Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Tristram Leech, co head of European Credit at Apollo.

Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Tristram Leech, co head of European Credit at Apollo.

How are you, Tristram, I'm great, Thank you, Thanks very much for having me.

How are you, Tristram, I'm great, Thank you, Thanks very much for having me.

Thank you very much for joining us today. We're also delighted to welcome back Lisa Lee, who covers credit markets from London. Great to see Lisa.

Thank you very much for joining us today. We're also delighted to welcome back Lisa Lee, who covers credit markets from London. Great to see Lisa.

Great to talk to you too, James.

Great to talk to you too, James.

Also on the show, we're going to be talking to Matt Goyner at Bloomberg Intelligence about high rates are actually good for some companies, so do stay with us. But first, Christram Leach with Apollo, it's great to have you on the Credit Edge. You're based in London, you cover global credit, and then since you're there in Europe, I just thought we'd start there. So I'm going to start with a question about European credit. When we look at the years so far, it has been pretty dire for the most of the world's investment grade bonds. The US is headed for its third straight year of losses, which has never happened before. When we look at our fifty year history on our index, and that's mostly your rates issue. Obviously, you know, we don't expect Amazon to default on their debt, although some of their bonds are trading in the fifties so they look pretty stressed. Junk bonds have done better, especially the riskiest ones, unless you're in China, when you would have lost a lot of money this year. But when we look at Europe, it's really surprising to me that it's done so well across the board. If you'd invested in corporate bonds there and not in the US, you would have made much more money this year than anywhere else, even though the economies over there seem to be in poor shape generally speaking, and although you do seem to be doing a bit better on inflation. And I know that index is higher quality, but how has it done so much better Tristram than other parts of the world.

Also on the show, we're going to be talking to Matt Goyner at Bloomberg Intelligence about high rates are actually good for some companies, so do stay with us. But first, Christram Leach with Apollo, it's great to have you on the Credit Edge. You're based in London, you cover global credit, and then since you're there in Europe, I just thought we'd start there. So I'm going to start with a question about European credit. When we look at the years so far, it has been pretty dire for the most of the world's investment grade bonds. The US is headed for its third straight year of losses, which has never happened before. When we look at our fifty year history on our index, and that's mostly your rates issue. Obviously, you know, we don't expect Amazon to default on their debt, although some of their bonds are trading in the fifties so they look pretty stressed. Junk bonds have done better, especially the riskiest ones, unless you're in China, when you would have lost a lot of money this year. But when we look at Europe, it's really surprising to me that it's done so well across the board. If you'd invested in corporate bonds there and not in the US, you would have made much more money this year than anywhere else, even though the economies over there seem to be in poor shape generally speaking, and although you do seem to be doing a bit better on inflation. And I know that index is higher quality, but how has it done so much better Tristram than other parts of the world.

Yeah, I guess there's a couple of things going on here.

Yeah, I guess there's a couple of things going on here.

Look.

Look.

Firstly, risk assets had that big rally in the early part of the year. Some of it's been given back, but spreads have been pretty contained in their moves all year, and rates have outperformed their US counterparts. Even though we've seen obviously weakening in rates globally, you know, the European picture is one that's been better, partly because we have seen some more softening and inflation data here in Europe.

Firstly, risk assets had that big rally in the early part of the year. Some of it's been given back, but spreads have been pretty contained in their moves all year, and rates have outperformed their US counterparts. Even though we've seen obviously weakening in rates globally, you know, the European picture is one that's been better, partly because we have seen some more softening and inflation data here in Europe.

So when you look at europe credit generally, does this kind of out performance continue.

So when you look at europe credit generally, does this kind of out performance continue.

Look, I think we think all in returns to credit are pretty great. Break evens are very very high, so it's relatively hard to visit yourself losing money in the medium term in credit. We like many other market participants, have been really forthcoming. I think that we think this is a great time to be engaged in the credit market, and we're hearing that from a lot of our ourps, our customers, you know, who are seeking to allocate money into credit. That being said, I don't think we think spreads are screaming by here. You've seen a little bit more weakness in kind of single bees, etc. In Europe versus the US, but economic data is slowing pretty fast, especially in Europe, so I think there's the scope for a little bit of spread weakness, possibly counterbalanced by more performance and rates.

