September 19, 2024 • 47 mins
This week, the Fed cut benchmark rates by 50 basis points. Lower financing costs should be a relief for companies that need to borrow in the form of bonds or loans. But, the weird thing about the previous few years of high rates and high inflation is how much corporate credit has defied expectations. While defaults increased slightly, there wasn’t a huge wave of bankruptcies. And most companies haven’t really had trouble finding financing, with a smorgasbord of options available to them — including from the booming private credit market. So what happens now that the Fed is lowering rates? In this episode, we speak with Danielle Poli, co-portfolio manager of Oaktree’s Diversified Income Fund and a founding member of the firm’s investment committee, about how she sees the next leg of the credit cycle unfolding, and how she decides between a multitude of potential investments in the space.
Related Links:
The Black Hole of Private Credit That’s Swallowing the Economy
The Hottest Way for Banks to Get Risk Off Their Balance Sheets
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
I'm Tracy Allaway.
Speaker 3 (00:23):
And I'm Joe Wisenthal.
Speaker 2 (00:24):
Joe, it struck me that we might be at the
beginning of a new cycle, a new credit side.
Speaker 3 (00:31):
Are you making a call? Are you making a market
timing call?
Speaker 2 (00:35):
I would never, never, No, I'm trying to frame this episode,
but we have recently, by the time this episode comes out,
had a very momentous presumably decision from the Federal Reserve
where they've been cutting rates or they will have cut
rates for the first time since I think the summer
of last year. Oh, sorry, summer of twenty two, I
(00:56):
can't remember that.
Speaker 3 (00:57):
That's yeah, it's wild. And when ever there is a
turning point in the raid cycle, people are often you know,
we've had this regime. Equity markets have done really well,
credit spreads generally have been pretty tight, and so when
you're in this sort of new phase of a cycle,
then it's a natural time to sort of revisit where
(01:18):
things stand, what kind of assumptions have been baked into markets,
and of course like what the risks and opportunities are.
Speaker 2 (01:25):
Yeah, and I think the previous couple of years have
certainly surprised a lot of people who are in credit.
You know, people thought when rates went up there was
going to be a spike in defaults, and we haven't
really seen that. We've seen an increase, but it hasn't
been disastrous. We've seen spreads, as you mentioned, still at
kind of multi year lows, which is very surprising, and
(01:48):
so it kind of begs the question of whether or
not this dynamic can continue where pockets of stress might emerge.
Speaker 3 (01:55):
That's right, And just to note for listeners, we are
recording this Monday subtem number sixteenth. We are out in
Huntington Beach, California. We are at the future Proof Festival
I think it's called, which is probably one of the coolest,
most distinct financial market conferences that I can fathom. It's
literally out on the beach.
Speaker 2 (02:15):
It's entirely that's a nice way of saying, we're at
a beach three days.
Speaker 3 (02:19):
It's very nice, it's pretty so we love get around here.
Speaker 2 (02:21):
But you know, the other thing I was thinking about
recently is just the other thing that's happened over the
past couple of years has just been the explosion in
different types of credit available to companies, right, Like, if
you're a company seeking some sort of funding, you basically
have an option of everything from a syndicated bond or
(02:41):
loan to maybe doing a private deal. There are just
all these different types of credit that you could choose.
Speaker 3 (02:48):
Now, everyone, if you're a company, people will find ways
to give you money. There's all kinds of different opportunities.
Speaker 2 (02:54):
So we need to talk about the credit cycle. We
need to talk about the big growth in the options
available to investors and also corporates, and we need to
talk about what happens now, whether this is a new
leg in the cycle or the beginning of a new
cycle in itself.
Speaker 3 (03:10):
Let's do it. I can't wait, all right, we.
Speaker 2 (03:11):
Have the perfect guests to discuss all of this. We
are speaking with the co portfolio manager of Oak Trees,
a diversified income fund better known as odd X. Bit
of a mouthful actually.
Speaker 1 (03:25):
Danielle Paully.
Speaker 2 (03:26):
Danielle, thank you so much for coming on all thoughts.
Speaker 4 (03:29):
Thank you so much for having me. Tracy and Joe.
Speaker 2 (03:31):
Are you enjoying the beach as well?
Speaker 5 (03:33):
Oh, I'm having a great time. I don't think I've
ever been to a conference quite like this on the beach,
so many people.
Speaker 2 (03:40):
It's something I've said this before, but all conferences should
be like this.
Speaker 3 (03:44):
On the beach. But you're base around here. This isn't
even special for you, like for us coming from New
York where the weather's starting to turn and everything's like, oh,
a few more days of amazing weather. This is just
your life, huh.
Speaker 5 (03:54):
It's true, is a commute down the four h five.
Anyone that's watched Saturday Night Live and the Californians know
as though how perilous it can be fair driving on
LA freeways.
Speaker 2 (04:04):
So I mentioned your CopM of the Diversified Income Fund,
but you're also a founding member of the investment committee.
Talk to us a little bit about what you do
at oak Tree.
Speaker 5 (04:15):
I serve as a portfolio manager for Global Credit at
oak Tree, and that's our multi asset credit business. So
back in twenty seventeen, we tried to think about a
way to bring all of our different credit areas into
an easily accessible way for our clients. And I get
to serve as a portfolio manager, a member of our
(04:36):
investment committee, thinking about relative value and helping with asset
allocation in the portfolio. Because, as you know, these different
strategies can be more attractive or not based on what's
happening with interest rates or dislocation in the market. So
it's an interesting role to be in.
Speaker 3 (04:52):
In my mind, I think I have some understanding of
what a portfolio manager does. What does an investment committee
do at an entity like oak Drink.
Speaker 5 (05:02):
Well, different firms will have committees doing different things, and
our committee is less of a voting committee and more
of a thought leadership committee. So we convene all of
the different portfolio managers at oak Tree that cover different
asset classes like hil bonds and leverage loans, structured credit,
emerging market debt, even convertibles, and we meet every other
(05:24):
week as a group to talk about what's happening in credit.
So we'll talk about the fundamentals of the companies that
we're lending to. Are we seeing any cracks, is it
likely that defaults may pick up? And we talk about
technical trends, what's happening with issuance. Are there reasons why
there may be more attractive opportunities in one strategy versus
(05:45):
the other.
Speaker 2 (05:46):
So at one of your weekly meetings, what would be
the big talking point during well, presumably during FOMC meeting
it would be the FED. But what have you been
talking about lately?
Speaker 5 (05:57):
Well, we're bottom up investors, macro investors, but it's hard
to ignore the macro outlook when we're at such a
pivotal point with you know, perhaps a change in FED
policy that may signal this new expansionary period and credit.
We've had interest rates so high for so long, and
really where we're focused on is what has that impact
(06:19):
ben on borrowers credit worthiness. So we really are trying
to avoid risk when we're investing in fixed income. We
like to say it oak tree. If you avoid the losers,
the winners will take care of themselves. A lot of
our conversation is avoiding bad outcomes and focusing on that
lower cohort of borrowers that you may be in trouble
(06:41):
given these higher rates.
Speaker 3 (06:43):
I love the idea, like this is sort of in
my mind. When I think of stock investing, it's like
you want to pick winners, and when I think of
credit investing, you want to avoid losers. I always sort
of think of it like cooking a steak, which is
just like you want to just nail it every time
in the perfect stake is just like, just avoid the
bad ones, just stay consistent. I don't know, maybe that's
(07:05):
a terrible analogy. I always think of stock credittak. Stocks's
pizza is like, you have the most extraordinary pizza in
the world. Credit is steak. You just want to not
missc mess it up, not mess it up, exactly right.
That's how I think of these things in my head.
So one of the things that's really surprised me, or
I think surprised a lot of people. We had this
really aggressive rate hiking cycle, and credit spreads have been
(07:28):
really narrow.
Speaker 5 (07:29):
Now.
Speaker 3 (07:29):
The obvious answer there, although it's a little question begging
I suppose, is like, yeah, well, because we didn't get
a recession. A lot of people expected a recession or
some sort of major downturn from the raid hikes. We
didn't get that, So that's maybe why asset valuations have
held up. Well, how would you Is there anything more
to it when you look at just how tight spreads
generally have remained over this cycle. What's your story that
(07:52):
you tell for that?
Speaker 5 (07:53):
It's a great question. I mean spreads have been tight.
I mean typically in high yield we see an average
spread range of three hundred to five hundred basis points.
Anything's higher than five hundred, no barrow really wants to
issue at anything lower than three hundred. You know, no
investor wants to buy it. And what I think we've
had to have conversations with our investors about is that
(08:16):
with yields so high, it's a different environment. You don't
need spreads to blow out and then compress to get
your total return when you can get a yield of
you know, seven percent or so. And so I think
you're starting to see a shift from being more tactical
buyer to a strategic buyer. And I think there's reasons
why that spread is lower in light of what you shared, Joe.
(08:38):
In the high old bond market, it's over fifty percent
double be today. It's the highest quality it's been in
ten years now. You have to contrast that with the
leverage loan market, where we have seen some degradation and quality,
and that is a market where we're focused on, you know,
the lower ten to fifteen percent of borrowers and looking
(08:58):
at the upcoming maturity schedule and wondering how some of
those are going to get financed. But generally, like the
market's okay, and so that lower spread feels more justified
to us.
Speaker 2 (09:08):
So you mentioned the rate cuts earlier and describe them
as potentially an expansionary period in credit. I guess I'm
wondering how much pent up demand is there in terms
of new issuance, because overall it feels like people have
termed a lot of stuff out. But I guess there
is that segment of struggling borrowers who perhaps for them
(09:31):
rate cuts will be really important and make all the difference.
Speaker 4 (09:35):
It's a really good question.
Speaker 5 (09:37):
I think when rates come down there is just more
availability of credit. And as you point out, there are
those barrows that have been struggling with higher rates. This
will provide some per relief to them, especially those that
have taken out floating rate debt. And if we look
at the maturity wall I alluded to this a little
bit earlier for loans over the next year, there's something
(09:59):
like forty billion of maturity is coming due. It's all
in the lowest rated credits, so it's split B triple
C and even you know for twenty twenty six, twenty
twenty seven, it's almost seventy percent. So it's this cohortive
companies that haven't been able to get refinancing and maybe
you know, lower rates will provide them some relief. They'll
(10:20):
be a little bit more availability of capital. Some of
them may not be able to be refinanced in traditional ways,
they may need more rescue financing or capital solutions. But
I do think it'll be positive for credit borrowers when you.
