PineBridge Fears Credit Calamity as Demand Balloons

Swelling demand for limited supply of corporate bonds and loans could spell trouble for credit markets, according to PineBridge Investments. “The thing that gives me a lot of pause right now — and some concern — is the lack of net new supply versus the amount of demand out there,” said Jeremy Burton, the firm’s portfolio manager for US high yield and leveraged loans. “That leads to the risk that the market as a whole will make subpar credit decisions,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence senior credit analyst Jody Lurie, in the latest Credit Edge podcast. Burton and Lurie also discuss the state of the consumer, default rates, coercive liability management, as well as risks in the media, health care and software sectors.

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Episode Transcript

Speaker 1 (00:18):
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Jeremy Burton, portfolio
manager for US high yield and leverage loans at pine
Bridge Investments. How are you, Jeremy great?

Speaker 2 (00:31):
Great to be here today, James, thanks so much for
joining us.

Speaker 1 (00:33):
A very excited to have you on the show. We're
also delighted to welcome back co host Jody Lurie with
Bloomberg Intelligence.

Speaker 2 (00:38):
Hello, Jody, Hello James, how are you great?

Speaker 1 (00:41):
Thank you very much. So just to set the scene
of it here, US markets are rallying as rates come down,
the economy keeps chugging along, and investors look forward to
a new administration, which the bulls will think will be
very pro growth. Credit is on fire, and we've seen
a huge amount of borrowing by companies, with more to come.
In twenty twenty five. Private debt in particular has experienced
a meteoric rise. It's now a one point six trillion

(01:03):
dollar market, and it could well be worth tens of
trillions of dollars more when you add in all of
the asset based finance. Floating rate assets are in favor
as yields stay high and the mood is very risk
on but very tight bond spreads, tons of issuance and
rising fun flows. That doesn't mean that there's no problems
out there. Despite credit strategists and investors calling it a
golden age. The FED started to ease, but treasury yields

(01:26):
seems stuck above four percent, and the stated aims of
the next government all sound very inflationary, signaling a period
of higher for longer interest rates. That means elevated debt costs,
which will hurt borrowers across the board, especially the weak ones.
In the background, we have a lot of geoplogical risk,
which will only be amplified by the Trump trade wars. Plus,
the threat of recession hasn't gone away entirely, and a

(01:47):
downturn would really cause distress in credit markets. So, Jeremy,
where do we go from here? Our credit market's still
a good place to be in twenty twenty five, particularly
at the risky end.

Speaker 3 (01:57):
Sure and thanks for having me today, James.

Speaker 2 (02:00):
I think when we look at the credit markets, I think,
you know, for a lot of people who are not
involved in the credit markets, the first thing that comes
to mind is that valuations look full, right, Spreads are
fairly tight. We're now almost five years out of the pandemic.
You know, particularly in leverage finance, we see high yield
spreads that haven't been hidden sometime in many cases, you know,

(02:20):
prior to the Great Financial Crisis. I think, on the
other hand, there's reasons for that, and I also don't
think there's necessarily a massive catalyst for driving spreads wider
over the next twelve months. When you think about fundamentals,
like I said, we're approaching the five year anniversary the pandemic.
You know, the economic impact of the pandemic, both on
the economy as a whole and on individual sectors and credits,

(02:43):
it was very complex, and there was really this massive
butterfly effect we saw where we saw so many companies
were down in twenty twenty, so many companies were way
up in twenty twenty one on the results because of
really what in retrospect was an over correction on the
part of the government and over stimulus. And then since
then we've seen the I would call it almost seismic
ways over time in decreasing magnitude hit a lot of

(03:05):
industries and a lot of sectors. There's still some situations
where industries are seeing that. It's obviously been well reported.
Almost anything commercial commercial real estate related, particularly on office
is still seeing problems. But I think in our world,
in the leverage finance world, we have seen the magnitude
of that come down materially. You know, twenty twenty four
saw really for I would say ninety percent of the
issuer base in our world good enough results from a

(03:28):
fundamental perspective, some better than others, we haven't. What we
haven't seen in a few quarters is I always say,
new themes of the fourth degree butterfly impact from the
pandemic that we were still seeing up until recently. And
our outlook for twenty twenty five is really continued economic strength.
Everyone debated forever when was the recession coming. It just

(03:50):
didn't come. It really doesn't seem like it's coming in
the next twelve months either.

Speaker 4 (03:53):
So Jeremy, you sound relatively optimistic, at least when it
comes to leverage finance, not so much on commercial real estate.

Speaker 2 (04:00):
Well, I'm not an expert on commercial real estate, just
to be clear, but that's clearly one sector that's still
seeing an impact, of.

Speaker 4 (04:07):
Course, and so you know, I'm a little bit concerned
because we recently just had our credit outlook event, right,
massive event. Lots of people on the street who, similar
to you, are pontificating about twenty twenty five. And I
think what was so interesting and uncomfortable for me as
a credit analyst was how optimistic everyone was. Right when

(04:30):
you hear that there's a general consensus on some sort
of take, you sort of pause and say, wait a minute,
where where could we go wrong? And why is everybody
so hyped up? How do you feel about that? I mean,
what are you sort of are you generally optimistic or
would you say that there are some pockets where you're
a little bit more concerned than others?

Speaker 3 (04:51):
Yeah?

Speaker 2 (04:51):
Sure, And obviously group think is always a risk, right
was it was in twenty twenty two and twenty twenty three.
In retrospect, it was probably a risk on the other side, right,
I mean the consensus was too negative. I take the
point that it could be too positive now. I think
I would differentiate a little bit between high yield and
loans at this point, you know, they are there are
very different different issuer bases right. And and you know

(05:14):
we always used to think about talk about high yield
and loans, how they are these related markets.

Speaker 3 (05:18):
You know, high yield is actually.