Look, I think we think all in returns to credit are pretty great. Break evens are very very high, so it's relatively hard to visit yourself losing money in the medium term in credit. We like many other market participants, have been really forthcoming. I think that we think this is a great time to be engaged in the credit market, and we're hearing that from a lot of our ourps, our customers, you know, who are seeking to allocate money into credit. That being said, I don't think we think spreads are screaming by here. You've seen a little bit more weakness in kind of single bees, etc. In Europe versus the US, but economic data is slowing pretty fast, especially in Europe, so I think there's the scope for a little bit of spread weakness, possibly counterbalanced by more performance and rates.

So you overseee a whole swath of different kinds of credit when you look at the relative value, where do you see the best buy in Europe versus US IG junk private clos One of the.

So you overseee a whole swath of different kinds of credit when you look at the relative value, where do you see the best buy in Europe versus US IG junk private clos One of the.

Things we've been I think pretty forthcoming about is that private credit is generally offering a really attractive pickup to syndicate it in public markets at the moment. If you look at where the European syndicated loan market is currently trading, and you look at where similar quality credit is pricing in the unitranch, you know, private debt market, that pickup is really striking. For very similar quality companies. You're getting a material spread pickup, and obviously the all in returns is very very attractive. So that's certainly something we'd call out as a very attractive relative value. I think the relative value piece of cross geographies is a little bit more nuanced. You know, there's a little bit more spread at a given level of credit quality in Europe versus the US. However, the European growth data has been you know, really slowing very fast. It's pretty eye catching how rapidly we're seeing Europe slow down, and so I think that probably does argue that you need a little bit more spread to compensate you for a more challenged economy.

Things we've been I think pretty forthcoming about is that private credit is generally offering a really attractive pickup to syndicate it in public markets at the moment. If you look at where the European syndicated loan market is currently trading, and you look at where similar quality credit is pricing in the unitranch, you know, private debt market, that pickup is really striking. For very similar quality companies. You're getting a material spread pickup, and obviously the all in returns is very very attractive. So that's certainly something we'd call out as a very attractive relative value. I think the relative value piece of cross geographies is a little bit more nuanced. You know, there's a little bit more spread at a given level of credit quality in Europe versus the US. However, the European growth data has been you know, really slowing very fast. It's pretty eye catching how rapidly we're seeing Europe slow down, and so I think that probably does argue that you need a little bit more spread to compensate you for a more challenged economy.

Do you think there kindly does to be slowing down, which suggests to me that there might be more defaults coming up. Do you feel like that's correctly priced in in especially in the high yield and leavised loan markets. And also what do you think about recoveries, because they've been pretty drastically low in the US but a bit higher in Europe.

Do you think there kindly does to be slowing down, which suggests to me that there might be more defaults coming up. Do you feel like that's correctly priced in in especially in the high yield and leavised loan markets. And also what do you think about recoveries, because they've been pretty drastically low in the US but a bit higher in Europe.

So as to whether the future default environment is appropriately priced, I think, you know, it's implied by the fact that you know, we think there's probably room for spreads to widen a little bit here, that it's it's possibly not as fully priced as it might be. You know, you look around the cell side and strategists, I think most people are calling for a pickup in in defaults given the higher rate environment, and given the slowing we're seeing in macro, it would be somewhat surprising with that not to eventuate. I think we've certainly been calling for and seeing more dispersion in credit outcomes. You know, you've now got a market where you know, there's really a real sense of winners and losers, and obviously some of those losers are gonna gonna tip over the edge into defaults, So it makes sense to me that directionally you're probably going to see a little bit more in terms of in terms of recoveries. Yes, we've seen lower recoveries at the moment, the sample size we're dealing with is still pretty small, right, We're still in the early stages, so it's relatively hard to draw super firm conclusions about why those recoveries are lower and how durable that's likely to be. Look across the Atlantic, we've definitely seen more of these aggressive liability management exercises going on, which are going to tend to depress recoveries. In Europe that hasn't as yet been a material feature of the market, and all things equal, can can militate for recoveries being a little bit better on the side of the Atlantic.

