. PGM
is one.
Speaker 3 (00:35):
Of the world's largest investment managers, with one point fortullion
in asset center management, of which fixed income AUM totals
over inn billion, and so Greg is one of the
co heads of the multisector team. Before joining PGM in
twenty fourteen, he was Morgan Stanley's Global Director of Fixed
Income and Economic Research and chief Global cross Asset Strategist,
responsible for the firm's macro research and asset allocation strategies.
(00:58):
And before that he was at Solomon as well as
the US Treasury. So I think that's sort of a
long way of saying I think when Greg speaks, we
should all listen. So do you want to kick us off?
Speaker 1 (01:07):
James, Yeah, we have tons of questions for Greg, but
first we will set the scene. Markets have rallied on
hopes of trade deals, but there's still a huge amount
of worry, not least about tariffs, but also about the
budget deficit, the FED, riots in la and global geopolitical concerns.
Despite this wall of angst and uncertainty, credit markets are
projecting an air of complacency, with debt sbreads back below
(01:29):
long term averages and likely to go tighter as demand
for yield rises and net new supply of corporate bonds
and loans remains muted, unless, of course, there's a big
m and a comeback. Public credit markets are performing well,
leading some to question the value proposition of private markets,
and most people seem confident about the strength of corporate
balance sheets. The end of American exceptionalism is another big theme.
(01:50):
Global investors say they're looking more at Europe and at
Asia as alternatives, but there are clear limitations when it
comes to scale and liquidity there. So, Greg, what's your
take our credit mark? It's fairly valued.
Speaker 2 (02:00):
Where do we go from here? Boy?
Speaker 4 (02:02):
That was a great intro. I found myself nodding to
everything that you said. I think it is a valuation story.
Heading into this year, we had a more optimistic view
of the global economy of the US economy, and we.
Speaker 2 (02:18):
Were still cautious.
Speaker 4 (02:20):
And the reason why we were simply cautious is because
risk reward.
Speaker 2 (02:24):
Was quite poor.
Speaker 4 (02:26):
You know, spreads are top kind of richest death style
that we've seen over the past just call it thirty years.
If you just oversimplify, spreads are you know, well below
the average. And it feels to me, just based on
your intro, that we have above average type of risk environment.
(02:47):
So I do think credit spreads are too tight. I
think this is a market where you're induced to take
less risk. Button down your risk profile, roll and carry,
don't go out the curve, don't necessarily go down the
credit curve. But we can talk more about it because
(03:08):
that's where the kind of the idiosyncratic opportunities lie. But yeah,
I think you have to be cautious in here.
Speaker 2 (03:16):
Talking about the risk profile.
Speaker 3 (03:17):
So what sort of the house of you at PGM
in terms of the big beautiful bill. Is it going
to trigger a sort of net reduction to the deficit?
I think President Trump has called out one point four
one point five trillion lower or do you think it's
going to push us further into the red to the
tune of two and a half million. I wouldn't exactly
call a four trillion dollar delta a small figure. So
(03:38):
how do you see that playing out. What's the impact
on demand for treasuries.
Speaker 2 (03:42):
Well, I have yet to see.
Speaker 4 (03:45):
Any think tank or independent study to suggest that this
is a deficit reducer, so I'd be curious to see
the math on that. So all roads lead to a
greater amount of debt, a larger deficit, and I think
the markets care a lot about it. This is one
(04:06):
of these things. As we entered this year, tax reform,
let's just call it.
Speaker 2 (04:11):
I'm doing air quotes.
Speaker 4 (04:12):
A tax reform was viewed as a market positive, you know,
balancing out immigration and tariffs. But I think what you're
realizing is that this comes out of cost, and the
markets are the bond market is increasingly worried about that
cost and the payback. And I think this is a
situation where this bill will get passed in one way,
(04:36):
shape or form, and I think the bond market is
going to dislike it.
Speaker 1 (04:42):
So it means high yields at the long end, But
it presumably doesn't make or it makes a recession less likely,
does it? Because it's very supportive.
Speaker 2 (04:52):
It does.
Speaker 4 (04:52):
There's a decent amount of fiscal stimulus coming in now.
I think that's lost on a lot of folks. So
this will can continue to push the fiscal that I
believe averts a recession. It's hard to it's hard to
forecast the course because there's you know, so much in
the way of unknowns and uncertainties. We have yet to
(05:15):
see the impact of the tariffing strategy or shall I say,
the change in the strategy that makes it really difficult
for companies to plan. So the truth is we don't know.
But the fiscal side, you know, does help. But the
flip side of that is it's an ultimate curve steepener.
(05:37):
Borrowing costs are going to go up. I think it
keeps the FED on hold as well, and that puts
more pressure on you know, a lot of these cap stacks.
Speaker 1 (05:48):
That most of the companies have shown that they can
live with these high rates for quite a long time
and they've done okay. And then on the other side,
you know, there isn't a lot of supply, there's a
lot of demand. So the sets up the credit, I mean,
at least the consensus shows is pretty bullish, pretty optimistic.