Speaker 3 (10:35):
Look at the types of entities that are struggling, fallen out,
or actually impacted by this rate segar are we talking?
Is it heavily in real estate? Is that the area
that would be most exposed or most feeling the pain
of higher rates? Are like, where do you see these
pockets that actually are facing some challenges in the financing environment.
Speaker 5 (10:55):
No, it's a great point because we do a lot
more than just corporate higal bonds leverage. Low real estate
I think has been ground zero for some of these challenges,
and a lower interest rate environment should create I think
a little more optimism about what's ahead for real estate
valuations and force I think some sales and some liquidity
(11:15):
in that market. And so we are starting to see
some positive outcomes in real estate as people get more
comfortable with the rate environment.
Speaker 2 (11:23):
So I'm always curious about tactical decisions when someone is
controlling like a very big fund that has a lot
of optionality embedded in it in terms of investments, Like
there are tons of different things you could invest in
as CopM of the diversified income fund. I mean, I
know it's all relative value, but say in a month
(11:45):
like August when there was a lot of volatility, but
despite that, credit spreads were kind of stable. They weren't
really blowing out during the big turmoil. How do you
judge the opportunities presented to you at a time of
like uncertainty.
Speaker 5 (12:01):
Like then, we get so excited when there's volatility in
the markets. It usually means there's some bargains. But as
you point out, I mean, credit spreads really didn't widen much,
and I think by the end of that volatile week
it even tightened or at least made back that movement,
So there wasn't much for us to do. On the
corporate credit side, we were starting to get excited about
(12:21):
convertible bonds, so it's an area that we invest in,
and for those that maybe are less familiar with convertible bonds,
I think the easiest way to explain them is it's
a way to get the safety of a bond with
some form of income, but you also get to participate
in some equity upside. We're not converting into equity. We'll
sell before that event happens, but it is nice to
(12:43):
have some correlation to equity markets at certain times.
Speaker 3 (12:47):
I don't think we've ever done an episode.
Speaker 4 (12:49):
We haven't actually convertible.
Speaker 3 (12:51):
Bond, so we could just talk about this, but can
you talk a little bit more about, like how big
is that market and who are the types of issuers
typically or is the typical situation in which an issuer
would go into the convert market.
Speaker 5 (13:05):
Well, if you're going to do a session on that,
you have to speak with our portfolio managers that only
focus on convertible.
Speaker 3 (13:10):
I'd love to set that up.
Speaker 5 (13:11):
So the convertible market is small, and it tends to
be focused more in technology, healthcare, certain sectors, and it
has more of a correlation, i'd say, to small cap
stocks as compared to the SMP, even though the SMP
does have a lot of tech exposure and so it
(13:33):
tends to follow that more. I mean, for us, our
approach there is really to find good credit that we
can underwrite and then participate in the equity.
Speaker 4 (13:42):
As I said, so just.
Speaker 3 (13:43):
To clarify from the issuer perspective, if it's small or
if it's tech, and so that implies that they're probably
fast growing. The appeal for them is what exactly There's
this pool of capital that they want to borrow. But
this sort of sweetener is that the end investor can
(14:04):
participate potentially in some of the actual growth of the company.
Speaker 4 (14:07):
Yeah, that's right.
Speaker 5 (14:09):
You don't have to give up outright equity. And then
also you can issue at a much lower rate than
prevailing rates in the market. So that can be helpful
for a company depending on where you are in a cycle.
But it just ends up being a much smaller, more
niche market, and you can't avoid the correlation to equities.
(14:30):
And we're credit investors, so we don't want equities to
influence too much the performance of our funds.
Speaker 4 (14:38):
Today, we're very.
Speaker 5 (14:39):
Under allocated to converts it's probably the lowest allocation that
we've had since twenty nineteen heading into COVID, just because
of the valuations and equities and not finding as many bargains.
Speaker 2 (14:52):
Oh wait, so you said you were getting interested in
convertibles going into the August selloff.
Speaker 4 (14:59):
But I guess you you changed your because of the volatility.
Speaker 5 (15:03):
Yeah, we felt that maybe we could go in at
a better entry point, see, because the valuations haven't made
a lot of sense for us, and we can get
better potential returns from credit than equities. It's been low,
but when you get some of these consecutive days in
the market and there's a sell off, you get excited
thinking converts are gonna be the first asset class to move.
(15:25):
And so we started looking though at which converts moved,
and they didn't really meet our criteria for wanting to
wander into equities, especially with this rate decision coming up,
an election coming up, a lot of risk out there.
Speaker 3 (15:37):
But the idea would be in a volatility event as
credit investors. If I mean that whole volatility event, it
least about fifteen minutes, really like it was so short,
but theoretically if it had lasted longer, the first opportunities
likely would have shown up in converted I.
Speaker 5 (15:52):
Think so, especially when spreads aren't moving totally.
Speaker 3 (15:55):
That makes sense. Can you talk a little bit about
from a portfolio standpoint? I mean it makes sense when
(16:15):
you say, okay, volatility is exciting if you're an active manager,
volatility presents opportunities. How do you position the portfolio such
that you have the cash or the liquidity to take
advantage of volatility? Because I joked on the day of
the big sell off as like, oh, I should sell
some stocks so I can buy the dip here. Like
I would have loved to take advantage of that, but
(16:36):
you know, I don't really like keep a lot of
like extra cash around. How do you think about that
from a portfolio standpoint, being invested but also being in
a position to take advantage of opportunities.
Speaker 4 (16:46):
And it's more of an art than a science.
Speaker 5 (16:48):
I mean, today cash is an ass that it's not
as delutive as it used to be to hold, so
you can at least get some decent yield. And we'll
invest our cash in investment gray kind of short duration
type paper, so we're getting an even better yield. And
we do like to have some of that in the
portfolio as a buffer to use for these.
Speaker 4 (17:09):
Periods of volatility.
Speaker 5 (17:10):
One thing that we did a year or so ago
as we looked at the portfolio and which were our
you know, less liquid assets outside of private credit, because
you really can't sell private credit a selloff. So we said,
leverage loans, while you can trade them quickly, they take
a while to settle, and so we have other options.
(17:31):
Maybe we should create some liquidity by taking some money
out of leverage loans. And what we did is we
basically took every dollar we took out of leverage loans,
we put fifty cents into cash and fifty cents into colos.
So it's a barbell strategy because colos are really levered instruments.
You're getting a higher yield, but they don't take time
to settle, and then the cash, you know, that's available
(17:54):
to us.
Speaker 4 (17:54):
So we created liquidity and we.
Speaker 5 (17:56):
Didn't really change the overall yield profile of the fund.
Speaker 2 (18:00):
You mentioned private credit. Just then, what has the growth
of the private credit market meant for the more syndicated stuff, so,
you know, leverage loans, publicly issued bonds, that sort of thing.
Speaker 5 (18:12):
I think Tricy, you said it so eloquently earlier on
borrow is have more options, right, they have different ways
to get financing, whether it's through the syndicated market working
with a private lender. I think for us it's provided
really attractive opportunities to step in when markets have been frozen.
(18:32):
So I look back maybe to the end of twenty
twenty two when banks were hung with what forty billion
on their balance sheets, and that was an opportunity to
step in and dictate terms and say, well, lend and
in scale, but we want covenants, we want protections.
Speaker 3 (18:48):
Well, sorry, explain that more. What were the assets that
were frozen or weren't moving, what types of assets were those,
and then what was this sort of what was your
package or what was your pitch to them?
Speaker 5 (19:02):
Yeah, so it was banks that had pre agreed to
syndicate loans, and because interest rates had moved so quickly,
those banks were going to take significant losses taking those
loans to market, and so those opportunities they needed private
lenders to step in to speak for those deals. And
(19:24):
so what we were able to do is we were
able to command better terms in the form of pricing,
so higher spreads got it, and the negotiate covenants that
you wouldn't see in the public markets. That's been the
big issue on loans. You've had no covenants or protections
in the levered loan market, whereas with private credit when
we're directly originating loans, especially on the non sponsor side,
(19:46):
we can actually protect ourselves in terms of structure and
get covenants in there that are going to protect us.
Speaker 2 (19:51):
This is one thing I always wondered. But in the
private market, when you're an entity like oak Tree, who
initiates the conversations. Is it the bank come to you
and say, hey, we have a hung loan we need
to get rid of it. Is it the company looking
for options? Do you approach potential borrowers? How does that work?
Speaker 5 (20:09):
It depends, But we do have a sourcing and origination
team that oak Tree that speaks for the entirety of
our firm. I think it's a competitive advantage for us
because they are facing off with companies with sponsors, with
the banks. It's like having a sophisticated capital markets team
within an alternative asset manager, and it allows us to
(20:30):
have conversations more from the point of what do you need,
what's your problem?
Speaker 4 (20:34):
What type of financing?
Speaker 5 (20:36):
And then they will come back to us at oak
Tree and say, this is what we need to do.
Where does this fit across the firm? Let's create something
that really is tailored to that entity. And so that's
kind of how we see a lot of different things.
We're also a first call in terms of these types
of opportunities given our roots and distressed debt, investing, special
(20:58):
situations and rescue finance.
Speaker 3 (21:01):
I mean, we've talked a lot on the show now
about the growth of private credit. How much has private
credit grown within oak Tree?
Speaker 4 (21:08):
It's grown a lot.
Speaker 5 (21:09):
When I joined the firm back in twenty fourteen, I
want to say, at that time, just the private credit
industry was maybe five hundred billion. It's grown to one
point seven trillion. I think today. The unique thing about
oak Tree is we've been doing private credit for a
long time. Back in two thousand, the firm launched a
(21:31):
mezzanine kind of middle market fund, and that's grown into
direct lending. It's really taken on all sorts of forms.
But I think we're still doing the same type of
lending that.
Speaker 4 (21:45):
We were historically.
Speaker 5 (21:47):
It's just now become much more popular and mainstream.
Speaker 2 (21:51):
So on that note, how competitive is that market at
the moment, Because I think back to you were talking
about covenants earlier. One of the driving forces behind the
rise of CoV light sort of posts two thousand and
eight was well, there was so much money chasing yield
that it was a race to the bottom, and if
(22:11):
one investor wanted protections built into their investment or their
loan that the company didn't want, then someone else would
step in and basically offer to do it on better
terms in the company's perspective. Do you feel that kind
of competitive pressure now in the private market.