So as to whether the future default environment is appropriately priced, I think, you know, it's implied by the fact that you know, we think there's probably room for spreads to widen a little bit here, that it's it's possibly not as fully priced as it might be. You know, you look around the cell side and strategists, I think most people are calling for a pickup in in defaults given the higher rate environment, and given the slowing we're seeing in macro, it would be somewhat surprising with that not to eventuate. I think we've certainly been calling for and seeing more dispersion in credit outcomes. You know, you've now got a market where you know, there's really a real sense of winners and losers, and obviously some of those losers are gonna gonna tip over the edge into defaults, So it makes sense to me that directionally you're probably going to see a little bit more in terms of in terms of recoveries. Yes, we've seen lower recoveries at the moment, the sample size we're dealing with is still pretty small, right, We're still in the early stages, so it's relatively hard to draw super firm conclusions about why those recoveries are lower and how durable that's likely to be. Look across the Atlantic, we've definitely seen more of these aggressive liability management exercises going on, which are going to tend to depress recoveries. In Europe that hasn't as yet been a material feature of the market, and all things equal, can can militate for recoveries being a little bit better on the side of the Atlantic.

On the private credit side, though, Tristan, you mentioned the big yield pick up there, We've had people tell us that it's not enough to compensate for the lack of transparency and the potential increase to fault risk, and you know, you just don't know what's going on there. Can you kind of put some numbers on it? Can you quantify like how much more of a pickup, how much more compensation are you getting for that extra risk.

On the private credit side, though, Tristan, you mentioned the big yield pick up there, We've had people tell us that it's not enough to compensate for the lack of transparency and the potential increase to fault risk, and you know, you just don't know what's going on there. Can you kind of put some numbers on it? Can you quantify like how much more of a pickup, how much more compensation are you getting for that extra risk.

Yeah, Look, i'd say the way i'd i'd look at at the moment as follows. I think your proper looking at a four fifty market for a for a standard syndicated single B so four to fifty in spread, and you're looking at six twenty five six fifty maybe for similar quality corporates in the in the private debt market. So to the extent you can perform like for like, and it's challenging because there are reasons companies are going one route or the other. But to the extent you can do like for like, I think you're probably getting almost two hundred basis points of pickup for being on the on the private side of things, which for us feels ample compensation when additionally you're generally getting slightly better documentation, you're close to it, you have a real bilateral dialogue with the issuer and the sponsor. You know, that's a pretty compelling setup for US versus being in a super loosely documented syndicated loan, and.

Yeah, Look, i'd say the way i'd i'd look at at the moment as follows. I think your proper looking at a four fifty market for a for a standard syndicated single B so four to fifty in spread, and you're looking at six twenty five six fifty maybe for similar quality corporates in the in the private debt market. So to the extent you can perform like for like, and it's challenging because there are reasons companies are going one route or the other. But to the extent you can do like for like, I think you're probably getting almost two hundred basis points of pickup for being on the on the private side of things, which for us feels ample compensation when additionally you're generally getting slightly better documentation, you're close to it, you have a real bilateral dialogue with the issuer and the sponsor. You know, that's a pretty compelling setup for US versus being in a super loosely documented syndicated loan, and.

The relative liquidity doesn't bother you.

The relative liquidity doesn't bother you.

Look, obviously, that's part of what you're getting paid for. It's a much less liquid product or even a wholey liquid product. But when you put your credit underwriting at the center of your process in the way we do, you know we have the confidence in our credit views and to lean into them. And when we're getting two hundred basis points that a pick up to give up liquidity in something which we've underwritten and we're super confident in, then you know that's something that is a trade that I think you're meant to do.