You're you're somewhat against that in terms of your well
courtious view, but you know you're fighting against some pretty
(06:11):
strong technicals there. How do you play that?
Speaker 4 (06:13):
I think technicals are ephemeral there, they'll they'll switch when
you know, as soon as you count on technicals to
save the day, a bad trade is not going to
be rescued by bad technicals. I just don't think that
as a fundamental analysis, and as an analyst, I'm just
(06:35):
not sure that's a real part of the calculus. I'm
not a trading desk, right, we are investors. That's different.
I mean it helps on the margin, But you know
what's different you talked about Obviously companies have.
Speaker 2 (06:51):
Been through a lot.
Speaker 4 (06:52):
There's a lot more resiliency in corporate America than I
think initially perceived. But keep in mind revenues, cash flows,
however you want to define it, we're pretty good, right. So, yeah,
the cost of capital really jumped up. That cost of
capital is not going down, So the delta the operating
(07:14):
leverage around future cash flows is really quite high. And
what we're seeing in the market is just tremendous differentiation
based on that. So these highly levered capital structures haven't
really been put to the test. Yet, if you see
just economic activities slow, it doesn't even have to be
zero or negative. That puts a lot of pressure on
(07:37):
these companies, and I don't think that story has yet
to unfold.
Speaker 3 (07:41):
I think going back to sort of maybe a little
bit higher levels. So I think when the FED d
first institute a QE back in two thousand and eight,
if I pull up the HI function on the terminal
and sort of regress the Fed's expanding balance, sheeversus returns
for the SMP. It's almost a perfect corollary, which I
think gave rise to the cloqualism don't fight the FED. Right, So,
Treasury Secretary Prestident has said that he wants a ten
(08:03):
year at four percent. He says he has tools available
to him. We're at four and a half percent right
now in the ten year. Do you think that that's
possible to get there? Can he limit the auction size
for the ten year or cut spending somewhere? Do you
regulate or do we get there? You know, basically for
the wrong reason, being that we're moving into an economic recession.
Speaker 4 (08:22):
There's a lot to kind of unpack there. You know,
each of those are really quite different. I think it's
very difficult for the US Treasury Department to have influence
on kind of rate levels. I think rates are driven
by fundamentals economic activity. You know, obviously growth and inflation.
(08:43):
So one can kind of tweak the auction sizes schedule,
but that doesn't change the fundamental fact that there's a
tremendous amount of debt that needs to be refinanced, particularly
as we enter twenty twenty six, that really are still
ramp So I think it's really hard to do anything
(09:05):
about that necessarily, And what you're also fighting is just
an increase in term slash risk premium. I think it's
a really hard task. I think the only way you
really get base rates lower is through a recession, unfortunately,
or fiscal prudence. If the markets had a better feeling
(09:27):
around the fiscal sustainability, then I think rates would move lower.
But we're seeing the opposite, and this bill isn't allaying
any of those fiscal concerns.
Speaker 1 (09:39):
Can we talk a bit more about the dispersion you
mentioned in terms of things all over the mat when
you look at the problems you mentioned with high rates
and the companies with worse economy, doesn't have to go
into recession, but just the earnings start to suffer. I
think the assumption broadly is that there is this liver
small piece of the market like triple c's, which we
all kind of know about. It's been this dumpsify that's
(10:01):
been going on forever, and those things will blow up potentially,
or they'll do Lem's, or they'll be some kind of restructuring,
whereas the rest of the market will be fine. Is
that too simplistic assumption?
Speaker 4 (10:13):
A little too simplistic if you throw in single bees,
which is kind of the catch all right, you know
a single bee can be two times levered and fourteen
times levered, so you know there's a lot there's not
a lot of informational content by just looking at kind
of the credit rating.
Speaker 1 (10:27):
Then that's a big chunk of the market, right it
is single bee It is what twenty thirty percent or
something like that.
Speaker 4 (10:31):
That's the point. So yeah, so it's a big chunk.
I think it's fascinating what's going on. So at the
top line level, credit spreads are exceedingly tight, but underneath
the surface, you're seeing dispersion in the triple C double
single bee space.
Speaker 2 (10:49):
The widest in decades.
Speaker 4 (10:51):
So I use this analogy that always goes over poorly,
but I'm going to use it anyway. Which is the
high your market is like, or the levered finance market
is like a duck. Right on top, it's very placid,
but underneath the surface there's a tremendous amount of churn
in activity. So what you're seeing on the high YULD
side and dispersion front is this manifestation of companies with
(11:17):
overlevered or levered cap structures that are very sensitive to
changes in the revenue or cashlow profile that are getting
really penalized.
Speaker 2 (11:27):
By the marketplace.
Speaker 4 (11:29):
What you're also seeing you mentioned the LME side, is
a security price hits eighty and it just is in
a vacuum. It just falls because the structure of the
market is such where there's not a lot of players
who are willing.