Speaker 5 (22:28):
I think we still have some of that today and
we will going forward, just given how much demand there
is for private credit. But I do segment the market,
so I feel like that's most acute in the direct
lending LBO finance sponsor backed transactions, where you know, we
try and play, though it's a smaller opportunity set, it's
(22:50):
more episodic, is directly originating debt non sponsor, and there
you don't have the competition, and so you're able to
set terms and you're the sole lender or maybe one
of two lenders, and there's just a lot less competition
because when you manage a very large private credit fund,
you've got to put a lot of capital to work,
(23:11):
and there are just more LBO sponsor backed opportunities available.
So if you are able to be nimble or manage
private credit in a multi asset portfolio like I do,
where you don't have to constantly be deploying in private credit.
You have other tools in your toolkit. We can be
selective and try and overweight those non sponsor opportunities.
Speaker 3 (23:32):
So I've been talking about the credit markets from the
borrower perspective. You mentioned in the beginning that in the
current rate environment, or at least the recent rate environment,
credit has also had a really big yield component as
part of the value proposition. And with raised as high
as they are, credit spreads okay, maybe a little narrower,
(23:53):
but all in, investors are getting a decent amount of income.
How have you seen the demands of investors evolve? What
are people looking for in terms of an income product
or a credit product? And how has that changed over
the last few years with the you know, the you know,
the worst inflation in forty years and the aggressive rate
hikes as such, what have you seen on this sort
(24:15):
of like the investor.
Speaker 5 (24:16):
End, I think investors have wanted more diversification, exposure to
a mix of fixed and floating rate so that they
aren't so susceptible to what's happening in the interest rate regime.
Speaker 4 (24:30):
Of the FED.
Speaker 5 (24:31):
Like fixed rate ig and high old only portfolios got
pretty beaten up as rates were rising, and you saw
a lot of interest and more floating rate leverage, loan,
private credit products that could continue to offer higher income.
Speaker 4 (24:44):
But now where we are, they want.
Speaker 5 (24:46):
To toggle back, right because the fixed rate is really
what's going to benefit the most from a rate cut,
and so having portfolios set up that can tactically access
both of those opportunity sets, I think that's really what we're.
Speaker 4 (24:59):
Hearing a lot of demand for. Wait, so talk to
us a little bit more.
Speaker 2 (25:03):
You know, earlier we were discussing credit spreads and the
fact that they've remained fairly low, but as you say,
maybe because of yield, they look a little bit more
attractive in the higher rate environment. But what does like
a good entry point into credit actually look like right now?
Like what should investors be looking for if they want
to kind of flip the switch on higher exposure.
Speaker 5 (25:24):
Well, I think today in the high yield market, you
can get good income from a high quality bond. You're
looking probably around a seven percent yield, and that's attractive
for some. I mean I work with a lot of
institutions as well, pension plans, endowments. Oftentimes they're trying to
solve for seven percent, they no longer need to allocate
to equities to get that type of return. Has the
(25:47):
yield been higher, sure, I mean it was as high
as ten percent, you know, not so long ago, which
is more of an equity like return. If you think
about the SMP the last one hundred years, it's probably
given you around ten percent. I mean, if you're getting
ten percent, it feels somewhat like a free lunch to
go into credit, and so I'd say, like, that's an
entry point you don't want to miss. But today you're
(26:08):
still getting you know, seven percent, it's pretty good.
Speaker 2 (26:10):
That's the old joke Joe, where like if you liked
high yield at seven percent, you love it at ten.
Speaker 3 (26:17):
Except no one actually does. Yeah, okay, So it was
very logical. As rates were rising, suddenly interest in floating
rate debt goes up. Then the interest rates turned around,
and suddenly, oh, people want the fixed rate debt for
obvious reasons. You know, one thing I wander about, and
it comes up in many interviews. Does the memory though
(26:38):
of twenty twenty two persist? And do you see that
over the next decade, the fact that you can have
these very sudden, sharp spikes in inflation and therefore rates
do you see that leaving a fingerprint on investor profiles,
are on investor risk management for years to come, even
setting aside this cycle, that memory of that experience.
Speaker 4 (27:01):
I'm a little skeptical.
Speaker 5 (27:02):
I think many just have this low rate, zero interest
environment stuck in their heads and they think that we're
going back down there and we're staying there. And what
you raise is a concern of mine, like if inflation
rears its ugly head again and at the same time
the economy is slowing like stagflation, not something that many
(27:24):
investors for investing today have seen.
Speaker 3 (27:26):
Well, then that actually brings to mind another question, which
is that one of the extraordinary aspects I would say,
you know, starting in March twenty twenty two is through policy,
through fiscal policy and aggressive FED action. You know, we
knocked out the recession in like three months, those the
shortest recession ever, and we sort of proved through policy
(27:47):
that we can always fight recessions, that they don't really
have to happen, but we know they'll happen again. But
it also makes me wonder, and then we didn't have
a recession in twenty twenty two or twenty twenty three
when everyone expected it. And so I'm curious from the
other side, like are people anxious about recession or is
there a view that's settled in that, like we don't
have to have recessions and they could be kind of
(28:10):
a thing of the past.
Speaker 5 (28:11):
I mean, it feels like the latter in the market,
right the Fed just took this big bazooka and yeah,
really kind of shot the economy and got things going.
And they're also in a pretty good place right now
with rates so high to be able to aggressively cut
rates if something does happen.
Speaker 4 (28:29):
So I agree with you.
Speaker 5 (28:30):
I think a lot of people are thinking will we
ever have recessions again? Now At oak Tree, yes, we
think we will. You know, we're very much a believer
of cycles. So maybe one you know, theory that we
have is because the recession was so talked about, this
upcoming recession that CFOs got in front of it. And
(28:51):
you did see that right with the wave of refinancings
that occurred, and frankly, you know, COVID, the reopening was
pretty good for companies. Like higher inflation has hurt consumers,
but it didn't hurt companies who saw their revenues increase,
so they're in a better cash position kind of coming
into this period too.
Speaker 2 (29:11):
We talk a little bit more about that. I find
that interesting the idea that because everyone was talking about
potential recession, maybe a bunch of corporate treasurers decided to
term out their maturities and that's maybe why we didn't
have the big maturity wall disaster that everyone thought we would.
Speaker 5 (29:27):
Yeah, maybe I'm giving them too much credit. Right, Look,
I think another thing that happened was COVID, and you
could argue that that was a recession, a mini recession,
and maybe it's just like the something, it was something, right,
I mean, we did see default spike, and what's happened
there is some of the worst companies kind of fell
(29:48):
out of the index and that's where you get that
better quality, right that I.
Speaker 4 (29:52):
Was alluding to.
Speaker 5 (29:53):
And so maybe you just had this kind of cleaning
event that happened. And because the market is of higher
cour quality, market participants see that, and so they're not
as concerned about having as big of an issue going forward.
Speaker 3 (30:22):
Can you talk about this whenever I hear like my
credit colleagues and Tracy talk about like, oh, like high
yield that environment just fundamentally doesn't look like the high
yield environment of past or I hear people talk about
like fallen angels or all these different things that are
a little bit outside of my own comfort zone. What
is this sort of I guess the credit profile of
(30:44):
the market look like, how has it changed over the
last I don't know, five years, ten years, et cetera.
So when we talk about high old today versus highyield
five years ago or high yeld fifteen years ago, like,
how have these markets changed?
Speaker 5 (30:56):
Well, credit rating agencies will issue their ratings, and you know,
if they were right all the time, we wouldn't have
a job.
Speaker 4 (31:03):
We'd like to say that, but assume they are.
Speaker 5 (31:05):
And what you've seen is that these markets have tended
to skew to lower ratings because they are sub investment
grade credit and there's inherently more risk than investment grade.
But it's a higher quality market today because some of
those companies prior to COVID, you know, we're in the market,
(31:25):
and then during COVID they defaulted on their debt, and
so it's more of a technical thing. Right, the market
looks better because you got rid of some of the
worst companies from the indices. At the same time than that,
some of the investment grade rated companies fell into the
index or the fallen angels that you mentioned. So it's
changed the composition of what's available out there. And then
(31:48):
in terms of just you know, what kind of companies
look like today versus the past.
Speaker 4 (31:53):
Leverage has stayed like pretty steady.
Speaker 5 (31:55):
It's actually come down a little bit in high yield,
which is interesting. Even in price credit, you know, you're
looking at maybe five turns of leverage. It's not excessive,
and so the fundamentals are okay, I think for credit,
and then you kind of overlay that with an economy
where you're not seeing cracks in the labor market in
any significant way. Like, sure, there are things that we
(32:17):
are focused on an oak tree, like student debt, picking
up delinquencies in auto payments, other indicators that you know
show some stress, but like generally things feel.
Speaker 4 (32:29):
Okay, and the same for the borrowers.
Speaker 2 (32:32):
It is true, Joe. I don't know if you remember,
but there was a moment pre COVID and sort of
post COVID where everyone was worried about the triple B
bubble involves. Do you remember that there's the idea that like,
so triple B is the lowest rung of investment grade,
and it was like the fastest growing cohort of the
IG market, and so everyone was like, oh god, the
(32:55):
quality of the overall corporate BALLB market is deteriorating. Everything's
triple B now, bublah blah blah blah, and it's going
to burst one day. And instead what we've seen over
the past year or so is the triple B bubble
kind of burst. But because everyone got upgraded. Yeah, so
like no downgrade, it's now falling down into high old status,
but everything getting upgraded to speak to the quality point. Okay,
(33:19):
since we have you, Danielle, one thing I've been wondering about,
and I feel kind of bad because I've used this
term in previous conversations, but we've never really flushed out
what it actually means. Creditor on credit or violence. It's
a very popular talking point.
Speaker 3 (33:34):
But what do we mean exciting?
Speaker 2 (33:35):
Yeah, it does, right, it sounds active at least, what
do we mean when we're talking about that?
Speaker 5 (33:41):
You know, it's it's funny, it's nothing new, It's happened
for a long time. But I think the dollars at
play are a lot bigger given the growth of these markets.
And it's what we talked about earlier that a lot
of the deals that got done over the last few
years have no covenants in the leverage loan market. And
so what that does is it just there's holes in
(34:02):
these deals and it allows for sometimes nefarious activities.
Speaker 3 (34:07):
Explain that further covenance and holes for someone like myself
who is not doesn't have a concrete idea of what
this means, like, is what talk to us a little
bit about how that plays.
Speaker 4 (34:17):
Yeah.
Speaker 5 (34:17):
Sure, so ideally when we're structuring alone with a company,
we want to find ways to protect ourselves, especially if
they are going to miss an interest payment or default
on the entirety of their loan. We want to ensure
things like we're first lean and the capital structure, meaning
that we're going to get paid back first in a bankruptcy.