Look, obviously, that's part of what you're getting paid for. It's a much less liquid product or even a wholey liquid product. But when you put your credit underwriting at the center of your process in the way we do, you know we have the confidence in our credit views and to lean into them. And when we're getting two hundred basis points that a pick up to give up liquidity in something which we've underwritten and we're super confident in, then you know that's something that is a trade that I think you're meant to do.

These private credit deals are getting larger and larger in Europe. We have one that could possibly be the biggest ever in this market. As these loans get bigger, do you worry that there'll be a confluence between leverage loans and some of the documentations will weaken, some of the terms will weaken, or do you think there's still a differentiation.

These private credit deals are getting larger and larger in Europe. We have one that could possibly be the biggest ever in this market. As these loans get bigger, do you worry that there'll be a confluence between leverage loans and some of the documentations will weaken, some of the terms will weaken, or do you think there's still a differentiation.

There's still a delta for sure at the moment between the terms you're getting in even the large UNITRNE and direct lending deals versus where the syndicated market is. So that convergence hasn't happened yet. I think it's true that the two markets are coming closer together. You know, you're seeing a direct lending market that's able to speak for bigger and bigger deals is able to you know, price really material slugs of debt, and you know, is another option for all but the very very largest companies. So I think we're seeing the syndicated and direct lending markets coming closer together. The way we've set up our credit business in Europe is really allowing us to pivot with issuers between the two. So if you look at some of the biggest financings we've done on both sides of the Atlantic this year, they've been in kind of public private structures, So deals like the as the deal that we did here in Europe that was a direct piece of financing. But for a company with a high your bond curve, I think you're going to see more and more of that, and I think setting up your business to be able to pivot with issuers between the multiple sources of funding is a really compelling offering to partner with them.

There's still a delta for sure at the moment between the terms you're getting in even the large UNITRNE and direct lending deals versus where the syndicated market is. So that convergence hasn't happened yet. I think it's true that the two markets are coming closer together. You know, you're seeing a direct lending market that's able to speak for bigger and bigger deals is able to you know, price really material slugs of debt, and you know, is another option for all but the very very largest companies. So I think we're seeing the syndicated and direct lending markets coming closer together. The way we've set up our credit business in Europe is really allowing us to pivot with issuers between the two. So if you look at some of the biggest financings we've done on both sides of the Atlantic this year, they've been in kind of public private structures, So deals like the as the deal that we did here in Europe that was a direct piece of financing. But for a company with a high your bond curve, I think you're going to see more and more of that, and I think setting up your business to be able to pivot with issuers between the multiple sources of funding is a really compelling offering to partner with them.

Private credit really is the hot thing this year. People are talking about the Golden Age and we just tell a story. We're showing showing that, you know, there's five hundred billion dollars of new money raised for it and not a lot to buy. How do you kind of find opportunities and do you have a kind of sector focus. I mean, do you have anything you particularly like at the moment in terms of sector.

Private credit really is the hot thing this year. People are talking about the Golden Age and we just tell a story. We're showing showing that, you know, there's five hundred billion dollars of new money raised for it and not a lot to buy. How do you kind of find opportunities and do you have a kind of sector focus. I mean, do you have anything you particularly like at the moment in terms of sector.

So, look, we definitely agree it's a golden age. I think there's a few nuances in terms of the way we look at private credit versus a lot.

So, look, we definitely agree it's a golden age. I think there's a few nuances in terms of the way we look at private credit versus a lot.

Of our peers.

Of our peers.