Speaker 2 (11:44):
To go through that process. Right.
Speaker 4 (11:46):
It's a long, arduous, costly process, legal fees, time, you know,
you name it. So there's not a lot of willingness
or appetite to kind of go through that process.
Speaker 2 (11:57):
So are you winning to go through that? Yeah?
Speaker 4 (12:00):
I mean we're we're a very big player, but in
that space, you know, we think we have a competitive
advantage in that space. It's something that we've been very
involved in.
Speaker 1 (12:12):
What's the advantage of though, is at scale scale you need.
Speaker 2 (12:15):
Size and scale. Yep.
Speaker 4 (12:16):
You know, a lot of the distress players have been
taken out kind of early and they've folded just because
you know, the investments didn't go well.
Speaker 2 (12:26):
So there's not a lot of players.
Speaker 4 (12:27):
But you need size and scale, and we have size
and scale at PGM. We have one hundred and fifty
six credit analysts, which is enormous. We have the distress
capabilities illegal all this stuff. But there's not a lot
of players that do it. But if you can do it,
the potential is really quite good.
Speaker 1 (12:47):
But the problem with these transactions, according to some analysis
that we've seen, is that half these deals don't work out.
You know, they end up going bankrupt anyway. So you know,
how do you kind of look ahead, particularly in these
times of very uncertain macro markets, you know, how do
you look ahead and see this one's going to make it,
this one isn't, and position yourself a quidity.
Speaker 2 (13:06):
Yeah, no, that's a good quote.
Speaker 4 (13:07):
We were just quoting that yesterday actually, So it's been
a coin flip. Yes, you know, whether it works out,
but I think it goes to asset value and looking
at businesses that are good businesses, good assets that are
over levered. So it's not a one hundred percent opportunity
(13:27):
obviously based on your fifty percent hit rate quote, but
if you're focused on certain elements of a business, namely
asset rich, solid, you know, operating kind of environment that
just has too much leverage, then those are the names
that we like to play in.
Speaker 1 (13:46):
You don't be hunded the keys, So how do you
avoid that situation? I mean, being the owner, you don't
have to run a company.
Speaker 4 (13:53):
Well, you know it's about the exit, right, So no,
we don't want to run the company. We tried that
at Morgan Sally and didn't go so well. No, it's
about refitting the capital structure to put this company in
a better position to succeed, not taking the keys and
running it right. So it's just kind of working through
(14:14):
just from a pure.
Speaker 2 (14:15):
Capital structure standpoint.
Speaker 3 (14:17):
We've retraced back to pre tariff levels on both the
IG and High Yield Corporates index, so I think we're
eighty five over right now for IG and about three
hundred over for high yield which to your point, is
very tight historically. So are you guys embedding any quote
sort of you know, potential left tail risk into your
guys base case for twenty twenty five because we're in
(14:37):
this nice window here where we have a moratorium on
ninety day tariffs here, so you know what happens when
this stuff potentially rolls out, or do we get a
bunch of bilateral deals and having is going to be
okay in two h Yeah.
Speaker 4 (14:50):
I've been surprised at how comfortable the market's been on
the idea of a deal, right, A true trade deal
is not a kind of a memoranda of understanding. So
I've I've been shocked that the markets have just been
this is great, We'll take it and move on. So
I don't think this story has ended yet. The devil's
(15:14):
into details. I think the market has been too swift
and quick to just declare victory.
Speaker 2 (15:22):
And then you know, who knows.
Speaker 4 (15:23):
You know, maybe the whole point of April second was
to make anything after that point, you know, completely consumable
and digestible and acceptable. Right, So I don't know, but
you have to follow the numbers, and you know, we
don't have enough data yet to follow those numbers. But
I've been, you know, surprised that the the the acceptance.
(15:44):
But I think the tail risk is still quite quite pronounced.
Our base case is one of muddling through, but the.
Speaker 2 (15:51):
Tails are as fat as.
Speaker 4 (15:53):
We've ever seen them. It just makes it really, really difficult.
So I don't think you are getting paid for those
tail risks. If you look at the pricing of credit
just broadly defined, I think it's pricing in a model
throw and mortal throw is great for credit, right, that's
what you want. But you know, I would submit that
(16:14):
the tail risk is higher than normal, and I want
to get paid for that too.
Speaker 1 (16:19):
Credit also seems to be pricing in the idea that
the Trump administration will be more pragmatic ultimately than comforted confrontational,
and that you know, things do get very choppy, then
that they will be this put taco trade. Ye, things
will reverse and you know people are even putting levels
on it, let's say one thirty for the IG spread.
In terms of that, that's where you you know, stop
because the administration does something differently to reverse that. So
(16:42):
do you believe that you know there is limited downside
in this market because of the way that the administration
is watching the bond market.
Speaker 4 (16:49):
The market is in eternal search of free puts, right,
so you know the Fed put, now the Trump put.