(34:37):
We may want to tie our loan to certain assets
that the company has so that those assets can be
used to pay the proceeds of the bankruptcy. And so
you put these covenants or terms into the bond indenture,
the loan document so that you're protecting yourselves. But because
there's been such competition to invest in these deals, and
(35:01):
there's been this low interest rate environment and just a
lot of capital, it's been harder to get these types
of protections into the documents.
Speaker 3 (35:10):
It sort of sounds like when everyone was buying homes
a few years ago and no one did the inspect
They like awave the inspections just because you just like
and that was like one of it. It's like, no,
if you want an inspection, someone's going to buy it
before you. It's like the same basic principle.
Speaker 5 (35:21):
Yeah. And so when it comes to lender on lender violence, then,
as you were saying, Tracy, these companies are struggling from
higher rates, right, they may not be able to make
their interest payments. And so what's happening is you have
certain creditors and sponsors looking at, well, how are we
going to remedy this situation. We need fresh capital for
this company to kick the can down the road, if
(35:43):
you will. And so what you're seeing is different techniques
applied taking advantage of there being no covenants. So a
classic example of this is stripping assets from a collateral package,
dropping them out.
Speaker 4 (35:58):
It's called a drop down.
Speaker 5 (36:00):
So you might see that they might go to a
new entity and unrestricted entity that can then take out debt.
That will just lessen the amount of assets that investors
can have to pay back their claims. You also have
the ability to have new capital come in so effectively
priming first lean investors. You go to bed thinking your
(36:22):
first lean, and then you wake up the next day
second lean surprise. That's challenging and oftentimes really the company
can work with the majority of creditors to do this
really quickly, and not all creditors may be involved, and
it can be really violent, I guess if you will,
which is why the term is used.
Speaker 2 (36:43):
So one of the things I've been thinking about recently.
We started this conversation talking about the credit cycle and
the idea of well, maybe we're at the start of
a new credit cycle or a new stage of the
current credit cycle. It does feel like the cycles have
kind of become a little bit muddled, right, I guess
as we were discussing, there are all these new options
(37:04):
for borrowers. So if they can't get a loan in
the syndicated market, maybe they talk to someone in the
private market, and so there's I guess additional pressure valves.
Does it feel to you like maybe the credit cycle
has changed in some either fundamental or permanent way.
Speaker 5 (37:22):
Here. Now, what you raise I think is important because
in some ways it may have extended the credit cycle
because there are different avenues for companies to access capital.
You know, well, I think it creates a lasting impact.
I think we'll have to wait and see, but probably
the answer is yes, especially as private credit grows and
(37:44):
morphs from more of an industry that was focused on
sponsor backed direct lending to areas like non sponsor directly
originated loans, which I had mentioned, and then other things
like asset back to finance. I think they'll just continue
to be an evolution of the market over time.
Speaker 3 (38:01):
I'm curious about industry sectors, and we've talked about it
a little bit. We talked about where companies issue preferreds.
We talked a little bit about the sensitivity of real
estate to the interest rate cycle. One of the other
big macro themes that we talk a lot about the
show is like this incredible boom into certain types of capex,
things like data centers, things like infrastructure, things like new energy.
(38:24):
All the different factories and plants that have come out
thanks to the Chips Act and the Inflation Reduction Act.
How do some of these big economy wide trends play
out in the credit space, and have there been new
areas of borrowing that you see due to things like
some of these secular trends in the nature of the economy.
Speaker 5 (38:43):
Yeah, you know, we have seen secular trends over time.
And most of the activity that was in M and
A and LBOs of the last however many years, was
in tech in particular.
Speaker 4 (38:55):
And now tech is.
Speaker 5 (38:56):
Such a large part of the leverage loan market. And
now today as you point out new areas of investment
AI chips, I think it's growing that area. But I mean,
the market has a beautiful way of adjusting itself, right,
Like we loved investing in data centers last year, but
then everyone else did too, and so the yields have
(39:16):
really compressed. So there is somewhat I think of a
resetting of return expectations and some of those hot sectors.
And then you really have to shift to say, wow,
so much of this was issued. Are these really quality
loans that were made? Is this going to be ground
zero for defaults? And then it becomes more of a problem,
(39:37):
right Like what's hot then becomes the area of concern.
Speaker 2 (39:41):
So one thing I was wondering about an event like
this future Proof. It bills itself as a wealth festival.
The predominant audience member seems to be rias. So I'm
curious when someone like you comes to an event like this,
what are you talking about with all the people here?
Are you like pitching those specific funds or like, what
(40:04):
are those client conversations or potential client conversations actually looking like.
Speaker 5 (40:08):
I mean, if you're an RIA, you have so much
to consider in terms of asset allocation outside of alternatives.
But even with alternatives, you've got VC, private equity, all
these different areas to consider. So I think a lot
of my conversations are around why credit is a compelling
investment opportunity today, getting those high yields and income. I
(40:31):
do think credit could potentially outperform equities, and you know,
having them think about it as a steady allocation in
their portfolios of their clients so that their clients can
do other things. I mean, why not have fixed income
credit be that steady core allocation that hopefully, you know,
(40:51):
they can then use to fund other areas. So a
lot of my conversations are educational it's also about talking
about the different types of private credit that's out there
and the different types of vehicles that they can access to.
So we've seen interval funds, BDC's, these types of funds
become more mainstream and really excited to just kind of
(41:13):
have those conversations about how individuals can access what institutions
have for so long.
Speaker 2 (41:19):
What type of questions do arias have about private debt, Like,
I'm curious to hear their concerns and how much they
overlap with the stuff you see in the headlines about
you know, private debt bubble or a creditor on creditor
or violence, which we kind of already discussed.
Speaker 5 (41:34):
So I think aria is the questions that we get
surprisingly relate more to the macro environment and less about
the fundamentals of credit. I think they're really wanting to
understand what rate cuts will do to private credit because
it will lower the yield, and the yield is really
important in private credit for them, and so we've had
(41:57):
some conversations around that. I think think less so the
conversation has been focused on the quality of private credit
and whether you know, a type of bubble is brewing
at this point, though, maybe the focus should kind of
turn there at some point soon. I do think that
active management in the space is so important, and you
are starting to see some products, you know now being
(42:20):
recently announced like ETFs that may be passive, and I
think we have to figure out, like what is that
going to mean? What does that look like? Those are
questions that our as should be asking.
Speaker 2 (42:31):
All right, daniel Paully, thank you so much for joining us.
That was really fun.
Speaker 3 (42:35):
That's fantastic. Thank you so much.
Speaker 2 (42:36):
Thank you so much, Joe, that was a good episode.
I felt to record after the conversation with dan Ives.
Speaker 3 (42:55):
Yeah, it was great.
Speaker 2 (42:56):
Dovetailed. So one of the things that is standing out
to me after all these discussions with bond market participants
on the West Coast is the yield versus spread. Yes, yeah,
so everyone's been complaint. Not everyone, but a lot of
people have been pointing out that spreads are still very,
very low and so it's difficult to find entry points
(43:16):
into credit. But on the other hand, as Danielle pointed out,
like at seven percent yields, that might be very attractive.
Speaker 3 (43:23):
I think a seven percent yield will double your portfolio
in about ten years, so it's not bad like you
just like if you could just like lock in that
seven percent yield.
Speaker 2 (43:30):
Just avoid messing up that credit sta Yeah.
Speaker 3 (43:33):
Just avoid over cooking the steak. Get all your money
in a seven percent yield, and then ten years from
now you've doubled your wealth. Like that's not bad.
Speaker 4 (43:40):
Yeah.
Speaker 2 (43:41):
The other thing that stood out to me was, you know,
she was talking about I guess quality trends within the
index itself, and I do think it's so funny how
much hand ringing there was about the triple B yeah,
bursting eventually and like causing this big wave of like
downgrades and defaults in the credit market. But instead of
the downgrades, it basically has ended or started to reverse
(44:04):
with upgrades. You know.
Speaker 3 (44:05):
I think one of the reasons my brain, like when
I first got interested in markets is through stocks. And
stocks are really nice because it's like there's one Microsoft,
there's one Google, you know, and then when you look
at credit and there's just like this like endless proliferation
of new terms and like interval funds. I don't know
what that is.
Speaker 2 (44:24):
What's it?
Speaker 3 (44:24):
Do you know what an interval fund is?
Speaker 5 (44:26):
I did.
Speaker 3 (44:26):
We got to learn what interval funds and business development
core just like all of these new things and preferreds
and stuff, and so you know, there's just this sort
of endless how do you mentioned in the beginning, just
like this endless buffet of credit products, and it's sort
of always interesting. And then the fact that like you
talk about like investment grade, but that does not mean
(44:46):
the same thing in twenty twenty two. Is it means
in twenty twenty one or twenty twenty five or twenty
nineteen or same with high yield? Just this endless buffet,
And then you understand why you sort of have these
entities like ratings agencies that can sort of segment at
risk in a sort of useful way, because it's just
so sprawling.
Speaker 2 (45:03):
Yeah, this is why I always like asking the process
questions of like how do options actually get in front
of someone like Danielle or dan Ivison? And then how
do you choose from? Like there must be dozens.
Speaker 3 (45:18):
If not hundreds, endless permutation.
Speaker 2 (45:20):
Like investment categories within credit like not talking about single
loans or investments or direct loans that sort of thing,
but just like the actual categories must be in the dozens.
Speaker 3 (45:31):
Let's do it, by the way, let's do a creditor
on creditor violence episode, like, let's just find one, like
maybe a specific incident in like dissecting, because I just
want to get that in a headline because I think
people would download it. But that also just sounds like
it's very It's like the thought that like you could
have like the first lean debt and then the next
morning somehow you don't, or that the idea that a
company could move assets that are sort of like a
(45:54):
collateral into some other vehicle and then the creditors can't
get access to them to liquidate them or pay the debt, Like,
let's talk about that more.
Speaker 2 (46:03):
I always think an episode about creditor on creditor violence
sounds almost like a PSA, like have you been hurt
by creditor on creditor violince?
Speaker 3 (46:11):
Well, let's do one, all right?
Speaker 2 (46:12):
Shall we leave it there?
Speaker 3 (46:13):
Let's leave it there.
Speaker 2 (46:14):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (46:20):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at, Carmen Arman, dash Ol
Bennett at Dashbot, and kil Brooks at Kelbrooks. Thank you
to our producer Moses. On more odd Laws content, go
to Bloomberg dot com slash odd lots where you have transcripts,
a blog and a newsletter and you can shout about
all of these topics with fellow listeners in our discord
(46:41):
discord dot gg slash odd Lots.