Speaker 2 (05:19):
Kind of in between loans on the one hand and
IG on the other hand, right, and it pivots between
an unsecured version of loans, which it was for much
of its history with similar issuers, or as it really
more is kind of now just a junkier version of IG.
You know, a lot of public corps right, fewer sponsor
owned credits. I think on the high yield side, what
we've seen over the past few years, given the rise

(05:42):
in rates, you know, there's been a lot of themes
out there. I think the number one thing we've seen
on the high yeld issuer base is companies have just
been a lot less opportunistic than they have been historically.
Twenty twenty one, companies were highly opportunistic. Why because you
could borrow at all time low yields right, due to
low all time lower rate and all time low spreads.
You know, since then, companies have just gotten much more conservative,

(06:05):
I think. I think on the high yeld side, I
think part of his rates, I think part of it
is just the general downturn m and a activity we've
seen during the Biden administration. The loan market's obviously been
a little bit different. It's a different issuer base. By definition,
the overwhelming majority of issuers in the loan market are opportunistic.
Why because they're leverage buyouts, right Those are by definition opportunistic.

(06:26):
I also think in the loan market. I mean, look,
we've we've certainly seen issuance over this year. We've not
seen a lot of true net new issuance. We've seen
a lot of refinancings, a lot of repricings. There's been
some re leveragings, not as many as I would have
thought based on where spreads are at this point. And
so I do take comfort in some of that, honestly,

(06:46):
from a credit perspective. The thing that gives me a
lot of pause right now and some concern is the
lack of net new supply versus the abount of demand
out there. And we're really seeing that in the loan market.
You know, I came into work yesterday and I saw
twenty emails about loan primary launches, and probably eighteen of
them were just repricings. Net new borrowing activity in the

(07:08):
loan market, it's still really low. I see estimates out
there that it's going to pick up next year.

Speaker 3 (07:14):
Let's see.

Speaker 2 (07:15):
I saw there were a lot of estimates the beginning
of twenty twenty four is going to pick up as well,
and it just really didn't. And there's a lot of
demand out there, and that's really what's driving spreads where
they are, I think, more than anything else.

Speaker 4 (07:27):
So you talk about spreads, but I think there's a
lot of conversation and I think you guys wrote about
this as well, about spread versus absolute yield, right, and
what we're thinking there in terms of where there's potential opportunity.

Speaker 2 (07:44):
Yeah, sure, And so in high yield, I think, particularly
the beginning of twenty twenty four, there was a lot
of opportunity on this front where you saw things that
were trading optically at low spreads and optically at low yields,
but at prices below par, and there was a pull
to par trade that went on as twenty twenty six
twenty twenty seven maturities got refinanced. We're still seeing some

(08:06):
of that that activity. You know, we keep seeing twenty
twenty seven and twenty twenty eight bonds in the high
yelled market, not necessarily with high coupons. I mean we're
not talking with three handle coupons, but still with with
with five and six handle coupons getting refinanced, and you
know that is a total return opportunity in excess of
what the spread and yield is. But look clearly the

(08:26):
way that average bond price in the high yeld market
it has come up. Part of that is also we've
actually seen you know, a fair amount of issuance this year,
a lot of it's been refinancing, not true net new
new issuance. That's also you know, inorganically pulled the average
price up. Now on the loan side, it's obviously tougher
at this point. You know, there's a big chunk of
the market that is you know, effectively at negative spread

(08:47):
duration at this point because it gets repriced, right, you know,
having something bid at par and a half in the
loan market, it's not really good in general, that's the
world we're in though right now.

Speaker 1 (08:57):
The supply, demand and balance point that you make though
Germany is very important. We've been following that for a
long time that you know, there is just a lot
of demand for mostly just looking at the yield for
all fixed income. And on the other side, there's not
much net new supply across the board. Most of the
new deals have been for refinancing, so the net is

(09:17):
getting squeezed. The demand is going up, and there's being
you know, also this pressure to fund privately for some
borrowers as well. So supply is disappearing, demand is going up.
Why does that give you pause?

Speaker 2 (09:27):
Though?

Speaker 1 (09:28):
Can you just break it down for us? Is it
resulting in miss priced risk?

Speaker 3 (09:33):
Right? I don't think it is yet.

Speaker 2 (09:34):
The risk is that it will, right, any time you
get in a situation and the credit markets where there's
not enough supply and too much demand. You know, in general,
people are not in the business of sending money back
to their clients, right, and so eventually the market as
a whole managers want to remain invested. For colos, it's
really a necessity, right, you have to remain invested, and

(09:56):
that leads to the risk that the market as a
whole will make subpar credit decisions. I think if you
look at twenty twenty one, you know it's all time
low yields. I think when you look at the amount
of lemy, you know liability management activity you've seen in
the loan market over the past two years. They're not
all twenty twenty one vintages. A lot of them are

(10:16):
twenty twenty one vintages on deals that were, you know,
underwritten at a time where yields were very low and
the economy was in a lot of flux because of
the pandemic. And clearly there's a lot of these situations
that leverage has gone up and cash flow is negative
because of where rates have gone. Right, it's both sides
of the story. It's companies have had earnings deterioration and
rates have gone up for some of those. So that's

(10:37):
my concern. You know, I think about you always in
the credit market. To me, you always think about vintages,
whether it's in the loan market or the high yeld market,
and you think about the credit decisions the market is
making in those years. I am a little concerned that
we are setting ourselves up for one of those. That's
at the end of the day from the manager's perspective,
where it's important not to take excess risk in that
sort of market. It's always tough. You want to remain

(11:00):
invested at the end of the day. You're always you're
oft in loved with the decision. Do you want to
under yield the market or do you want to over
risk the market? I think time will Time has told
you and experience has told you in these sorts when
these years come, you want to be under risk. You
don't want to be over yield. It will cost you
on the other side.

Speaker 1 (11:18):
Not thing we've learned over the is that you know,
is all relative. And when we look at the spreads,
not on an outright basis, but between the different ratings buckets,
they are very compressed. You know, look at the gap
between single B and triple C. It just gets tighter
and tied to which to me, you know, I'm not
a portfolio manager, so you can correct me if I'm wrong.
That seems to be mispriced risk. It just gets you know,

(11:38):
I mean, it cannot be the same spread on a
single beevers the triple C bond ken it well.

Speaker 2 (11:44):
It depends on the details of the individual credit. Of course,
the devil is always in the details and credit. There
are triple C situations that are better than single these situations.

Speaker 3 (11:53):
When you think about what is triple C and what's
in triple C, it's a mix and.