I just don't know enough. I would not bank on
that at no point intended. There's definitely this de escalation
strategy at place, So I do think there's some element
of it for sure. But you know, we haven't yet
(17:10):
seen the data around the uncertainty feeding into the economics
shet right. You know the economy is going to show
some signs of strength because it pulled forward. I think
that's more of a mirage than a reality. So I
think there's going to be some headfakes along the way.
But I just think that, you know, declaring like I
(17:32):
changed my mind and swipe of a pen, I don't
think that's a strategy.
Speaker 2 (17:37):
To allay those fears necessarily.
Speaker 1 (17:40):
So, I mean, this all makes absolute sense on a
fundamental basis. But I go back to the point about technicals,
which just every time there is a widening out, it
snaps right back because there's so much cash out there
looking to buy, regardless of all the problems that we
are facing, and I am often puzzled by it. But again,
it just thinks you can't fight the technicals.
Speaker 2 (18:00):
No, I think that's right for now. Could it go on?
Speaker 1 (18:02):
It's been going on for saving the years.
Speaker 4 (18:04):
Well, I've been a different macro environment too, but there's
a lot of cash in the system.
Speaker 2 (18:09):
Absolutely.
Speaker 4 (18:10):
But if your thesis, not yours, but kind of like
the generic you thesis, is that I'll be rescued by
the technicals, I just have a hard time with that.
And if I'm wrong, then I'm okay with that. Actually,
things have a tendency of going on longer than I
think we you know, anticipate oftentimes. I think this is
(18:31):
one of those times. But given the TEL risk and
everything else we mentioned, I'm not sure technicals what I
would hang my hat on as an investment thesis. If
I was a trading desk could be a different story.
Speaker 3 (18:44):
So for the PM's listening today, you know, what's your
guys pre election for portfolio positioning? You guys EU over
the US, are you short data? There is longer data
paper to help temper those fiscal risks relating to those
deficits and structure products? What does that what does that
bias look like for you guys?
Speaker 4 (19:00):
Yeah, so we've been very button up on the risk side.
So we love credit, so we have a a natural
tendency of playing in credit. We think we're very good
at it. But you think about from a scaling standpoint,
we have the ability to you know, run one hundred
(19:21):
percent of our risk threshold.
Speaker 2 (19:22):
E's actually we can go up.
Speaker 4 (19:23):
To one twenty if we really like it, you know,
kind of spinal tap esque. We're at thirty now, so
we're at the lower end of the range, and so
how are we getting there? So it's a short maturity
roll and carry and high yield fits that built too,
So this is not an up and quality trade necessarily.
Speaker 2 (19:45):
You know, high yield.
Speaker 4 (19:47):
Carry is attractive carry, so we still like that, and
then the structure product piece really fits in. So structure
product is an area where you know, we feel in
a portfolio construct, but it allows you to move up
and out the efficient frontier.
Speaker 2 (20:04):
And they're the quintessential carry trades.
Speaker 4 (20:06):
You look at you know, double A, triple A colos,
it's carry safe carry, and so that's that's what we're doing.
I mean, Europe has been you know, slightly more cheap
than the US. You know, a lot of that has
to do with the proximity to what's going on in
Ukraine and Russia. But it's it's it's small to this point.
(20:27):
It was larger this time last year. That kind of
valuation gap has you know, someone closed.
Speaker 2 (20:32):
But it's a.
Speaker 4 (20:34):
Portfolio that's more defensively positioned, i'd say, And we have
more US treasuries in our portfolio than we've had in
a long time as a defensive measure, because I want
to be front footed, right, so I don't want to
be locked in my risk if the markets.
Speaker 2 (20:50):
Do blow up, if there's a period of dislocation.
Speaker 4 (20:55):
We want to have the cash and the ability to
kind of jump in.
Speaker 2 (20:58):
So we're biding our time.
Speaker 4 (21:00):
I'm laying in wait for that, and US kind of treasuries,
you know, allow for that. What's lost on I think
a lot of investors on the credit side is the
swap spread, right. So the cheapness the yield that credit
folks are so excited about really the byproduct of the
swap spread more than the credit spread, right, So treasuries
(21:22):
are cheap more than credit is cheap.
Speaker 1 (21:25):
And treasuries and thank you, by the way for being
the first credit edge guest to mention spinal tap. I'm
very happy to hear that reference, you'll get the short
end of the treasury curve, are you you're not going
out long on mean, we've told you talk about the
long end being somewhat more Yeah.
Speaker 4 (21:39):
Yeah, so we want to be closer to FED policy
than further away. The back end of the curve is
driven by you know, all these other uncontrollable type of factors,
and that manifests itself in that risk turm premium. So yeah,
it's uh, it's more kind of ten years and in
so it's not taking a duration bet as much much
(22:00):
as it is taking a liquidity stance.
Speaker 1 (22:04):
I don't see that's you know, leverage loans, repackaged floating rate.
Does that mean that you don't expect any rate cuts
this year?