Speaker 2 (46:43):
And if you enjoy odd Lots, if you want us
to do that Creditor on Creditor Violence episode, then please
leave us a positive review on your favorite podcast platforms.
And remember, if you are a Bloomberg subscriber, you can
listen to all of our episodes absolutely ad free. All
you need to do is find the Bloomberg channel on
Apple Podcasts and follow the instructions there. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
I'm Tracy Allaway.
Speaker 3 (00:23):
And I'm Joe Wisenthal.
Speaker 2 (00:24):
Joe, it struck me that we might be at the
beginning of a new cycle, a new credit side.
Speaker 3 (00:31):
Are you making a call? Are you making a market
timing call?
Speaker 2 (00:35):
I would never, never, No, I'm trying to frame this episode,
but we have recently, by the time this episode comes out,
had a very momentous presumably decision from the Federal Reserve
where they've been cutting rates or they will have cut
rates for the first time since I think the summer
of last year. Oh, sorry, summer of twenty two, I
(00:56):
can't remember that.
Speaker 3 (00:57):
That's yeah, it's wild. And when ever there is a
turning point in the raid cycle, people are often you know,
we've had this regime. Equity markets have done really well,
credit spreads generally have been pretty tight, and so when
you're in this sort of new phase of a cycle,
then it's a natural time to sort of revisit where
(01:18):
things stand, what kind of assumptions have been baked into markets,
and of course like what the risks and opportunities are.
Speaker 2 (01:25):
Yeah, and I think the previous couple of years have
certainly surprised a lot of people who are in credit.
You know, people thought when rates went up there was
going to be a spike in defaults, and we haven't
really seen that. We've seen an increase, but it hasn't
been disastrous. We've seen spreads, as you mentioned, still at
kind of multi year lows, which is very surprising, and
(01:48):
so it kind of begs the question of whether or
not this dynamic can continue where pockets of stress might emerge.
Speaker 3 (01:55):
That's right, And just to note for listeners, we are
recording this Monday subtem number sixteenth. We are out in
Huntington Beach, California. We are at the future Proof Festival
I think it's called, which is probably one of the coolest,
most distinct financial market conferences that I can fathom. It's
literally out on the beach.
Speaker 2 (02:15):
It's entirely that's a nice way of saying, we're at
a beach three days.
Speaker 3 (02:19):
It's very nice, it's pretty so we love get around here.
Speaker 2 (02:21):
But you know, the other thing I was thinking about
recently is just the other thing that's happened over the
past couple of years has just been the explosion in
different types of credit available to companies, right, Like, if
you're a company seeking some sort of funding, you basically
have an option of everything from a syndicated bond or
(02:41):
loan to maybe doing a private deal. There are just
all these different types of credit that you could choose.
Speaker 3 (02:48):
Now, everyone, if you're a company, people will find ways
to give you money. There's all kinds of different opportunities.
Speaker 2 (02:54):
So we need to talk about the credit cycle. We
need to talk about the big growth in the options
available to investors and also corporates, and we need to
talk about what happens now, whether this is a new
leg in the cycle or the beginning of a new
cycle in itself.
Speaker 3 (03:10):
Let's do it. I can't wait, all right, we.
Speaker 2 (03:11):
Have the perfect guests to discuss all of this. We
are speaking with the co portfolio manager of Oak Trees,
a diversified income fund better known as odd X. Bit
of a mouthful actually.
Speaker 1 (03:25):
Danielle Paully.
Speaker 2 (03:26):
Danielle, thank you so much for coming on all thoughts.
Speaker 4 (03:29):
Thank you so much for having me. Tracy and Joe.
Speaker 2 (03:31):
Are you enjoying the beach as well?
Speaker 5 (03:33):
Oh, I'm having a great time. I don't think I've
ever been to a conference quite like this on the beach,
so many people.
Speaker 2 (03:40):
It's something I've said this before, but all conferences should
be like this.
Speaker 3 (03:44):
On the beach. But you're base around here. This isn't
even special for you, like for us coming from New
York where the weather's starting to turn and everything's like, oh,
a few more days of amazing weather. This is just
your life, huh.
Speaker 5 (03:54):
It's true, is a commute down the four h five.
Anyone that's watched Saturday Night Live and the Californians know
as though how perilous it can be fair driving on
LA freeways.
Speaker 2 (04:04):
So I mentioned your CopM of the Diversified Income Fund,
but you're also a founding member of the investment committee.
Talk to us a little bit about what you do
at oak Tree.
Speaker 5 (04:15):
I serve as a portfolio manager for Global Credit at
oak Tree, and that's our multi asset credit business. So
back in twenty seventeen, we tried to think about a
way to bring all of our different credit areas into
an easily accessible way for our clients. And I get
to serve as a portfolio manager, a member of our
(04:36):
investment committee, thinking about relative value and helping with asset
allocation in the portfolio. Because, as you know, these different
strategies can be more attractive or not based on what's
happening with interest rates or dislocation in the market. So
it's an interesting role to be in.
Speaker 3 (04:52):
In my mind, I think I have some understanding of
what a portfolio manager does. What does an investment committee
do at an entity like oak Drink.
Speaker 5 (05:02):
Well, different firms will have committees doing different things, and
our committee is less of a voting committee and more
of a thought leadership committee. So we convene all of
the different portfolio managers at oak Tree that cover different
asset classes like hil bonds and leverage loans, structured credit,
emerging market debt, even convertibles, and we meet every other
(05:24):
week as a group to talk about what's happening in credit.
So we'll talk about the fundamentals of the companies that
we're lending to. Are we seeing any cracks, is it
likely that defaults may pick up? And we talk about
technical trends, what's happening with issuance. Are there reasons why
there may be more attractive opportunities in one strategy versus
(05:45):
the other.
Speaker 2 (05:46):
So at one of your weekly meetings, what would be
the big talking point during well, presumably during FOMC meeting
it would be the FED. But what have you been
talking about lately?
Speaker 5 (05:57):
Well, we're bottom up investors, macro investors, but it's hard
to ignore the macro outlook when we're at such a
pivotal point with you know, perhaps a change in FED
policy that may signal this new expansionary period and credit.
We've had interest rates so high for so long, and
really where we're focused on is what has that impact
(06:19):
ben on borrowers credit worthiness. So we really are trying
to avoid risk when we're investing in fixed income. We
like to say it oak tree. If you avoid the losers,
the winners will take care of themselves. A lot of
our conversation is avoiding bad outcomes and focusing on that
lower cohort of borrowers that you may be in trouble
(06:41):
given these higher rates.
Speaker 3 (06:43):
I love the idea, like this is sort of in
my mind. When I think of stock investing, it's like
you want to pick winners, and when I think of
credit investing, you want to avoid losers. I always sort
of think of it like cooking a steak, which is
just like you want to just nail it every time
in the perfect stake is just like, just avoid the
bad ones, just stay consistent. I don't know, maybe that's
(07:05):
a terrible analogy. I always think of stock credittak. Stocks's
pizza is like, you have the most extraordinary pizza in
the world. Credit is steak. You just want to not
missc mess it up, not mess it up, exactly right.
That's how I think of these things in my head.
So one of the things that's really surprised me, or
I think surprised a lot of people. We had this
really aggressive rate hiking cycle, and credit spreads have been
(07:28):
really narrow.
Speaker 5 (07:29):
Now.
Speaker 3 (07:29):
The obvious answer there, although it's a little question begging
I suppose, is like, yeah, well, because we didn't get
a recession. A lot of people expected a recession or
some sort of major downturn from the raid hikes. We
didn't get that, So that's maybe why asset valuations have
held up. Well, how would you Is there anything more
to it when you look at just how tight spreads
generally have remained over this cycle. What's your story that
(07:52):
you tell for that?
Speaker 5 (07:53):
It's a great question. I mean spreads have been tight.
I mean typically in high yield we see an average
spread range of three hundred to five hundred basis points.
Anything's higher than five hundred, no barrow really wants to
issue at anything lower than three hundred. You know, no
investor wants to buy it. And what I think we've
had to have conversations with our investors about is that
(08:16):
with yields so high, it's a different environment. You don't
need spreads to blow out and then compress to get
your total return when you can get a yield of
you know, seven percent or so. And so I think
you're starting to see a shift from being more tactical
buyer to a strategic buyer. And I think there's reasons
why that spread is lower in light of what you shared, Joe.
(08:38):
In the high old bond market, it's over fifty percent
double be today. It's the highest quality it's been in
ten years now. You have to contrast that with the
leverage loan market, where we have seen some degradation and quality,
and that is a market where we're focused on, you know,
the lower ten to fifteen percent of borrowers and looking
(08:58):
at the upcoming maturity schedule and wondering how some of
those are going to get financed. But generally, like the
market's okay, and so that lower spread feels more justified
to us.
Speaker 2 (09:08):
So you mentioned the rate cuts earlier and describe them
as potentially an expansionary period in credit. I guess I'm
wondering how much pent up demand is there in terms
of new issuance, because overall it feels like people have
termed a lot of stuff out. But I guess there
is that segment of struggling borrowers who perhaps for them
(09:31):
rate cuts will be really important and make all the difference.
Speaker 4 (09:35):
It's a really good question.
Speaker 5 (09:37):
I think when rates come down there is just more
availability of credit. And as you point out, there are
those barrows that have been struggling with higher rates. This
will provide some per relief to them, especially those that
have taken out floating rate debt. And if we look
at the maturity wall I alluded to this a little
bit earlier for loans over the next year, there's something
(09:59):
like forty billion of maturity is coming due. It's all
in the lowest rated credits, so it's split B triple
C and even you know for twenty twenty six, twenty
twenty seven, it's almost seventy percent. So it's this cohortive
companies that haven't been able to get refinancing and maybe
you know, lower rates will provide them some relief. They'll
(10:20):
be a little bit more availability of capital. Some of
them may not be able to be refinanced in traditional ways,
they may need more rescue financing or capital solutions. But
I do think it'll be positive for credit borrowers when you.
Speaker 3 (10:35):
Look at the types of entities that are struggling, fallen out,
or actually impacted by this rate segar are we talking?
Is it heavily in real estate? Is that the area
that would be most exposed or most feeling the pain
of higher rates? Are like, where do you see these
pockets that actually are facing some challenges in the financing environment.