Speaker 2 (11:58):
Particularly in high yield, because high yield you've got companies
that are intentionally triple C and companies that are unintentionally
trible C. And the loan market is different because the
broadly syndicated loan market, it really is, for the most part,
it is a bus and better market. And this is
obviously one of the things that's created part of the
direct lending private credit opportunity, right, because the broadly syndicated

(12:19):
loan market doesn't really deal well with stuff that's triple
C rated.

Speaker 3 (12:22):
Hyld's little bit different.

Speaker 2 (12:23):
Right, So you have companies that are actually performing well
that are triple C rated and may or may not
have a chance to get out of triple C. They're
trible C because probably it was an LBO, doesn't have
to be an LBO, but there was some sort of opportunity.
You also have companies, on the other hand, where there's
been some sort of earning deterioration, and we see we've
seen those two different types of credits bucket very distinctly

(12:44):
over time. Right.

Speaker 3 (12:45):
You have the.

Speaker 2 (12:48):
Issuers that have gone downhill organically in many cases because
they have business models that have some sort of secular
challenge to them or some sort of question about their
long term viability versus unsecured at in credits that are
just very highly leveraged, because they're intentionally highly leveraged.

Speaker 1 (13:04):
So if you're not worried about mispriced risks right now,
what would make you worry? When do you think it
might happen? You know, what are the signs you're looking
for that it is getting mispriced?

Speaker 2 (13:14):
Yeah, I think it's when we're going to get an
economic slowdown, right and and that's when I'm thinking about
what's going to get underwritten next year. I do hope
there's a pickup in net new issues. I think it
would be good for our market. I think we're in
a tough situation right now, particularly on the LBO side,
where yields are high on the one hand, and equity
valuations are also high. And I get that, and I

(13:36):
get the math is just tough right now for a
lot of LBOs. You know, look, things will, things should
go back into balance over time. I'm just hoping that
the thing that it takes to get us back into
balance is not is not bad.

Speaker 3 (13:49):
Credit underwriting decisions as a whole.

Speaker 2 (13:51):
On the market, and when we see pricings now, sometimes
the choice right, it's for an issuer. You know, repricing
isn't necessarily the worst thing that can happen. Releveraging is
the worst thing that can happen, right, because an issuer
can say, hey, I'm paying sover plus three fifty, I
want to reprice to three hundred. The other alternative in
many of those cases is to keep it at three
fifty and just take a dividend, right, And these are

(14:13):
the choices that issuers.

Speaker 3 (14:15):
Make right now.

Speaker 2 (14:16):
I mean, honestly, it's not the end of the world.
We're still seeing mainly repricings. There's actually been some deals
that it's a combo dividend plus repricing. That's like the
worst case scenario, I guess. But these are the decisions
that market participants are going to have to make.

Speaker 4 (14:30):
So Jeremy to talk a little bit about how you
mentioned how companies are acting more conservatively post pandemic in
terms of their balance sheet at large, but then you
also talk about how companies are repricing plus dividend. Right,
And I'm thinking about in the context of next year,
with so much uncertainty about the new administration, so much

(14:53):
uncerned about what's going on, how do you feel comfortable,
you know, even looking at a tripleC company and if
it is because of LBO situations, right, even if there's
a reason behind their tripleC, how do you feel comfortable
with it with so much macroeconomic uncertainty? And how do
you feel that they're still going to keep to that
conservative balance sheet?

Speaker 3 (15:13):
Yeah?

Speaker 2 (15:13):
So when I say companies are behaving more conservatively, and
I should have been a little bit more clear, I
really mean regular way corporate public companies right that universe.
You know, within LBO world, there's a wide range of
situations that have been more conservative versus situations that have
been less conservative. I think in the corporate world, you know,
the one thing that's happened recently is clearly the election

(15:35):
that clearly could make a difference. You know, M and
A activity has been way down. I don't think it's
just because of you know, I hear sometimes people talk about, oh,
this deal, it could have happened in twenty twenty three,
twenty twenty four, you know they weren't going to block that.
But that's not all it's about, right, I think a
lot of a lot of the deal activity that didn't
happen over the past few years, was not just concerned
that a deal was going to get blocked, but it

(15:56):
was also well, it was going to be a nine
month review versus a four month review. Right, And there's
a cost to that. There's a dollar cost in terms
of advisors and all sorts of stuff like that. But
there's also an opportunity costs.

Speaker 3 (16:07):
Right, you're kind of.

Speaker 2 (16:07):
On hold, just waiting to make sure the deal gets closed.
There's opportunity costs in that there's been increased remedy costs
and deals that have gotten approved. I think we certainly
could see in corporate world, you know, in public company
corporate world, a pickup in definanced in an a activity,
particularly given where yields are back down a little bit
now in IG and high yield. So when I say

(16:29):
more conservative, that's really the market I was talking about.
You know, on the on the sponsor side, it's just
not in their bones to be conservative, let's be honest.
You know, when you do get some of those situations,
it usually involves an IPO exit for the sponsor. That's
really the situation where they all of a sudden see
a value in being more conservative because they need a
balance sheet that is sellable as an IPO, right, and

(16:50):
seven times leverage is not sellable.

Speaker 3 (16:52):
As an IPO. You know, you want to be four
four and a half.

Speaker 2 (16:55):
Or something like that.

Speaker 4 (16:56):
I'm hearing a lot of discussion of supply demand and
melons from you. Right. So you have lack of supply
of lbo's, lack of supply of definanced MNA on the
on the public side, then you also have a lack
of new issues supply, right. And so we've seen in

(17:17):
this I mean since the Great Financial Crisis, we've seen
just massive amounts of covenant light issuance. When you're looking
at individual deals and you're looking at individual situation, what's
the type of stuff that gives you pause? What's the
type of stuff that that sort of turns your stomach
when there's so little out there to protect you as

(17:37):
a lender?

Speaker 3 (17:38):
Right, I think.

Speaker 2 (17:39):
Across all the corporate credit markets or all the public
corporate credit markets, whether it's IG you know, high yield
broadly syndicate loans, right, there's been a general deterioration in
documentation that's been going on for the entire life of
the market.

Speaker 3 (17:53):
Right that this isn't.