You know, you'll have heard our CEO, Mark Rowan talking about the way we think of private credit not just in terms of financing LBOs, but but really a much broader opportunity set, so including lots and lots of investment grade opportunities. If you look at investment grade issuers in Europe, a lot of them are looking to diversify their funding sources away from the bond market. You look at it deals like the deal we did with Venovia in the in the spring of this year, where you know, the company had really good assets but was seeking to protect its rate and by speaking you know, in scale and being thoughtful around structure, we were able to do something which was protective to their rating and you know, very very attractive for us. So I think that's really an important angle for us in terms of what we look to do in private credit rather than exclusively in the in the kind of traditional unit change space in terms of sectors. Look, it's it's probably a bit a bit glib and interesting to say that with macro data slowing the way it is, we're steering clear of anything that's going to cycle super hard. For example, a lot of the post COVID winners, you know, the travel, the revenge travel dynamic, you saw, a lot of that stuff has done super well. Pricing has been pushed enormously in a lot of those issuers, and I think it's something we'd probably seek to to steer clear of. You know, there's there's plenty of returns to be made top of capital structure in non sectical businesses where your ability to be speaking in size, quick to execute, and sophisticated in your underwright really is enough of an edge.

You know, you'll have heard our CEO, Mark Rowan talking about the way we think of private credit not just in terms of financing LBOs, but but really a much broader opportunity set, so including lots and lots of investment grade opportunities. If you look at investment grade issuers in Europe, a lot of them are looking to diversify their funding sources away from the bond market. You look at it deals like the deal we did with Venovia in the in the spring of this year, where you know, the company had really good assets but was seeking to protect its rate and by speaking you know, in scale and being thoughtful around structure, we were able to do something which was protective to their rating and you know, very very attractive for us. So I think that's really an important angle for us in terms of what we look to do in private credit rather than exclusively in the in the kind of traditional unit change space in terms of sectors. Look, it's it's probably a bit a bit glib and interesting to say that with macro data slowing the way it is, we're steering clear of anything that's going to cycle super hard. For example, a lot of the post COVID winners, you know, the travel, the revenge travel dynamic, you saw, a lot of that stuff has done super well. Pricing has been pushed enormously in a lot of those issuers, and I think it's something we'd probably seek to to steer clear of. You know, there's there's plenty of returns to be made top of capital structure in non sectical businesses where your ability to be speaking in size, quick to execute, and sophisticated in your underwright really is enough of an edge.

And when you look across the board at everything, I mean you cover quite a broad sworth of credit globally. Is private credit the best opportunity let's take it on a twelve month horizon. Is that the best thing to look at right now?

And when you look across the board at everything, I mean you cover quite a broad sworth of credit globally. Is private credit the best opportunity let's take it on a twelve month horizon. Is that the best thing to look at right now?

Yes, Look, there's a ton of opportunity across the credit market. You know, there's some very interesting features to the high your bond market in Europe, given how short dated that market's got, So we're super engaged in looking at you know, the names that need to refine will and won't be able to et cetera. But if I had to pick a single area that I think you're mental lean into and frankly where we're seeing, where we're seeing clients lean into as well, it is private credit.

Yes, Look, there's a ton of opportunity across the credit market. You know, there's some very interesting features to the high your bond market in Europe, given how short dated that market's got, So we're super engaged in looking at you know, the names that need to refine will and won't be able to et cetera. But if I had to pick a single area that I think you're mental lean into and frankly where we're seeing, where we're seeing clients lean into as well, it is private credit.

And is it mostly in the Europe or mostly in the US or any particular geographic focus.

And is it mostly in the Europe or mostly in the US or any particular geographic focus.

No, Look, I think I think you're seeing attractive opportunities on both sides of the Atlantic. You know, I struggle really to differentiate in terms of there being one market that's outright compelling versus the others. There's probably a little bit more spread still in Europe in a lot of private credit, but as we touched it at the beginning, that's, you know, possibly for good reason, given slightly softer macro here. So I don't think there's like a standout relative value in terms of private credit product on either side of the Atlantic.

No, Look, I think I think you're seeing attractive opportunities on both sides of the Atlantic. You know, I struggle really to differentiate in terms of there being one market that's outright compelling versus the others. There's probably a little bit more spread still in Europe in a lot of private credit, but as we touched it at the beginning, that's, you know, possibly for good reason, given slightly softer macro here. So I don't think there's like a standout relative value in terms of private credit product on either side of the Atlantic.