Speaker 5 (10:55):
No, it's a great point because we do a lot
more than just corporate higal bonds leverage. Low real estate
I think has been ground zero for some of these challenges,
and a lower interest rate environment should create I think
a little more optimism about what's ahead for real estate
valuations and force I think some sales and some liquidity
(11:15):
in that market. And so we are starting to see
some positive outcomes in real estate as people get more
comfortable with the rate environment.
Speaker 2 (11:23):
So I'm always curious about tactical decisions when someone is
controlling like a very big fund that has a lot
of optionality embedded in it in terms of investments, Like
there are tons of different things you could invest in
as CopM of the diversified income fund. I mean, I
know it's all relative value, but say in a month
(11:45):
like August when there was a lot of volatility, but
despite that, credit spreads were kind of stable. They weren't
really blowing out during the big turmoil. How do you
judge the opportunities presented to you at a time of
like uncertainty.
Speaker 5 (12:01):
Like then, we get so excited when there's volatility in
the markets. It usually means there's some bargains. But as
you point out, I mean, credit spreads really didn't widen much,
and I think by the end of that volatile week
it even tightened or at least made back that movement,
So there wasn't much for us to do. On the
corporate credit side, we were starting to get excited about
(12:21):
convertible bonds, so it's an area that we invest in,
and for those that maybe are less familiar with convertible bonds,
I think the easiest way to explain them is it's
a way to get the safety of a bond with
some form of income, but you also get to participate
in some equity upside. We're not converting into equity. We'll
sell before that event happens, but it is nice to
(12:43):
have some correlation to equity markets at certain times.
Speaker 3 (12:47):
I don't think we've ever done an episode.
Speaker 4 (12:49):
We haven't actually convertible.
Speaker 3 (12:51):
Bond, so we could just talk about this, but can
you talk a little bit more about, like how big
is that market and who are the types of issuers
typically or is the typical situation in which an issuer
would go into the convert market.
Speaker 5 (13:05):
Well, if you're going to do a session on that,
you have to speak with our portfolio managers that only
focus on convertible.
Speaker 3 (13:10):
I'd love to set that up.
Speaker 5 (13:11):
So the convertible market is small, and it tends to
be focused more in technology, healthcare, certain sectors, and it
has more of a correlation, i'd say, to small cap
stocks as compared to the SMP, even though the SMP
does have a lot of tech exposure and so it
(13:33):
tends to follow that more. I mean, for us, our
approach there is really to find good credit that we
can underwrite and then participate in the equity.
Speaker 4 (13:42):
As I said, so just.
Speaker 3 (13:43):
To clarify from the issuer perspective, if it's small or
if it's tech, and so that implies that they're probably
fast growing. The appeal for them is what exactly There's
this pool of capital that they want to borrow. But
this sort of sweetener is that the end investor can
(14:04):
participate potentially in some of the actual growth of the company.
Speaker 4 (14:07):
Yeah, that's right.
Speaker 5 (14:09):
You don't have to give up outright equity. And then
also you can issue at a much lower rate than
prevailing rates in the market. So that can be helpful
for a company depending on where you are in a cycle.
But it just ends up being a much smaller, more
niche market, and you can't avoid the correlation to equities.
(14:30):
And we're credit investors, so we don't want equities to
influence too much the performance of our funds.
Speaker 4 (14:38):
Today, we're very.
Speaker 5 (14:39):
Under allocated to converts it's probably the lowest allocation that
we've had since twenty nineteen heading into COVID, just because
of the valuations and equities and not finding as many bargains.
Speaker 2 (14:52):
Oh wait, so you said you were getting interested in
convertibles going into the August selloff.
Speaker 4 (14:59):
But I guess you you changed your because of the volatility.
Speaker 5 (15:03):
Yeah, we felt that maybe we could go in at
a better entry point, see, because the valuations haven't made
a lot of sense for us, and we can get
better potential returns from credit than equities. It's been low,
but when you get some of these consecutive days in
the market and there's a sell off, you get excited
thinking converts are gonna be the first asset class to move.
(15:25):
And so we started looking though at which converts moved,
and they didn't really meet our criteria for wanting to
wander into equities, especially with this rate decision coming up,
an election coming up, a lot of risk out there.
Speaker 3 (15:37):
But the idea would be in a volatility event as
credit investors. If I mean that whole volatility event, it
least about fifteen minutes, really like it was so short,
but theoretically if it had lasted longer, the first opportunities
likely would have shown up in converted I.
Speaker 5 (15:52):
Think so, especially when spreads aren't moving totally.
Speaker 3 (15:55):
That makes sense. Can you talk a little bit about
from a portfolio standpoint? I mean it makes sense when
(16:15):
you say, okay, volatility is exciting if you're an active manager,
volatility presents opportunities. How do you position the portfolio such
that you have the cash or the liquidity to take
advantage of volatility? Because I joked on the day of
the big sell off as like, oh, I should sell
some stocks so I can buy the dip here. Like
I would have loved to take advantage of that, but
(16:36):
you know, I don't really like keep a lot of
like extra cash around. How do you think about that
from a portfolio standpoint, being invested but also being in
a position to take advantage of opportunities.
Speaker 4 (16:46):
And it's more of an art than a science.
Speaker 5 (16:48):
I mean, today cash is an ass that it's not
as delutive as it used to be to hold, so
you can at least get some decent yield. And we'll
invest our cash in investment gray kind of short duration
type paper, so we're getting an even better yield. And
we do like to have some of that in the
portfolio as a buffer to use for these.
Speaker 4 (17:09):
Periods of volatility.
Speaker 5 (17:10):
One thing that we did a year or so ago
as we looked at the portfolio and which were our
you know, less liquid assets outside of private credit, because
you really can't sell private credit a selloff. So we said,
leverage loans, while you can trade them quickly, they take
a while to settle, and so we have other options.
(17:31):
Maybe we should create some liquidity by taking some money
out of leverage loans. And what we did is we
basically took every dollar we took out of leverage loans,
we put fifty cents into cash and fifty cents into colos.
So it's a barbell strategy because colos are really levered instruments.
You're getting a higher yield, but they don't take time
to settle, and then the cash, you know, that's available
(17:54):
to us.
Speaker 4 (17:54):
So we created liquidity and we.
Speaker 5 (17:56):
Didn't really change the overall yield profile of the fund.
Speaker 2 (18:00):
You mentioned private credit. Just then, what has the growth
of the private credit market meant for the more syndicated stuff, so,
you know, leverage loans, publicly issued bonds, that sort of thing.
Speaker 5 (18:12):
I think Tricy, you said it so eloquently earlier on
borrow is have more options, right, they have different ways
to get financing, whether it's through the syndicated market working
with a private lender. I think for us it's provided
really attractive opportunities to step in when markets have been frozen.
(18:32):
So I look back maybe to the end of twenty
twenty two when banks were hung with what forty billion
on their balance sheets, and that was an opportunity to
step in and dictate terms and say, well, lend and
in scale, but we want covenants, we want protections.
Speaker 3 (18:48):
Well, sorry, explain that more. What were the assets that
were frozen or weren't moving, what types of assets were those,
and then what was this sort of what was your
package or what was your pitch to them?
Speaker 5 (19:02):
Yeah, so it was banks that had pre agreed to
syndicate loans, and because interest rates had moved so quickly,
those banks were going to take significant losses taking those
loans to market, and so those opportunities they needed private
lenders to step in to speak for those deals. And
(19:24):
so what we were able to do is we were
able to command better terms in the form of pricing,
so higher spreads got it, and the negotiate covenants that
you wouldn't see in the public markets. That's been the
big issue on loans. You've had no covenants or protections
in the levered loan market, whereas with private credit when
we're directly originating loans, especially on the non sponsor side,
(19:46):
we can actually protect ourselves in terms of structure and
get covenants in there that are going to protect us.
Speaker 2 (19:51):
This is one thing I always wondered. But in the
private market, when you're an entity like oak Tree, who
initiates the conversations. Is it the bank come to you
and say, hey, we have a hung loan we need
to get rid of it. Is it the company looking
for options? Do you approach potential borrowers? How does that work?
Speaker 5 (20:09):
It depends, But we do have a sourcing and origination
team that oak Tree that speaks for the entirety of
our firm. I think it's a competitive advantage for us
because they are facing off with companies with sponsors, with
the banks. It's like having a sophisticated capital markets team
within an alternative asset manager, and it allows us to
(20:30):
have conversations more from the point of what do you need,
what's your problem?
Speaker 4 (20:34):
What type of financing?
Speaker 5 (20:36):
And then they will come back to us at oak
Tree and say, this is what we need to do.
Where does this fit across the firm? Let's create something
that really is tailored to that entity. And so that's
kind of how we see a lot of different things.
We're also a first call in terms of these types
of opportunities given our roots and distressed debt, investing, special
(20:58):
situations and rescue finance.
Speaker 3 (21:01):
I mean, we've talked a lot on the show now
about the growth of private credit. How much has private
credit grown within oak Tree?
Speaker 4 (21:08):
It's grown a lot.
Speaker 5 (21:09):
When I joined the firm back in twenty fourteen, I
want to say, at that time, just the private credit
industry was maybe five hundred billion. It's grown to one
point seven trillion. I think today. The unique thing about
oak Tree is we've been doing private credit for a
long time. Back in two thousand, the firm launched a
(21:31):
mezzanine kind of middle market fund, and that's grown into
direct lending. It's really taken on all sorts of forms.
But I think we're still doing the same type of
lending that.
Speaker 4 (21:45):
We were historically.
Speaker 5 (21:47):
It's just now become much more popular and mainstream.
Speaker 2 (21:51):
So on that note, how competitive is that market at
the moment, Because I think back to you were talking
about covenants earlier. One of the driving forces behind the
rise of CoV light sort of posts two thousand and
eight was well, there was so much money chasing yield
that it was a race to the bottom, and if
(22:11):
one investor wanted protections built into their investment or their
loan that the company didn't want, then someone else would
step in and basically offer to do it on better
terms in the company's perspective. Do you feel that kind
of competitive pressure now in the private market.
Speaker 5 (22:28):
I think we still have some of that today and
we will going forward, just given how much demand there
is for private credit. But I do segment the market,
so I feel like that's most acute in the direct
lending LBO finance sponsor backed transactions, where you know, we
try and play, though it's a smaller opportunity set, it's
(22:50):
more episodic, is directly originating debt non sponsor, and there
you don't have the competition, and so you're able to
set terms and you're the sole lender or maybe one
of two lenders, and there's just a lot less competition
because when you manage a very large private credit fund,
you've got to put a lot of capital to work,
(23:11):
and there are just more LBO sponsor backed opportunities available.