Speaker 4 (22:11):
Well, so we penciled in from you know, god, it's
been forever now kind of two two, maybe three now
maybe it's one to two. Uh, you know, our view
all along has been kind of higher for longer. I
don't see the same scope and capacity for FED cutting rates.
Speaker 2 (22:30):
Uh.
Speaker 4 (22:30):
You know, if you look at the market reaction for
you know, any swoon up until recently, it was the
instantaneous rate cuts, right, So you look at kind of
what happened when we had the regional bank situation. I
think within you know, six hours, eight cuts were priced in.
You know, this is a time when I think the
inflation rate was over six percent. You know, I think,
(22:53):
so this this muscle memory, this this outdated playbook, whatever
you want to call you know, I think investors are
not really thinking about what they fed objective function is,
and that's being an inflation fighter. So I think it's
hard to be aggressive on the rate cut side or
at all when inflation is, you know, well above their
(23:14):
target and mandate.
Speaker 1 (23:16):
You also got the president and Smett said the treasury sector,
you're talking about pushing rates down somehow. We'll see how
that goes.
Speaker 3 (23:22):
But so obviously the theme is obviously very defensive. So
within at least the corporate credit portion of the portfolio,
are you guys under overweight any particular sectors? And given
the defensive nature of the posturing, and do you guys
like single a's like a GI aerospace or defense names
or are you guys wanting to go down to something
that looks like a Boeing at a sort of low
(23:44):
low ig Like how do you guys, how you guys
positioning that I.
Speaker 2 (23:48):
Love how you snuck in Boeing there very smooth. I
like that.
Speaker 4 (23:53):
I would say this cycle, if you can call a cycle,
is less kind of sector sectorial driven than previous cycles.
What we're seeing is just real differentiation by leverage. I
think the consumer segment is a fascinating segment to evaluate.
(24:14):
So what we're seeing is the you know, the larger
public kind of consumer retailers. They're obviously concerned and talking
about tariffs, but they are eating that, so to speak,
in their margin, and margins are quite skinny to begin
with to build market share. If you look at more
(24:37):
of the levered operators, namely kind of LBO type of names,
they're telling us that they're actually passing that through. And
why are they passing it through because they have no choice, right,
they have to cover their capital costs, right, which are
pre substantial. I'm not sure how that's going to play
(24:58):
out necessarily, but I think the consumer is smart enough
to realize, you know, I'm going to go here versus there.
Speaker 2 (25:06):
The fact that you.
Speaker 4 (25:06):
Have you know, X amount of leverage more than you
know this institution. I don't care. I care about the price.
And so this case shaped type of experience that we're
seeing on the consumer side. So this is a long
winded way of saying, I don't know if it's so
sector specific. Obviously we have biases around you know, you know,
(25:29):
different sectors, of course, But I just find it fascinating
that the differentiation across all these different you know, views
of the credit market is by leverage, not by sector,
which is very different.
Speaker 2 (25:42):
Right.
Speaker 4 (25:42):
You look at twenty fifteen, it was all about energy.
You look at kind of late nineties, two thousand, it
was all about tech and telecom. Now it's really about
how much leverage do you have, and it's indiscriminate.
Speaker 2 (25:56):
Years and years and years of really.
Speaker 4 (25:58):
Low rates, it just kind of lifted, you know, across
It was indiscriminate, right, didn't matter what segment of the
economy you're in. You know, you got cheap costs of capital,
and you know that's that's wor it's playing out.
Speaker 1 (26:12):
I'd say, so you expect more defaults in the consumers,
that's to whether it have been LBOs.
Speaker 2 (26:17):
I would expect that to be the case.
Speaker 4 (26:19):
Yeah, I think, you know, retail is kind of fickle
in the best of times, very exposed to consumer behaviors,
you know, of course, and so I would expect, you know,
higher than what we've seen before.
Speaker 1 (26:32):
Any other sectors that stick out in terms of high
leverage and getting penalized by the market.
Speaker 4 (26:37):
Well, you know, I think the other sector that we're
focused on, well well too, I guess one is the
chemical sector. So the chemical sector is you know, under pressure.
You know, it's been dominated by China. You know over
the past n number of years. There's lots of chatter
if it's a structural shift, and you know, will these
(26:59):
chemical companies suffer through it like they have in the past.
Our view is you know, much more kind of negative
around that, you know, just some kind of see the
same same ability to operate. So that's an area that
we're concerned about.
Speaker 2 (27:14):
You know. The other is the hospitality space.
Speaker 4 (27:16):
Right if you think about immigration as an example that
you know, as a very targeted part of the market
where immigration is quite important and as as that turns,
not only are they running out of workers, but they
have to pass those costs along and once again consumers
are very sensitive. Right, So you know, those are you
(27:40):
know areas that we're you know, we're quite focused on.
But there's you know, there's positives too, right, I mean
there's all this talk around you know, AI investment. You know,
we're on the bond side, so we you know, don't
have the same kind of sexy story so to speak,
you know, but it manifests in a couple of ways.