You mentioned refinancings. So far, within this higher rate environment, there hasn't been that much of a need because a lot of companies pushed out maturities doing COVID and right afterwards. But now the matuary wall is starting to build and people are companies that are going to have to deal with it next year and the year after. Do you think there's enough capital and appetite to refinance all these firms? Given the higher interest rate which seems to be staying higher for longer, they might not be able. Many companies might not be able to hold the debt burdens that they have now. So can you address that a bit?

You mentioned refinancings. So far, within this higher rate environment, there hasn't been that much of a need because a lot of companies pushed out maturities doing COVID and right afterwards. But now the matuary wall is starting to build and people are companies that are going to have to deal with it next year and the year after. Do you think there's enough capital and appetite to refinance all these firms? Given the higher interest rate which seems to be staying higher for longer, they might not be able. Many companies might not be able to hold the debt burdens that they have now. So can you address that a bit?

Yeah, that's what's so interesting. So if you look at the European high yield market at the moment, it's the short to status that's ever been. The waighted average life of the European h how your market is about three and a half years, So for these companies, the time really is now. It made sense that they weren't refinancing all that proactively, given both credit spreads and rates were higher. But over the next couple of years, in the next three years, fifty percent of the European high your market has got to refinance, and they're going to refinance that higher all in cost of funding. That's a super interesting dynamic for us because if you're buying bonds materially below par on average, they're taking out sixteen months ahead of maturity, So you've got a real pull to part story there. But you've got to get it right because some of these companies aren't going to be able to and you haven't got very much time, you know, if something goes wrong, you haven't got very much time to correct your mistake to get yourself into a refinance of our shape. So we think there's this is why you're going to start to see even more dispersion because the maturity is the best catalyst for establishing whether you know credit is viable or not. In terms of whether there's enough capital out there. Yeah, I think there is across across private, private debt and public markets that there's still a lot of capital. There's an enormous amount of appetite for credit generally because of the way risk reward has improved at the top of the capital structure. But that's going to be pointed at the viable businesses, the capital structures that work, and for those who are just two levered running into refinancing, you know, they're not all going to make it, and that kind of catalyst the environment is something that's very invigorating for us as a fundamental driven credit house.

Yeah, that's what's so interesting. So if you look at the European high yield market at the moment, it's the short to status that's ever been. The waighted average life of the European h how your market is about three and a half years, So for these companies, the time really is now. It made sense that they weren't refinancing all that proactively, given both credit spreads and rates were higher. But over the next couple of years, in the next three years, fifty percent of the European high your market has got to refinance, and they're going to refinance that higher all in cost of funding. That's a super interesting dynamic for us because if you're buying bonds materially below par on average, they're taking out sixteen months ahead of maturity, So you've got a real pull to part story there. But you've got to get it right because some of these companies aren't going to be able to and you haven't got very much time, you know, if something goes wrong, you haven't got very much time to correct your mistake to get yourself into a refinance of our shape. So we think there's this is why you're going to start to see even more dispersion because the maturity is the best catalyst for establishing whether you know credit is viable or not. In terms of whether there's enough capital out there. Yeah, I think there is across across private, private debt and public markets that there's still a lot of capital. There's an enormous amount of appetite for credit generally because of the way risk reward has improved at the top of the capital structure. But that's going to be pointed at the viable businesses, the capital structures that work, and for those who are just two levered running into refinancing, you know, they're not all going to make it, and that kind of catalyst the environment is something that's very invigorating for us as a fundamental driven credit house.

So Christian. Before we talk to Matt Gooynder over at Bloomberg Intelligence, I just kind of wanted to push a bit on the risks. Obviously, this is a credit show. We credit guys. We worry about stuff all the time, and there's so much macro stress, there's so much political stress, there's so much you know, fundamental stress. Frankly, what really keeps you up at night worrying about credit at the moment, what are you most concerned about?