So if you are able to be nimble or manage
private credit in a multi asset portfolio like I do,
where you don't have to constantly be deploying in private credit.
You have other tools in your toolkit. We can be
selective and try and overweight those non sponsor opportunities.
Speaker 3 (23:32):
So I've been talking about the credit markets from the
borrower perspective. You mentioned in the beginning that in the
current rate environment, or at least the recent rate environment,
credit has also had a really big yield component as
part of the value proposition. And with raised as high
as they are, credit spreads okay, maybe a little narrower,
(23:53):
but all in, investors are getting a decent amount of income.
How have you seen the demands of investors evolve? What
are people looking for in terms of an income product
or a credit product? And how has that changed over
the last few years with the you know, the you know,
the worst inflation in forty years and the aggressive rate
hikes as such, what have you seen on this sort
(24:15):
of like the investor.
Speaker 5 (24:16):
End, I think investors have wanted more diversification, exposure to
a mix of fixed and floating rate so that they
aren't so susceptible to what's happening in the interest rate regime.
Speaker 4 (24:30):
Of the FED.
Speaker 5 (24:31):
Like fixed rate ig and high old only portfolios got
pretty beaten up as rates were rising, and you saw
a lot of interest and more floating rate leverage, loan,
private credit products that could continue to offer higher income.
Speaker 4 (24:44):
But now where we are, they want.
Speaker 5 (24:46):
To toggle back, right because the fixed rate is really
what's going to benefit the most from a rate cut,
and so having portfolios set up that can tactically access
both of those opportunity sets, I think that's really what we're.
Speaker 4 (24:59):
Hearing a lot of demand for. Wait, so talk to
us a little bit more.
Speaker 2 (25:03):
You know, earlier we were discussing credit spreads and the
fact that they've remained fairly low, but as you say,
maybe because of yield, they look a little bit more
attractive in the higher rate environment. But what does like
a good entry point into credit actually look like right now?
Like what should investors be looking for if they want
to kind of flip the switch on higher exposure.
Speaker 5 (25:24):
Well, I think today in the high yield market, you
can get good income from a high quality bond. You're
looking probably around a seven percent yield, and that's attractive
for some. I mean I work with a lot of
institutions as well, pension plans, endowments. Oftentimes they're trying to
solve for seven percent, they no longer need to allocate
to equities to get that type of return. Has the
(25:47):
yield been higher, sure, I mean it was as high
as ten percent, you know, not so long ago, which
is more of an equity like return. If you think
about the SMP the last one hundred years, it's probably
given you around ten percent. I mean, if you're getting
ten percent, it feels somewhat like a free lunch to
go into credit, and so I'd say, like, that's an
entry point you don't want to miss. But today you're
(26:08):
still getting you know, seven percent, it's pretty good.
Speaker 2 (26:10):
That's the old joke Joe, where like if you liked
high yield at seven percent, you love it at ten.
Speaker 3 (26:17):
Except no one actually does. Yeah, okay, So it was
very logical. As rates were rising, suddenly interest in floating
rate debt goes up. Then the interest rates turned around,
and suddenly, oh, people want the fixed rate debt for
obvious reasons. You know, one thing I wander about, and
it comes up in many interviews. Does the memory though
(26:38):
of twenty twenty two persist? And do you see that
over the next decade, the fact that you can have
these very sudden, sharp spikes in inflation and therefore rates
do you see that leaving a fingerprint on investor profiles,
are on investor risk management for years to come, even
setting aside this cycle, that memory of that experience.
Speaker 4 (27:01):
I'm a little skeptical.
Speaker 5 (27:02):
I think many just have this low rate, zero interest
environment stuck in their heads and they think that we're
going back down there and we're staying there. And what
you raise is a concern of mine, like if inflation
rears its ugly head again and at the same time
the economy is slowing like stagflation, not something that many
(27:24):
investors for investing today have seen.
Speaker 3 (27:26):
Well, then that actually brings to mind another question, which
is that one of the extraordinary aspects I would say,
you know, starting in March twenty twenty two is through policy,
through fiscal policy and aggressive FED action. You know, we
knocked out the recession in like three months, those the
shortest recession ever, and we sort of proved through policy
(27:47):
that we can always fight recessions, that they don't really
have to happen, but we know they'll happen again. But
it also makes me wonder, and then we didn't have
a recession in twenty twenty two or twenty twenty three
when everyone expected it. And so I'm curious from the
other side, like are people anxious about recession or is
there a view that's settled in that, like we don't
have to have recessions and they could be kind of
(28:10):
a thing of the past.
Speaker 5 (28:11):
I mean, it feels like the latter in the market,
right the Fed just took this big bazooka and yeah,
really kind of shot the economy and got things going.
And they're also in a pretty good place right now
with rates so high to be able to aggressively cut
rates if something does happen.
Speaker 4 (28:29):
So I agree with you.
Speaker 5 (28:30):
I think a lot of people are thinking will we
ever have recessions again? Now At oak Tree, yes, we
think we will. You know, we're very much a believer
of cycles. So maybe one you know, theory that we
have is because the recession was so talked about, this
upcoming recession that CFOs got in front of it. And
(28:51):
you did see that right with the wave of refinancings
that occurred, and frankly, you know, COVID, the reopening was
pretty good for companies. Like higher inflation has hurt consumers,
but it didn't hurt companies who saw their revenues increase,
so they're in a better cash position kind of coming
into this period too.
Speaker 2 (29:11):
We talk a little bit more about that. I find
that interesting the idea that because everyone was talking about
potential recession, maybe a bunch of corporate treasurers decided to
term out their maturities and that's maybe why we didn't
have the big maturity wall disaster that everyone thought we would.
Speaker 5 (29:27):
Yeah, maybe I'm giving them too much credit. Right, Look,
I think another thing that happened was COVID, and you
could argue that that was a recession, a mini recession,
and maybe it's just like the something, it was something, right,
I mean, we did see default spike, and what's happened
there is some of the worst companies kind of fell
(29:48):
out of the index and that's where you get that
better quality, right that I.
Speaker 4 (29:52):
Was alluding to.
Speaker 5 (29:53):
And so maybe you just had this kind of cleaning
event that happened. And because the market is of higher
cour quality, market participants see that, and so they're not
as concerned about having as big of an issue going forward.
Speaker 3 (30:22):
Can you talk about this whenever I hear like my
credit colleagues and Tracy talk about like, oh, like high
yield that environment just fundamentally doesn't look like the high
yield environment of past or I hear people talk about
like fallen angels or all these different things that are
a little bit outside of my own comfort zone. What
is this sort of I guess the credit profile of
(30:44):
the market look like, how has it changed over the
last I don't know, five years, ten years, et cetera.
So when we talk about high old today versus highyield
five years ago or high yeld fifteen years ago, like,
how have these markets changed?
Speaker 5 (30:56):
Well, credit rating agencies will issue their ratings, and you know,
if they were right all the time, we wouldn't have
a job.
Speaker 4 (31:03):
We'd like to say that, but assume they are.
Speaker 5 (31:05):
And what you've seen is that these markets have tended
to skew to lower ratings because they are sub investment
grade credit and there's inherently more risk than investment grade.
But it's a higher quality market today because some of
those companies prior to COVID, you know, we're in the market,
(31:25):
and then during COVID they defaulted on their debt, and
so it's more of a technical thing. Right, the market
looks better because you got rid of some of the
worst companies from the indices. At the same time than that,
some of the investment grade rated companies fell into the
index or the fallen angels that you mentioned. So it's
changed the composition of what's available out there. And then
(31:48):
in terms of just you know, what kind of companies
look like today versus the past.
Speaker 4 (31:53):
Leverage has stayed like pretty steady.
Speaker 5 (31:55):
It's actually come down a little bit in high yield,
which is interesting. Even in price credit, you know, you're
looking at maybe five turns of leverage. It's not excessive,
and so the fundamentals are okay, I think for credit,
and then you kind of overlay that with an economy
where you're not seeing cracks in the labor market in
any significant way. Like, sure, there are things that we
(32:17):
are focused on an oak tree, like student debt, picking
up delinquencies in auto payments, other indicators that you know
show some stress, but like generally things feel.
Speaker 4 (32:29):
Okay, and the same for the borrowers.
Speaker 2 (32:32):
It is true, Joe. I don't know if you remember,
but there was a moment pre COVID and sort of
post COVID where everyone was worried about the triple B
bubble involves. Do you remember that there's the idea that like,
so triple B is the lowest rung of investment grade,
and it was like the fastest growing cohort of the
IG market, and so everyone was like, oh god, the
(32:55):
quality of the overall corporate BALLB market is deteriorating. Everything's
triple B now, bublah blah blah blah, and it's going
to burst one day. And instead what we've seen over
the past year or so is the triple B bubble
kind of burst. But because everyone got upgraded. Yeah, so
like no downgrade, it's now falling down into high old status,
but everything getting upgraded to speak to the quality point. Okay,
(33:19):
since we have you, Danielle, one thing I've been wondering about,
and I feel kind of bad because I've used this
term in previous conversations, but we've never really flushed out
what it actually means. Creditor on credit or violence. It's
a very popular talking point.
Speaker 3 (33:34):
But what do we mean exciting?
Speaker 2 (33:35):
Yeah, it does, right, it sounds active at least, what
do we mean when we're talking about that?
Speaker 5 (33:41):
You know, it's it's funny, it's nothing new, It's happened
for a long time. But I think the dollars at
play are a lot bigger given the growth of these markets.
And it's what we talked about earlier that a lot
of the deals that got done over the last few
years have no covenants in the leverage loan market. And
so what that does is it just there's holes in
(34:02):
these deals and it allows for sometimes nefarious activities.
Speaker 3 (34:07):
Explain that further covenance and holes for someone like myself
who is not doesn't have a concrete idea of what
this means, like, is what talk to us a little
bit about how that plays.
Speaker 4 (34:17):
Yeah.
Speaker 5 (34:17):
Sure, so ideally when we're structuring alone with a company,
we want to find ways to protect ourselves, especially if
they are going to miss an interest payment or default
on the entirety of their loan. We want to ensure
things like we're first lean and the capital structure, meaning
that we're going to get paid back first in a bankruptcy.
(34:37):
We may want to tie our loan to certain assets
that the company has so that those assets can be
used to pay the proceeds of the bankruptcy. And so
you put these covenants or terms into the bond indenture,
the loan document so that you're protecting yourselves. But because
there's been such competition to invest in these deals, and
(35:01):
there's been this low interest rate environment and just a
lot of capital, it's been harder to get these types
of protections into the documents.