Speaker 2 (17:54):
New And even in the broadly syndicate loan space, which
is probably you know, the last of the markets to
really get bad documentation. That's been going on for a while.
I think in the loan market in particular, the big
change it's occurred in the past few years is not
that the documentation has gotten worse, but the sort of
acceptable standards of what flies and what doesn't fly, and

(18:15):
what's okay for a sponsor to do that that will
just be forgotten six months later on the next deal.
I think that's changed a lot. I don't think it
comes necessarily from a bad place. I get LPs and
private equity funds. They're interested in having sponsors make the
best economic outcome for them, you know, and for them

(18:36):
in that fun not necessarily I think historically there's been
a concern on the part of some sponsor as well,
do I want to do this or that, because people
are going to remember down the road. Now if you're
an LPN of particular fund, you don't necessarily care about that.
You have a different set of interests. And I think
that's actually what's changed more in the past couple of years.
It's really the definition of what's become acceptable and what's

(18:56):
fair game and what's not fair game. I think when
we look at individual deals, you know, look at the
end of the day, we always we always talk about
this as a firm, and it is in group. You know,
documentation is only going to help you so much the
end of the day. Your number one protection is buying
good credits. And that's not always totally within your control
because things can happen that are unexpected, right, But at
the end of the day, choosing good credits, regardless of

(19:18):
whether the documentation is good or bad, that's your number
one defense. Right over a long period of time. I
think sometimes the ones that are the most just I
would I don't want to say disgusting, because this isn't
a moral thing to me. It certainly is some participants
in our market. The way they talk about it, I
think it's where people have identified certain certain risk situations,
like there's going to be an asset sale, the sponsor

(19:40):
has telegraphed it, and they're not willing to put any
sort of protections against that asset sale in the documents,
and it still clears the market, right, And I think
those are the ones sometimes when we talk about these
with our analysts as a team, these are the ones
we were going to we're going to be most focused on.
You can obviously never totally protect yourself against the unknown.
But when the sponsor in the company you're telling you

(20:02):
they are likely to do this, and that the document
has baked in that that is going to result in
an increase in leverage that's not being priced in in
the spread, that's probably not the That's probably the one
to pass on, right, That would be my take on it.

Speaker 1 (20:15):
And as you said earlier, lmes are on the rise
liability management exchanges, which you know, for our listeners who
haven't been following it closely, you know, basically there there
is some kind of exchange that is coercive and you're
losing some money on it, and you're waking up to
the fat. Some investors are waking up the fat that
maybe they should have read the documents more carefully because
of just the sort of issue you're you're mentioning. But

(20:35):
so as an investor, I mean, clearly, because of the
demand supply, you don't have a lot of leverage, you
don't have a lot of a stick against against these things.
I mean, how do you protect yourself? How do you
you know, what do you do in these situations, you
can see these precedents being set on the LME side.
There's going to be more of them. As one of
our guests recently said, this is just capitalism at work.

Speaker 2 (20:57):
Yes, I mean, this is the ultimate free market, you know,
I heard I heard a recent comment by someone who's
a restructuring lawyer in Europe saying, you know, the US.
You know, people in the US have been pushing for
this sort of stuff for years, just like freedom to
do what you're allowed to do Europe. You know, in
many countries in Europe used to stereotypically have very weak
creditor protections. It's not the opposite, right, you know, France

(21:19):
is the bulwark of credit or protection now, and it's
it's sort of a joke because you know, the Americans
were always saying, oh, why can't you do this stuff
over here? We'll look at where you are now in
the US. Right, That's sort of the situation we're in.
I think there's three general categories of things you can do.
One is just good credit work.

Speaker 3 (21:37):
To begin with.

Speaker 2 (21:38):
Most of the lemy that we see going on, the
starting goal of the sponsor was not to go through lemy.
These are all situations where something has not gone according
to plan. It is generally a combination of earnings being
down by some degree combined with interest rates have gone up, right,
And so.

Speaker 3 (21:57):
There's some stuff where it's like there's.

Speaker 2 (21:58):
A maturity coming up in twenty twenty five, twenty twenty six,
that you got to do something, you got to restructure
it or or or in court or out of court,
right because there's a maturity. There's a whole lot of
other situations. A lot of them are twenty twenty one
vintage deals that have maturities in twenty twenty eight. You
have time on the maturity, but unlike in some prior cycles,
particularly after the financial crisis, you also have an interest

(22:20):
rate problem and a free cash flow problem now, and
so sponsors are left with the choice do I put
in more money or do I try to get something
out of creditors. I don't find it shocking that they're
taking the latter one, And particularly in the case of
many of these situations, I think it's one thing when
you think about something that goes into some sort of
stress because it's a cyclical downturn, that is much easier

(22:41):
to me if I'm an equity owner to say Hey,
I want to put more money into this because I
think this is going to turn and I want to
see the other side of it. A lot of the
stress we're seeing right now, and a lot of these
ELMI names, they're not in cyclical sectors, you know, they're
in healthcare, they're in software, right and these are some
situations that maybe we're just poorly underwritten by both the
sponsor and the credit markets. Those are tougher situations. I

(23:03):
get it for anyone to put more money in in
a subordinate point in the capital structure. So the first
thing you can do is basic credit work. The second thing,
and I think we've definitely seen it this year, is
the number of managers, particularly on more of the real
money side and the COLO side, that are far more
active in these situations early versus later. That's increased dramatically.

(23:25):
Everyone wants to be an initial party. If there's a group,
everyone wants to get in touch with whoever the law
firm is. There's some very repeat law firms on a
lot of these deals. Everyone wants to make sure that
they're more active than they used to be. Whereas it
used to be there was a very clear delineation between
I would say more active hedge fund style investors and
sort of the rest of the real money community, which

(23:45):
is more passive. That's definitely changed, And those are the
main things you can do the documentation. I think you
need to assume that most deals in our market, unless
it was underwritten as a stressed or some sort of
rescue financing, there's a loophole. And if one loopool got
closed closed, someone's going to find another loophole at the

(24:05):
end of the day.

Speaker 1 (24:06):
But everyone comes on the show and says that they
want to do the right deals. You know, they want
to do the good deals, not the bad deals. So everyone,
you know, and as we've discussed, you know there's too
much demand for limited supply show me. There are going
to be some mistakes.