The way that I think is really interesting is the
power you know, the merchant power space is is a
(28:03):
space that we like a lot. The regulated utilities is
going to take more time, right because they have to
go through and pass that along. But the demand for electricity,
you know is you know, plus one percent for the
first time in decades.
Speaker 2 (28:19):
Right, that's not.
Speaker 4 (28:20):
Going to you know, move lower anytime soon. And just
think that's a real opportunity.
Speaker 3 (28:27):
Does that include like themes about the energy transition. I
think you've had Caterpillars tilted some pretty bullish views for
their mining business over the next five to ten years,
whether it's copper, li theum, all of these important metals
that are needed to facilitate this huge transition. Is that
something you guys are expressing in the portfolio or are
you not necessarily.
Speaker 4 (28:46):
Is not necessarily it's a more complicated story, yeah, right.
You know, these are high cyclical type of commodities, So
I think that's a very different story. You know, ultimately
you're taking cyclical risk there structural things that you mentioned,
but I think, you know, the sickle aspect is still
quite pronounced.
Speaker 1 (29:06):
I'm interested in your Vie's also on private credit because
a lot of people we've had on this show have
just talked about it endlessly, and you know, it's seemingly
this great, very safe, very high return product that everybody's
piling into at the moment. The guests we've had have
talked about equity like returns, although we kind of saw
a shift later last year where we had one large
asset manager on talking about the relative value between public
(29:29):
and private and talking about, you know, there should be
about two hundred basis points on the leverage side difference,
you know, in terms of pick up for the illiquidity
that seems to be going away. So what's your view
in terms of, you know, the value between the two markets.
Speaker 4 (29:41):
Yeah, so, I you know, would start out by saying,
I think over time it's going to be a single market.
You know, this demarcation between public and private will fade.
I go back to my experience when I was you know,
in lever finance high yield at the time and you know,
loans were the new shiny thing, and why were they
(30:04):
so popular, Well, they had great sharp ratios because they
didn't get marked and they were senior in the cap.
Speaker 1 (30:11):
Structure pretty much how private credit is today pretty.
Speaker 4 (30:14):
Much and loans, to be fair, loans aren't even considered
as security. So it's more complicated, right, just structurally contracts
right then, yeah, yeah, yeah, so so so I think
over time that that'll just continue to fade. I'll tell
you that we get refinanced out of our public deals
(30:34):
into privates and privates in the public, so it's already
being blurred.
Speaker 2 (30:38):
So you have to have a view.
Speaker 4 (30:40):
But I think there's been you know, maybe a little
too much excitement on the private side. You know, I
think there's real value in pockets, but you know, the
value that I see is more on the below investment
grade side it syncratically, of course, and then on the
ass the asset base an ant side, which is where
(31:02):
I think there's more opportunities. You know, at this point
in time on.
Speaker 1 (31:06):
How I mean, you have to wonder that about the
sustainability of the capital structure when you know, those borrowers
that are going to that market because they have to
paying you know, substantially high rates. How much longer can
they fold? And it's floating as well, So are we
not instead of setting them up for failure?
Speaker 2 (31:23):
Well, time will tell.
Speaker 4 (31:25):
If you look at leverage in the system, there's a
lot more leverage, you know, in the levered loan market
and in the private credit market. I think the trap
that acid allocators are falling into is that they're looking
at the empiricals and the empiricals.
Speaker 2 (31:43):
Are way out of date.
Speaker 4 (31:44):
Right, So the history around both lever loans and private
credit is they have a lower incidence of default and
higher recoveries. I'm not convinced that's going to be the
case going forward. If you look at kind of distressed activity,
default activity, you know, you've been seeing the private space running.
Speaker 2 (32:07):
Higher rate than the public space. You know.
Speaker 4 (32:10):
The issue on the private side is that it's not
until you experience an impairment.
Speaker 2 (32:15):
That you have to recognize it.
Speaker 4 (32:17):
So it just takes longer kind of inherently to to
play out. But you know, we're seeing these companies struggle
just based on you know, their higher costs of capital
and a little little hit to their cash flows. They
can't afford that hit. The cash flows, So you know,
we'll see about the wherewithal of the industry to you know,
(32:39):
put more money into these you know situations. But you know,
not all the sponsors of these different private credits have
that wherewithal.
Speaker 1 (32:48):
Is there enough of a pickup though to justify the
lack of liquidity, lack of transparency, all of the other
things you can't see, is that is there enough in
private when you when you're shown a deal, could you
don't just get a broady syndicated leverage loan that pays
you just as much and you know has a transparency.
Why wouldn't you just say, say, in the public market.
Speaker 4 (33:06):
It depends on your liability and your liquidity needs. So
if you have just kind of in theory ten years
locked up capital, then you're less worried about the liquidity
aspect of it.
Speaker 1 (33:21):
If you had, are you getting the pickup over the
private even to justify that?
Speaker 4 (33:26):
Well, right, if you're not worried about liquidity, then yes.