Speaker 3 (35:10):
It sort of sounds like when everyone was buying homes
a few years ago and no one did the inspect
They like awave the inspections just because you just like
and that was like one of it. It's like, no,
if you want an inspection, someone's going to buy it
before you. It's like the same basic principle.
Speaker 5 (35:21):
Yeah. And so when it comes to lender on lender violence, then,
as you were saying, Tracy, these companies are struggling from
higher rates, right, they may not be able to make
their interest payments. And so what's happening is you have
certain creditors and sponsors looking at, well, how are we
going to remedy this situation. We need fresh capital for
this company to kick the can down the road, if
(35:43):
you will. And so what you're seeing is different techniques
applied taking advantage of there being no covenants. So a
classic example of this is stripping assets from a collateral package,
dropping them out.
Speaker 4 (35:58):
It's called a drop down.
Speaker 5 (36:00):
So you might see that they might go to a
new entity and unrestricted entity that can then take out debt.
That will just lessen the amount of assets that investors
can have to pay back their claims. You also have
the ability to have new capital come in so effectively
priming first lean investors. You go to bed thinking your
(36:22):
first lean, and then you wake up the next day
second lean surprise. That's challenging and oftentimes really the company
can work with the majority of creditors to do this
really quickly, and not all creditors may be involved, and
it can be really violent, I guess if you will,
which is why the term is used.
Speaker 2 (36:43):
So one of the things I've been thinking about recently.
We started this conversation talking about the credit cycle and
the idea of well, maybe we're at the start of
a new credit cycle or a new stage of the
current credit cycle. It does feel like the cycles have
kind of become a little bit muddled, right, I guess
as we were discussing, there are all these new options
(37:04):
for borrowers. So if they can't get a loan in
the syndicated market, maybe they talk to someone in the
private market, and so there's I guess additional pressure valves.
Does it feel to you like maybe the credit cycle
has changed in some either fundamental or permanent way.
Speaker 5 (37:22):
Here. Now, what you raise I think is important because
in some ways it may have extended the credit cycle
because there are different avenues for companies to access capital.
You know, well, I think it creates a lasting impact.
I think we'll have to wait and see, but probably
the answer is yes, especially as private credit grows and
(37:44):
morphs from more of an industry that was focused on
sponsor backed direct lending to areas like non sponsor directly
originated loans, which I had mentioned, and then other things
like asset back to finance. I think they'll just continue
to be an evolution of the market over time.
Speaker 3 (38:01):
I'm curious about industry sectors, and we've talked about it
a little bit. We talked about where companies issue preferreds.
We talked a little bit about the sensitivity of real
estate to the interest rate cycle. One of the other
big macro themes that we talk a lot about the
show is like this incredible boom into certain types of capex,
things like data centers, things like infrastructure, things like new energy.
(38:24):
All the different factories and plants that have come out
thanks to the Chips Act and the Inflation Reduction Act.
How do some of these big economy wide trends play
out in the credit space, and have there been new
areas of borrowing that you see due to things like
some of these secular trends in the nature of the economy.
Speaker 5 (38:43):
Yeah, you know, we have seen secular trends over time.
And most of the activity that was in M and
A and LBOs of the last however many years, was
in tech in particular.
Speaker 4 (38:55):
And now tech is.
Speaker 5 (38:56):
Such a large part of the leverage loan market. And
now today as you point out new areas of investment
AI chips, I think it's growing that area. But I mean,
the market has a beautiful way of adjusting itself, right,
Like we loved investing in data centers last year, but
then everyone else did too, and so the yields have
(39:16):
really compressed. So there is somewhat I think of a
resetting of return expectations and some of those hot sectors.
And then you really have to shift to say, wow,
so much of this was issued. Are these really quality
loans that were made? Is this going to be ground
zero for defaults? And then it becomes more of a problem,
(39:37):
right Like what's hot then becomes the area of concern.
Speaker 2 (39:41):
So one thing I was wondering about an event like
this future Proof. It bills itself as a wealth festival.
The predominant audience member seems to be rias. So I'm
curious when someone like you comes to an event like this,
what are you talking about with all the people here?
Are you like pitching those specific funds or like, what
(40:04):
are those client conversations or potential client conversations actually looking like.
Speaker 5 (40:08):
I mean, if you're an RIA, you have so much
to consider in terms of asset allocation outside of alternatives.
But even with alternatives, you've got VC, private equity, all
these different areas to consider. So I think a lot
of my conversations are around why credit is a compelling
investment opportunity today, getting those high yields and income. I
(40:31):
do think credit could potentially outperform equities, and you know,
having them think about it as a steady allocation in
their portfolios of their clients so that their clients can
do other things. I mean, why not have fixed income
credit be that steady core allocation that hopefully, you know,
(40:51):
they can then use to fund other areas. So a
lot of my conversations are educational it's also about talking
about the different types of private credit that's out there
and the different types of vehicles that they can access to.
So we've seen interval funds, BDC's, these types of funds
become more mainstream and really excited to just kind of
(41:13):
have those conversations about how individuals can access what institutions
have for so long.
Speaker 2 (41:19):
What type of questions do arias have about private debt, Like,
I'm curious to hear their concerns and how much they
overlap with the stuff you see in the headlines about
you know, private debt bubble or a creditor on creditor
or violence, which we kind of already discussed.
Speaker 5 (41:34):
So I think aria is the questions that we get
surprisingly relate more to the macro environment and less about
the fundamentals of credit. I think they're really wanting to
understand what rate cuts will do to private credit because
it will lower the yield, and the yield is really
important in private credit for them, and so we've had
(41:57):
some conversations around that. I think think less so the
conversation has been focused on the quality of private credit
and whether you know, a type of bubble is brewing
at this point, though, maybe the focus should kind of
turn there at some point soon. I do think that
active management in the space is so important, and you
are starting to see some products, you know now being
(42:20):
recently announced like ETFs that may be passive, and I
think we have to figure out, like what is that
going to mean? What does that look like? Those are
questions that our as should be asking.
Speaker 2 (42:31):
All right, daniel Paully, thank you so much for joining us.
That was really fun.
Speaker 3 (42:35):
That's fantastic. Thank you so much.
Speaker 2 (42:36):
Thank you so much, Joe, that was a good episode.
I felt to record after the conversation with dan Ives.
Speaker 3 (42:55):
Yeah, it was great.
Speaker 2 (42:56):
Dovetailed. So one of the things that is standing out
to me after all these discussions with bond market participants
on the West Coast is the yield versus spread. Yes, yeah,
so everyone's been complaint. Not everyone, but a lot of
people have been pointing out that spreads are still very,
very low and so it's difficult to find entry points
(43:16):
into credit. But on the other hand, as Danielle pointed out,
like at seven percent yields, that might be very attractive.
Speaker 3 (43:23):
I think a seven percent yield will double your portfolio
in about ten years, so it's not bad like you
just like if you could just like lock in that
seven percent yield.
Speaker 2 (43:30):
Just avoid messing up that credit sta Yeah.
Speaker 3 (43:33):
Just avoid over cooking the steak. Get all your money
in a seven percent yield, and then ten years from
now you've doubled your wealth. Like that's not bad.
Speaker 4 (43:40):
Yeah.
Speaker 2 (43:41):
The other thing that stood out to me was, you know,
she was talking about I guess quality trends within the
index itself, and I do think it's so funny how
much hand ringing there was about the triple B yeah,
bursting eventually and like causing this big wave of like
downgrades and defaults in the credit market. But instead of
the downgrades, it basically has ended or started to reverse
(44:04):
with upgrades. You know.
Speaker 3 (44:05):
I think one of the reasons my brain, like when
I first got interested in markets is through stocks. And
stocks are really nice because it's like there's one Microsoft,
there's one Google, you know, and then when you look
at credit and there's just like this like endless proliferation
of new terms and like interval funds. I don't know
what that is.
Speaker 2 (44:24):
What's it?
Speaker 3 (44:24):
Do you know what an interval fund is?
Speaker 5 (44:26):
I did.
Speaker 3 (44:26):
We got to learn what interval funds and business development
core just like all of these new things and preferreds
and stuff, and so you know, there's just this sort
of endless how do you mentioned in the beginning, just
like this endless buffet of credit products, and it's sort
of always interesting. And then the fact that like you
talk about like investment grade, but that does not mean
(44:46):
the same thing in twenty twenty two. Is it means
in twenty twenty one or twenty twenty five or twenty
nineteen or same with high yield? Just this endless buffet,
And then you understand why you sort of have these
entities like ratings agencies that can sort of segment at
risk in a sort of useful way, because it's just
so sprawling.
Speaker 2 (45:03):
Yeah, this is why I always like asking the process
questions of like how do options actually get in front
of someone like Danielle or dan Ivison? And then how
do you choose from? Like there must be dozens.
Speaker 3 (45:18):
If not hundreds, endless permutation.
Speaker 2 (45:20):
Like investment categories within credit like not talking about single
loans or investments or direct loans that sort of thing,
but just like the actual categories must be in the dozens.
Speaker 3 (45:31):
Let's do it, by the way, let's do a creditor
on creditor violence episode, like, let's just find one, like
maybe a specific incident in like dissecting, because I just
want to get that in a headline because I think
people would download it. But that also just sounds like
it's very It's like the thought that like you could
have like the first lean debt and then the next
morning somehow you don't, or that the idea that a
company could move assets that are sort of like a
(45:54):
collateral into some other vehicle and then the creditors can't
get access to them to liquidate them or pay the debt, Like,
let's talk about that more.
Speaker 2 (46:03):
I always think an episode about creditor on creditor violence
sounds almost like a PSA, like have you been hurt
by creditor on creditor violince?
Speaker 3 (46:11):
Well, let's do one, all right?
Speaker 2 (46:12):
Shall we leave it there?
Speaker 3 (46:13):
Let's leave it there.
Speaker 2 (46:14):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (46:20):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at, Carmen Arman, dash Ol
Bennett at Dashbot, and kil Brooks at Kelbrooks. Thank you
to our producer Moses. On more odd Laws content, go
to Bloomberg dot com slash odd lots where you have transcripts,
a blog and a newsletter and you can shout about
all of these topics with fellow listeners in our discord
(46:41):
discord dot gg slash odd Lots.
Speaker 2 (46:43):
And if you enjoy odd Lots, if you want us
to do that Creditor on Creditor Violence episode, then please
leave us a positive review on your favorite podcast platforms.
And remember, if you are a Bloomberg subscriber, you can
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you need to do is find the Bloomberg channel on
Apple Podcasts and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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