Speaker 2 (24:18):
Yes, of course, and we've seen that that you know.
I think one of the most most interesting things about
the past year has been you know, if you look
at the default rates, and when I say default rate,
I'm including distress restructurings because at this point I think
you kind of have to. It's an overwhelming majority of workouts.
There's a clear difference between the highield market and the
loan market. Right now, the loan market the default rate

(24:38):
including l ME, has continued to increase over the over
the course of the past year, really driven by a
lot of these twenty twenty one vintage deals. High yield
hasn't had that to the same degree. There's been some
some large restructurings in the high yield market, you know,
not exclusively in media telecom, but a lot in media telecom,
but we've continued to see that in the loan market.
I don't you know, I don't think that the default

(24:59):
rate is going to at three and a half or
three and three quarters in the loan market next year.
But I don't think it's going down to one and
a quarter or wherever the high yeld market is right now.
I still think we'll see a gap between the two markets.

Speaker 1 (25:10):
And recovery is also dropping, you know, we just saw
from Fitch saying that they're below forty on average, forty
percent on average this year compared to more than fifty
last year. Do recoveries keep going down?

Speaker 2 (25:20):
Well, I think recovery is always a tough thing to
look at, right because we always think about recovery in
the traditional context of when something goes through a chapter,
chapter eleven, right, and there's just a resetting of the
capital structure. Many of these L and ME transactions, particularly
the ones where there is no maturity coming up, they
are that's they're not traditional restructurings. They are almost like
a restructuring one point oh and there's probably going to

(25:41):
be in many of these cases a two point oh
down the road. So oftentimes you look at the recovery
if you want to define it as you know, where
the old loan was trading before the restructuring occurred. Many
of those are not at bad levels. Many of them
are in the sixties and seventies, which we always think
about in the past is the quote unquote standard average
recovery for first line loans. But in many of these situations,

(26:03):
nothing's been fixed. It's caan has been kicked down the
road for a few years. You know you're going to
get some pick interest, but still things need to recover
in order for there not to be another restructuring. So
I always it's always a tough metric to look at.
I see the charts of how recoveries have changed over time.
It's always very heavily dependent on what's the cohort of
things that are actually defaulting right at that point in

(26:26):
time that can change pretty materially over time, and clearly
a lot of these Lemy transactions we're pulling forward restructurings
that in prior market cycles would have occurred in twenty
six and twenty seven.

Speaker 4 (26:35):
Okay, so I'm going to switch gears a little bit. Jeremy.
You mentioned healthcare and software companies, and I know that
your team has written a bunch about tariffs and what
the implications are for different sectors within credit, and of
course you know Big tech is certainly has a target
on his back healthcare as well. What sectors are you

(27:00):
focused on for the positive which ones for the negative?

Speaker 2 (27:04):
Yeah, look, leverage, finance. It's always a mix between credit
selection and sector allocation. You know, over over a full cycle,
credit selection dominates. That's just at the end of the day.
There's a handful of sectors where there's real themes, like
like energy in some parts in the cycle, like consumers.
Certainly during the pandemic, the sectors are talking all the

(27:25):
leisure related sectors were highly topical for correlated reasons. That's
not always been the case in the past, where when
there's a slowdown, I think when you think about when
I said talked about loans earlier. I mentioned software and healthcare.
It's not like there's anything inherently wrong with those sectors.
They're the largest sectors in the loan market, so almost
by definition, they're going to make up a good chunk

(27:46):
of the problem in the law market. You know, they're
big sectors in the lower market because they're low capex
businesses right there, and they're theoretically at least, you know,
highly recurring revenue types of businesses. When I think about
sectors from here, we know that we're more positive on
or less positive on. There's not a lot that jump

(28:06):
out big time.

Speaker 3 (28:08):
You know.

Speaker 2 (28:08):
I think energy has clearly had a great run in
high yield over the past few years. I think we
still like energy, but it's it's it's getting tougher and
tougher to see a very strong outperformance story at this point.
And so that's the type of sector where we're you know,
we've been making some moves to go from I would
say call it an overweight to more of a market
weight position. It's and it's not negative necessarily on the credit.

(28:30):
It's just pricing is tight, right, and it's a sector
where that's a sector where there's been a massive amount
of arising star activity over the past few years. And
so even as you think about how that sector changed
in terms of composition and really changed the whole the
whole high yield index, you know, starting in twenty twenty,
when you had that all that fall and angel activity,

(28:50):
you know, all that's gone now, right, and so you're
you're what you're left with is good companies, but more
high heeld companies, right than companies that are more traditional
ig stories.

Speaker 3 (29:00):
Look. On the consumer side, yes, you're right, it's been
very gung.

Speaker 2 (29:04):
Ho, Hurrah, hurrah. For the most part, it's been an
incredible run since the since the pandemic. I echo, I'm
a former consumer analyst myself. I covered gaming, lodging, and leisure.
It was quite a ride over the course of are
the same, Yeah, it was. It was quite a ride
over the course of the pandemic and then the years after.
You know, the cruise names went from issuing a lot

(29:25):
of paper in twenty twenty because they needed cash, to
trading tight in twenty twenty one, and then going back
to stress levels in twenty twenty two to now at
the point where you know, it's all trading like it's
almost ig right, what a ride? You know, I think
there's you know, I don't have an obvious reason why
that's not going to continue. The consumer still seems pretty strong,

(29:47):
and I do believe in the long term shift from
goods to experiences. I don't think that's going away. I
think that's a secular shift that's gone on, and I
don't I don't really see any reason why that's not
going to continue.

Speaker 4 (29:59):
So let's go in to that a little bit more, Jeremy,
because we recently did our most recent iteration of US travel.
We do a survey every half year, and our results
came out a little while ago. We saw that the
average vacationer is planning on spending more in twenty five
over twenty four, and that amount is, or the percentage

(30:21):
that said that is greater than what we saw last
year going into twenty four. So more people are planning
on spending more next year versus we're planning on spending
more going into this year. And that's encouraging for me.
But also then I sort of wonder, okay, where are
the pockets of trouble within consumer, And of course regional

(30:42):
gaming is constantly talked about. Then you hear the narrative
coming from companies and they say, well, it's actually proof
that regional gaming is actually defensive during recessions. And I
think they based it off of the most recent recession,
right or the Great Financial Crisis, not necessarily over the
life of one hundred years of recessions. So I mean,

(31:07):
I guess my question for you, Jeremy is, as you're
thinking about it, you know, you don't want to just
say leisure as a whole. You don't want to say
consumer goods as a whole, because there are pockets of
positive pockets negative. Are you sort of putting on your
prior consumer hat and sort of picking and choosing, or
are you really sticking to your current hat of Okay,

(31:29):
I'm going to look at it on a credit by
credit basis. I'm not necessarily going to pull in my
prior knowledge and really kind of go gung ho in
what I do now.