So Christian. Before we talk to Matt Gooynder over at Bloomberg Intelligence, I just kind of wanted to push a bit on the risks. Obviously, this is a credit show. We credit guys. We worry about stuff all the time, and there's so much macro stress, there's so much political stress, there's so much you know, fundamental stress. Frankly, what really keeps you up at night worrying about credit at the moment, what are you most concerned about?

Well, look, the the higher rates environment is part of the opportunity here, but as Lisa just touched on it, it's also part of the threat. You know, all these capital structures that were put in place in a very different rates environment and frankly speaking normally a lower spread environment, have now got to reset their debtor. Their capital structures at are much much higher all in interest cost. If that's happening at a time when macro is deteriorating fast and you're unable to improve your earnings, that obviously can be a very uncomfortable vice that these companies are put in. So the macro slowdown, combined with the fact that at least so far in Europe, you haven't seen rates collapse. Is an uncomfortable place for the market to be in. It's providing a huge array of opportunities, it's providing great all in returns to credit, which they say, on the medium term we think are ultra attractive and you're meant to be in. But you've got to be relying on your credit selection making sure you're not going to find yourself in one of these capital structures where with this confluence of factors it just doesn't work inn.

Well, look, the the higher rates environment is part of the opportunity here, but as Lisa just touched on it, it's also part of the threat. You know, all these capital structures that were put in place in a very different rates environment and frankly speaking normally a lower spread environment, have now got to reset their debtor. Their capital structures at are much much higher all in interest cost. If that's happening at a time when macro is deteriorating fast and you're unable to improve your earnings, that obviously can be a very uncomfortable vice that these companies are put in. So the macro slowdown, combined with the fact that at least so far in Europe, you haven't seen rates collapse. Is an uncomfortable place for the market to be in. It's providing a huge array of opportunities, it's providing great all in returns to credit, which they say, on the medium term we think are ultra attractive and you're meant to be in. But you've got to be relying on your credit selection making sure you're not going to find yourself in one of these capital structures where with this confluence of factors it just doesn't work inn.

So the best head is just to avoid what could blow up.

So the best head is just to avoid what could blow up.

Yeah, look, it's a glib thing to say, and you'll always find fundamentals driven credit managers like us saying that it's the most important thing. But it's more the most important thing now than it has been for most of the ten years, the last ten years. Rather because the last ten years have seen you know, endlessly falling rates, easy refinancing conditions, generally speaking, very tight spreads. That period is over, so it really really matters now. And as I said, because of the relatively short dated nature of the market, and that's in both high yield and leverage loans. The you know that the test of all these capital structures is coming sooner rather than later.

Yeah, look, it's a glib thing to say, and you'll always find fundamentals driven credit managers like us saying that it's the most important thing. But it's more the most important thing now than it has been for most of the ten years, the last ten years. Rather because the last ten years have seen you know, endlessly falling rates, easy refinancing conditions, generally speaking, very tight spreads. That period is over, so it really really matters now. And as I said, because of the relatively short dated nature of the market, and that's in both high yield and leverage loans. The you know that the test of all these capital structures is coming sooner rather than later.

Great stuff. Christram Leach, co head of European Credit at Apollo, thank you so much for joining us.

Great stuff. Christram Leach, co head of European Credit at Apollo, thank you so much for joining us.

Thank you very much, indeed, and Lisa lu.

Thank you very much, indeed, and Lisa lu.

Bloomberg News in London. Brilliant to see you again.

Bloomberg News in London. Brilliant to see you again.

Cheers, thanks, bye bye.

Cheers, thanks, bye bye.

So, as I mentioned earlier, we were joined by Matt Ginner with Bloomberg Intelligence in New York. How's it going, Matt, Everything's going good. Thanks for having me on again, appreciate it great. So last time you were on the show, we talked about revenge spending. We all did it. Maybe it's cooling off a bit now, but today we're going to look at pensions. Most of us have one, or at least some kind of savings plan. But why do we care about pensions in the context of credit Matt?