If you are, then maybe not. But you know, there
is a trade off when you go into private credit.
You know, even with less and inappropriate pickup, there's other things
that go away, like acid allocation or relative value. You
(33:48):
you're not as front footed, right, You're you're kind of
stuck in that allocation. Whereas if you're in the public market,
you know, let's say kind of a single asset barrower
deal looks cheap to one corporate credit deal that you have,
you can swap out and take advantage, right, you have
that ability. But on the private side, you're just stuck.
(34:11):
You can't take advantage of that. So I think that's
something that is often lost from an acid allocation standpoint.
But I also think, you know, a lot of these
acid allocation models need to change, right, you know, you know,
everything is a form of a mean variance model, which
is to say, you know, it's volatility based, right, And
(34:34):
I mean I've seen private credit presentations, not from USC
of course, with like sharp ratios of eight x, pretty impressive,
like come on, like you know, like you know, that's
obviously not the case. But there's some version of that
gets placed into these these acid allocation mean variance models
and they look good, right, And so I think there
(34:57):
needs to be kind of a future adjustment to adequately
understand what the asset allocation and thus the spread should be.
Speaker 2 (35:05):
Is two hundred enough? Is it one fifty is it,
you know, so on and so forth.
Speaker 1 (35:09):
And when you say convergence that the two will converge,
how long does it take and what does it look like?
Does it mean that it's just exactly the same as
leverage loans on now? Ultimately, I just.
Speaker 4 (35:18):
Think they'll they'll there'll be differences, of course, like there's
a difference between you know, lever loan, HI you bond.
But players think of that as one big sandbox. Right
when we look at deals, we look at it versus
loans and bonds. Companies issue oftentimes and loans and bonds.
(35:39):
So I just think it's it'll be a single leve
fin market, not a very separated private credit.
Speaker 1 (35:48):
But will the private credit be more broady, syndicated and
traded with muks and you know all of that stuff
that you get in the leverage loan market.
Speaker 4 (35:55):
I think it's going that way. You know, the push
tour words ETFs in this space is you know, pushing
it along.
Speaker 2 (36:05):
Now.
Speaker 4 (36:06):
I think this is a good news bad news story
as well as any time you get retail involved in
a niche market, you know, the emphasis and onus changes.
Right when private credit investors are just dealing with institutional
savvy investors. The hurdle is different. Once you push it
(36:27):
into the retail space. There's a much closer examination, and
it'll be curious to see how it holds off upon
closer examination.
Speaker 1 (36:37):
So all of the stuff you look at, Greg, globally,
we probably hadn't hits on it all. But I'm interested
in your idea of relative value right now?
Speaker 2 (36:46):
Where is the value?
Speaker 1 (36:47):
I mean, we've talked about how tight spreads are in
US credit, We've talked about a bit of the value
proposition in Europe. It's a big weld out there. There
are many other products. What do you what do you
think whe's the value?
Speaker 2 (37:00):
Yeah?
Speaker 4 (37:01):
My caveat is there's not a tremendous amount of value.
There's no real highly dislocated asset as far as I
can tell. So it's all on the margin and marginally
what I see is structure products is being dislocated and attractive.
Speaker 2 (37:22):
Most clos cnbs less.
Speaker 4 (37:26):
So I think you know that's changed unless you go
into the single assets single barwer space, which is basically
lending on property. There's some you know, interesting opportunities there,
but yeah, I would say, you know, clos broadly defined
anything structured still trades a little more cheaply because of
(37:49):
the time and effort it takes to explain it to someone, right,
you know, it's it's true, it's one of these things.
Speaker 1 (37:57):
Then people are still still thinking that cl those are
the same as CDOs that blew the world.
Speaker 4 (38:02):
Four letter words. Yeah, yeah, you know it was. Obviously
it's a very different market. And even then, to be fair,
the COLO space behave exactly as it was supposed to
in the global financial crisis, and now it is even
better protected more subordination, and so you know, we think
these structures are bold.
Speaker 1 (38:20):
But if you're worried about the loans though underlying it,
I mean, do you think there's enough diversity in the
basket to protect you against that?
Speaker 2 (38:26):
I do?
Speaker 4 (38:27):
I mean, to put it in perspective, if you own
a triple a colo you have, I'll just round up
because it doesn't matter forty percent subordination underneath you. So
a lot has to go wrong. I mean, the world
almost effectively has to end for that to be touched
at the top. I think the structure and the subordination
(38:49):
is what you're really participating.
Speaker 2 (38:52):
In, not the underlying loans itself.
Speaker 4 (38:54):
I know it sounds kind of funny to say, but
when you're that senior with that much protection, you know,
the loan market could really come upon hard times and
these structures will be fine as you go down less.
Speaker 2 (39:06):
So right, it's just kind of the lost absorption nature
of it.
Speaker 4 (39:09):
So triple b's not so much, uh, you know, even
single a's but you know, definitely triple as you're fine.