Speaker 2 (31:39):
I think you have to stick at it from a
credit by credit basis. And you know, if you think
about the cruisers in particular, certain the large cruisers have
not always been totally correlated by on how they've traded
over the past few years, They've been pretty correlated. There
are certainly some smaller operators in that space that have
not traded in the same way, and smaller business models
that have for one reason or another, you know, had

(32:01):
trouble coming back, and there are some a handful of
them that have gone through restructurings and maybe need to
go through another restructuring, and there's some real questions about
the viability.

Speaker 3 (32:12):
Of their businesses.

Speaker 2 (32:13):
To me, I always come back to the end of
the day, I think I think in the high yield
market and in the loan market, I think the sector
themes work better on the larger companies. I think on
the smaller companies that are more of the challengers and
the laggards and sectors and not necessarily the global leaders.
You know, we don't have a lot of sectors where
we have global leaders in our market, but cruising and
regional gaming we do, right, And I think it's easier

(32:37):
to take those sector themes on some of those companies
versus you know, when you're looking at a you know,
fifty million dollar evendal leisure company or a single property,
or you know a regional gaming company that has three
to five properties or something like that, all of the
which are thirty years old or something like that.

Speaker 3 (32:56):
You need to differentiate there. Well.

Speaker 2 (32:59):
I always think, I always think in a downturn that
you know, everyone gets hurt in a downturn, but the
companies that had a pre existing challenge or have not
have not invested well in their businesses over time, or
suffer or facing some sort of technological change, right, they're
gonna get hit worse. And if you think about to
the crisis, you can think about, let's say the media industry, Right,

(33:21):
the entire industry got hit.

Speaker 3 (33:23):
Everything was print related.

Speaker 2 (33:24):
Basically, all the trends that you had been seeing negative
on print advertising accelerated rapidly during the Great Financial Crisis.
The percentage of US advertising was in print just got decimated, right,
I would think, you know, if you want to compare
that to something like regional gaming, you know, I think
there are aspects of regional gaming that are probably somewhat

(33:46):
defensive in a downturn, particularly as we've seen the growth.
And I would call it more luxury type leisure activities
amongst the broad swath of Americans that that regional gaming
is almost more of a cheaper entertainment. Sounds crazy to
talk about it that way, but I always talked about
it that way when I was an analyst.

Speaker 3 (34:03):
I think you could see that.

Speaker 2 (34:04):
But I think if you think about a property that's
thirty five years old and hasn't been invested in as
in a competitive market, is that going to be defensive?
I don't know about that, right, And I think that's
the sort of credit work that we're always doing in
a situation like that.

Speaker 4 (34:17):
And I guess in the context of you know, so
you talk about the cruise lines, and I'm in agreement
with you that there's been a lot of movement in tandem,
and we are finally starting to see a divergence between
the companies in terms of their strategies to de lever
or not or base all of the delevering off of

(34:37):
ebdout growth versus actual debt repayment. Right, And so we
have a few companies that are definitely getting close to
investment grade. And one thing I wonder for the high
yield space is how impactful that's going to be once
we sort of see that shift, that rising star shift finally,
how that's going to affect consumer at large? Right? You know,

(34:59):
if a large part of your consumer space has been
benefiting from the momentum within certain companies in certain sectors.
Now they've gone into IG. I mean, you know what
then is left behind.

Speaker 3 (35:12):
Right, and we've clearly seen that trend.

Speaker 2 (35:13):
We saw that trend in twenty twenty three right across
a lot of sectors where you know, in twenty twenty
and twenty twenty one, we had seen all particularly twenty twenty,
we'd seen all this fallen angel activity. It took the
percentage of the market of the higheld market that was
double b to all time highs. I think it topped
out at fifty two to fifty three percent. You know,
twenty twenty two, twenty twenty three, we saw the reversal, right,

(35:34):
a big of that because we saw so much rising
star activity, less in consumer but definitively in energy. We
also saw Forward obviously get upgraded. And then there was
sort of a long list of mid size credits out
there that a lot of which were not necessarily on
people's radars of going IG, but they got to IG.
It's been interesting also to see how these how these

(35:56):
issuers trade once they go to IG. You know, there's
a bit difference between a company like a lot of
the energy companies that had a lot of registered bonds
that were you know, Bloomberg AG eligible versus companies that
are just longtime high yealed issuers that it's all one
forty four A and it's all high yield style call protection.

(36:18):
And for those of the listeners that aren't familiar with this,
traditional IG bonds are typically non call life or non
call almost all the way to life. There'll be maybe
a clean up call at the end. Highald bonds or
typically if it's an eight year issue, it's probably non
callable for three years and then callable at a premium thereafter.
There's a difference in IG world and how those trade,
and so it has been interesting a a lot of

(36:39):
these names that have gotten upgraded, there were legacy high
yeld issuers have come out of our market, but it
also takes a long time for them to trade like
their IG and it gets takes a while for IG
investors to actually give a hoot about them. Many times
it takes them actually bringing a new IG benchmark deal
for people to get interested in the non and shmark

(37:00):
names that have already been upgraded.

Speaker 1 (37:02):
On the flip side, you make it a ton of
fallen angels, which is some some of the IG guests
I've been talking about recently, which may alter the mix.

Speaker 2 (37:09):
Yeah, I've heard that for a while, and it just
never happened, right, I mean, it happened during the pandemic,
but that wasn't why people. You know, before the pandemic,
everyone talked all this time about the percentage of the
IG market that was triple B and how you know
what percentage that was it at risk of a downgrade,
and there were a lot of big numbers thrown out,
And then the pandemic happened and there was stuff that

(37:30):
was downgraded. Although a lot of this that has gone
back the other way. You know, it seems like in
the downgrade activity that we've seen over the past few years,
I mean, there's been some themes. You know, certainly just
been a number of stuff that's commercial real estate related reads.
You know, there's also a lot of idiosyncratic stuff, right
like that for one reason or another, just there's been
some sort of you know, Walgreens is kind of the

(37:52):
case in point, right, That's it's hard to point to
that is symptomatic of broader themes other than the fact
that you know, retail that has a high degree of
shrinkage it's not a good business model which we all
know about. It hasn't really been thematic though, I would
say we just we just haven't seen it.

Speaker 1 (38:10):
But within high year, where is the value in terms
of ratings bucket? Because the W and single be very crowded,
it would seem. And meanwhile, everyone tells us they're avoiding
triple cs. So where do you position yourself and how
do you how do you not overpay for it?

Speaker 3 (38:23):
Yeah?

Speaker 2 (38:24):
Well, certainly, certainly over the past couple quarters it's been
in triple C and below. You know, I think the
C A ratings heer has performed really strongly this year.
Obviously it's only a handful of names.

Speaker 3 (38:34):
Certainly, the theme.

Speaker 2 (38:35):
Over the past couple of quarters has been almost a
I would say, a reinjury of real money managers into
a lot of these left for dead names, mainly in
media telecom, but not exclusively exclusively in media telecom. You know,
the the Lumens, the Dishes, the Balshes, the comscripts of
the world that I think a lot of people were
just kind of head left for dead in some ways,
assumed that they were going to need to restructure, and

(38:57):
they all for one reason or another seem to have
another lease on life for idiosyncratic reasons.

Speaker 3 (39:02):
That's been the theme recently.

Speaker 2 (39:03):
There's definitely been i would say, a fomo grab for
risk in the triple C space over the past few quarters.
You know, you look at where you look at if
you look at your to date in the high yeald market,
you know, the index looks pretty good versus the versus
the peer group, you know, telling you that a lot
of this paper that's really outperformed. It's not owned by
regular way high yield managers. It's owned by distress funds,

(39:24):
it's owned by activists. Yeah, I think going forward, when
you look at things, look where spreads are now, it's
it's hard to really pound the table. Look, I think
you're supposed to remain invested in the high yield market.
It does not seem like the type of market where
you'll want to be over beta within your high heeled allocation, right,
And so when we look at things, I think looking
at you know, double B single B to me makes

(39:47):
more sense. I think, particularly given where triple C spreads
are now, it just seems like there's been a little
bit too much of a run up in some of
these names.

Speaker 1 (39:54):
So Triple c's that run is over. I mean, do
you think they'll hit the wall in terms of when.

Speaker 2 (39:57):
I say that, when I say that run is over,
triple there's always opportunities, right, There's always something there to do.
I think it's always an interesting question for acid owners,
you know, when you think about how you're allocating to
high yield, and if you do have a strategic allocation
to high yield, do you want triple C to be
strategic or tactical? And that a lot of that gets
to the differences in different investors in terms of index selection.

(40:20):
When do they want to go with a broad index?
Do they want to go with a BA B index?
But maybe give the manager some ability to go buy
triple C when they see value.

Speaker 3 (40:29):
There's always something to do in triple C.

Speaker 2 (40:31):
I we always when we always hear what people are
talking about, is it a good time to buy triple
C or not? That's a complicated answer, right, and really
just to buy it in bulk as a basket. We
always think there's a better way.

Speaker 3 (40:44):
To do it than that.

Speaker 1 (40:45):
Those not these were the most exposed to the higher
for longer and also potentially some idiosyncratic risk from the
next administration or geopolitics or anything that that flips the market.
Risk off is does that not market? But that market
does not get hit really hard by this and reprice
very quickly.

Speaker 2 (41:00):
The triple C market, you mean, well, there's certainly some
parts of it, and you know, I think one of
the themes that's a little underappreciated is, you know, there's
certainly parts you know, particularly in communications sector, there's parts
of it that are asked of life. But there's other
parts of it that are very acid intensive, right. I
think those have been really hit by interest rates, not
just from a capital structure perspective, but long term questions

(41:20):
about you know, how do you how do you finance
these businesses at single B triple C levels, particularly when
you're you're competing against companies that are either ig rated
or you know, think about in the satellite space, someone
like Starlink that has infinite resources at least theoretically right,
because it's got.

Speaker 3 (41:37):
A big check behind it.

Speaker 2 (41:39):
Those are tough questions and those are the type of
companies we're clearly a low rates environment made them competitive,
and now there's some long term questions about how do
they work in a higher rate environment and having to
think about that. I think it'll be the next year
is going to be interesting. We're sitting here at all
time tight spreads, and I think in many ways that
can seem boring. I do think we'll see some dispersion

(42:01):
this year. I think, you know, everyone's thinking about the
impact of tariffs and the impact of immigration policy on inflation.
You know, there's a lot of stuff below that. And
every time Trump nominates someone on true Social obviously because
that's where you would do that sort of thing, it
seems like everyone in our market is thinking about how
how that nominees priorities could impact this credit or that credit,

(42:25):
and thinking about are those priorities implementable?

Speaker 3 (42:28):
Right?

Speaker 2 (42:29):
Is it actually something that could could be a negative
or a positive for a company's results. That to me
is the interesting, the thing that's going to be interesting
over the next few months.

Speaker 1 (42:37):
So what's the biggest opportunity for you next year? Jeremy,
where's the best relative value?

Speaker 4 (42:41):
Ooh?

Speaker 2 (42:41):
Best relative value? I think the best relative value out
there is. I would think about it in a couple
of different ways. I think a continuing to find, you know,
good credits that have a good credit outlook over the
next two to three quarters. And you know, so it's
a situations where a they have the ability to improve
their credit A profile, but be the also have the
willingness to improve their credit profile, right, because it takes both.

Speaker 3 (43:03):
It doesn't.

Speaker 2 (43:04):
Ability is one thing, but if you want to remain leverage,
it doesn't really matter if you're going to go buy
back shares with the extra free cash flow, right, it's
sort of who cared. I think those are opportunities. I
also think with the return of M and A activity,
you know, particularly in hig yield, that's going to be
an opportunity to extent that companies are getting bought out
by IG rated companies. Thinking about situations like that, who

(43:24):
is who are strategic targets you know those when you
think about individual security selection opportunities in high yield, the
double B company that is trading in line with the
double B index that has some call protection gets bought
out by an IG company that is the best risk
adjusted total return opportunity.