Speaker 1 (39:18):
Yeah, although we did see a triple A. I think
the c NBS that didn't make it. That was recently
so no old triple as.
Speaker 4 (39:26):
That was a savsby deal, right, so that didn't have
the diversification piece to it.
Speaker 2 (39:30):
Yeah, But point well taken.
Speaker 4 (39:33):
This is why this is why it trades more, chiefly
because there's always a you know, you know, a story
about it.
Speaker 1 (39:40):
Yes, yes, yes, and it sounds you'll edge right, you've
been doing this for a long time. We've had a
great conversation. You've seen you've seen it all. How do
you differentiate your self?
Speaker 4 (39:49):
I think there's there's a few ways. One is just discipline.
I think being longer term focus is.
Speaker 2 (39:58):
A competitive advantage.
Speaker 4 (40:00):
You know, we talked about the technical side, and the
technical side helps on the margin for sure, But you know,
when you're running close to nine hundred billion of assets.
You know, you need to be fundamentally focused, and we're
very good on the fundamental focus side. So you know,
whether it's corporate credit, whether structure, products, it all starts,
(40:21):
you know, with fundamentals, and we have an extremely deep,
well resourced team to you know, allow us to do
that and allow us to do it you know pretty well.
So I think our competitive advantages is, you know, the
long term nature of it and the deep understanding of
credit and structure, and you put that together, it's a
pretty powerful duo.
Speaker 2 (40:42):
I think.
Speaker 1 (40:43):
Give them the new cycle that we have trouble seeing longer
than the end of the week. So what does long
term mean to you?
Speaker 4 (40:48):
It's definitely longer than the news cycle, which is I
don't know, twenty seconds now. I mean we take you know,
at least a twelve month few And you know that's
not to say, you know, we're blind to what's happening
around us, like we modulate and we take advantage, but
you know, we think about things and you know, longer
(41:09):
term increments, and that's particularly in the case of credit,
you know, credit, I try not we try not to
worry about the vagaries of of you know, the week
or the month and just you know, take a longer
term perspective, and that has a tendency of you know,
proving itself out.
Speaker 1 (41:28):
Do you worry about anything, particularly Greg, We've had people
worry about all sorts of things on the show, and
we are credit people, and you know that's over there
looking very worried. So what what keeps you up at night?
Speaker 4 (41:38):
Well, there's a lot that you know keeps me up.
But I think what keeps me up on the credit
side is there's not a lot of history recent history
of credit issues. Say that differently, you know, it's not
a well experienced market. There hasn't been a true credit
cycle since honestly, you know, thirty years. So you know,
(42:02):
I think there's a tendency for investors to be dismissive
around the downside of credit, you know, whether it's the
Taco put or the Fed put, whatever you want to
call it. You know, rescuing bad capital structures in bad position.
Speaker 1 (42:17):
Even in twenty twenty that barely lasted, it was.
Speaker 4 (42:20):
We have it was, yeah, it was not even three weeks, right,
so we have not seen a sustained downtrade and what
words me is when and if that does happen.
Speaker 2 (42:34):
I do think the next credit.
Speaker 4 (42:36):
Cycle will be a more classic one, whatever that means.
But it's not going to be you know, reinflated instantaneously
by the FED or by the fiscal. Right you put
those two things together. You have a FED that's constrained
by inflation. You have the fiscal constrained by you know,
the current state of the fiscal which suggests to me
(42:58):
that credit is you know, going to drift much lower
than what we've seen and when.
Speaker 2 (43:03):
If we do hit a patch here.
Speaker 4 (43:04):
So I worry about the behaviors of the market in that.
And you know, you talked about l E and you
know the knives are going to be much sharper in
the capacity to absorb the downgrades is going to be
much less, And so I worry about credit really becoming
dislocated in a meaningful way. The flip side of that,
I'm also excited about it.
Speaker 1 (43:25):
Well, plussibly could trigger the end of the cycle. I mean,
because as we've talked about, it goes on forever and
we've thrown everything else it and the bad news just
keeps coming, but spreads just keep getting tights of.
Speaker 4 (43:34):
No the doorability of the economy, and these companies are real.
But the trap is just because it didn't happen doesn't
mean it can't happen.
Speaker 2 (43:44):
And you know, we'll see.
Speaker 4 (43:46):
But these things take time, and it's important to remember that,
you know, these companies are financing themselves at a much
higher rate than they have in a long time, and
and it just takes time to play out, and so
that operating leverage piece, I think is missed. That cushion
to absorb those cash flows moving lower is not what
(44:07):
it once was.
Speaker 1 (44:08):
Great stuff. Greg Peters, co, Chief investment Officer at PGM
Fixed Income. Many thanks for joining us on the credit edge.
Thank you, and of course we're very grateful to Matt
Gooyner from Bloomberg Intelligence. Thanks for joining us today. Thanks
for having me back for more credit and market analysis
and insight. Read all of Matt'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.
(44:29):
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 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 Jcrombie eight at Bloomberg dot net.
(44:51):
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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