Speaker 3 (43:40):
In the highield market. Right. And so I do think
we'll see we'll see some of those, you know.

Speaker 2 (43:45):
I think as we get an increase in corporate M
and A activity.

Speaker 1 (43:48):
And you think it's more on the bond side the
opportunity than the leverage loan side, which I mean it
would seem that higher for longer would benefit floating rate assets.

Speaker 2 (43:55):
Right, Yeah, Well on the M and A front, look,
I mean, I if a loan is your gets bought
out by an IG corporate, unless it's trading at stressed levels,
it doesn't really matter. You're just going to get repaid,
right because most of those loans will already be trading
at least at par, potentially higher. In some cases sometimes
they can trade down, right because you're going to get
repaid as opposed to you know, having having an asset

(44:17):
that's going to keep paying a spread. I think on
the loan market, look, the good news is higher rates
for longer means more coupon for longer, and there's a
material carry advantage to loans over high yield as it
is to the extent that you know, maybe we stay
in the four and a quarter to four and a half,
you know, fed funds area. That's going to continue even
more when you think about the scenarios, when you think

(44:40):
about the scenario where high yield outperforms loans over the
next twelve months, you know, right, staying in the four
and quarter to four and a half area on the
front end, that's not one of those scenarios, right. That
probably means the carry advantage for loans is just too
much versus whatever whatever could potentially happen on the high
yield side. On the other hand, you know, higher for longer.
Is it going to mean a little bit more stress

(45:01):
in the low market? Yeah, on the margin, But I
don't think it's something that I think most of those
situations are already identified. I don't think there's a lot
of situations out there that are trading at par right
now where the fact that rates are not going to
three and a half and they're staying at four and
a half is going to put them into in distress.
Those situations are probably already trading well below par, not

(45:23):
because of raids, but because ebades off right or something
is not gone according to plan.

Speaker 1 (45:27):
And it's private credit more of a help or hindrance
to what you're doing.

Speaker 2 (45:31):
Yeah, I think look the private credit market, and when
I say private credit, I mean direct you know, direct
lending to sponsor you know, to sponsor backed companies and
the BSL market.

Speaker 3 (45:39):
I think they both play roles in the market. I
think clearly so.

Speaker 2 (45:44):
On the on the one hand, there's there are a
lot of deals in the middle that they are both
potential solutions to over a full cycle. There's always some
stuff that's higher quality that other than in situations like
twenty twenty two where the syndicate business is just really
screwed up for a period of time, that are almost
always going to be BSL solutions. You know, stuff that
has a double B first line rating or something like that.

(46:07):
It's hard like that almost always is going to get
better pricing in the BSL market. It's going to be
very few scenarios on the other end of the spectrum,
right there's all sorts of stuff that structurally just doesn't
work for BSL. The biggest category is stuff that cannot
get B minus ratings, you know on a first line
and a corporate basis, stuff that for whatever reason is

(46:27):
maybe still in a gross stage. And we've probably seen
more of this in software than in other sectors, where
you know, we've seen a lot of sponsors that are
not just interesting. I think you know, historically in the
software space, most sponsor interests on the LBO side was
more mature software companies that are cash flowing. We've seen
a lot more interest in more growth stage companies. BSL
doesn't necessarily work for those, right because they need pick component,

(46:48):
or at least pick the pick option built into it.
That also doesn't really work for the COLO market. So
there's places where they where they have different roles. Then
there's the stuff in the middle that there's this competition
goes on. Clearly right now, a lot more of that
is going to the BSL market, not necessarily for great reasons.
It's just because there's a supply demand and balance in
the BSL market and that stuff's coming really really tight.

(47:11):
Now there's also been another, you know a number of
situations that were BSL deals where private equity has sort
of come to the rescue where for whatever one reason
or another, the cap structure no longer works for BSL.
This is not stuff that is trading at seventy or eighty,
but this is stuff that's trading probably at ninety to
ninety five where you know, sponsors are sitting here saying,

(47:31):
you know, look, I like this business. The earnings are off,
but I have plans for the business. I need capital
for the business. For one reason or another, BSL is
no longer a solution, and it might be because it's
B three negative outlook or something like that, and where
they're sitting here and saying, you know, private credit for
what I want to accomplish with this. It's just a
better solution. Those situations are great for us because you're
only the things that are not trading at par and

(47:53):
they get repaid at par.

Speaker 1 (47:54):
Last question for you, where are you most contrarian for
twenty twenty five?

Speaker 2 (47:58):
Oh, contrarian everything I've talked about. You know, I do
agree with the comment earlier there is quite a bit
of group think girl going on right now. I think
that's in line with the animal spirits that in journal
we've seen since the election. Animal spirits. Animal spirits generally
lead to group think. That's that sort of goes hand
in hand with it. I do think my biggest point

(48:20):
of concern, and I'm hearing it from some investors but
not all right now, is just this supply demand imbalance
issue and the risk that it will lead to bad
underwriting decisions in our.

Speaker 3 (48:31):
Space, and we're going to try to avoid those.

Speaker 2 (48:33):
But you know, the market is what the market is.
People want to stay invested.

Speaker 1 (48:36):
Gray stuff. Jeremy Burton from Prime Bridge. It's been a
pleasure having you on the Credit Edge. Thanks James, and
to Jody Lurie with Bloomberg Intelligence, thank you so much
for joining us today. Thank you James for even more
great analysis. Read all of Jody's work on the Bloomberg Terminal.
Check it out, especially the cruise Line research. Bloomberg Intelligence
is part of our research department, with five hundred analysts
and strategies working across all markets. Coverage includes over two

(48:58):
thousand equities and credits and outlooks on more than ninety
industries and one hundred market industries, currencies and commodities. Please
do subscribe to the Credit Edge wherever you get your podcasts.
We're on Apple, Spotify and all other good podcasts providers,
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tell your friends, or email me directly at jcrombieight at

(49:18):
Bloomberg dot net. I'm James Crombie. It's been a pleasure
having you join us again next week on the Credit Edge.