So, as I mentioned earlier, we were joined by Matt Ginner with Bloomberg Intelligence in New York. How's it going, Matt, Everything's going good. Thanks for having me on again, appreciate it great. So last time you were on the show, we talked about revenge spending. We all did it. Maybe it's cooling off a bit now, but today we're going to look at pensions. Most of us have one, or at least some kind of savings plan. But why do we care about pensions in the context of credit Matt?

Yeah, So our team we recently did some work trying to assess the potential impact of the surge and rates that we've seen for companies within the S and P five hundred, they have some of the largest underfunded pension positions, So there's a lot of inputs that sort of get distilled down into coming up with total assets within the pension, total liabilities, and those assets need to fund into future. So despite all that, there's a couple of levers that can really get these liabilities moving one way or the other. Those being the discount rate used to measure the pension liabilities owed and the return on assets within the pension plan, the difference, if any, when the liabilities exceed the pension plan assets being referred to as the underfunded portion.

Yeah, So our team we recently did some work trying to assess the potential impact of the surge and rates that we've seen for companies within the S and P five hundred, they have some of the largest underfunded pension positions, So there's a lot of inputs that sort of get distilled down into coming up with total assets within the pension, total liabilities, and those assets need to fund into future. So despite all that, there's a couple of levers that can really get these liabilities moving one way or the other. Those being the discount rate used to measure the pension liabilities owed and the return on assets within the pension plan, the difference, if any, when the liabilities exceed the pension plan assets being referred to as the underfunded portion.

Let me just start you that because it's getting very very technical, very very quickly break it down for us, for those who don't know how this stuff works. How does it work in practice? I mean, you mentioned underfunded, You mentioned discount rate. Break it down in really basic terms for us.

Let me just start you that because it's getting very very technical, very very quickly break it down for us, for those who don't know how this stuff works. How does it work in practice? I mean, you mentioned underfunded, You mentioned discount rate. Break it down in really basic terms for us.

Yeah, So the mechanics of the discount rate is pretty straightforward. So the higher the potential rate you can theoretically earn, the lower the future payments would be, and vice versa. So the yield on the Moody's Double A index is what's typically used as a proxy for where discount rates could end up when these companies snap the line or take their measurement, which happens at year end. So we've seen yields on the double A index continue to climb, which started in twenty twenty one, as the FED has aggressively raised so for contacts last year, the surgeon rates helps drive down total underfunding by about forty percent. So using the EQS function that we have available on the terminal, were identified the top fIF teen most underfunded pension plans that could stand a benefit by revising upward their discount rate that they use to measure those liabilities. The guys at surface to the top were ge Lockheed, Boeing, Exxon, and AT and T. With the entirety of those underfunded pension obligations totally about eighty five billion, and those top fifteen comprising a little over half of that figure.

Yeah, So the mechanics of the discount rate is pretty straightforward. So the higher the potential rate you can theoretically earn, the lower the future payments would be, and vice versa. So the yield on the Moody's Double A index is what's typically used as a proxy for where discount rates could end up when these companies snap the line or take their measurement, which happens at year end. So we've seen yields on the double A index continue to climb, which started in twenty twenty one, as the FED has aggressively raised so for contacts last year, the surgeon rates helps drive down total underfunding by about forty percent. So using the EQS function that we have available on the terminal, were identified the top fIF teen most underfunded pension plans that could stand a benefit by revising upward their discount rate that they use to measure those liabilities. The guys at surface to the top were ge Lockheed, Boeing, Exxon, and AT and T. With the entirety of those underfunded pension obligations totally about eighty five billion, and those top fifteen comprising a little over half of that figure.

But in really basic terms of these are large companies in the US that are basically saying to their employees paying to some plan, and when you retire, will give you x amount as a recurring payment over time.

But in really basic terms of these are large companies in the US that are basically saying to their employees paying to some plan, and when you retire, will give you x amount as a recurring payment over time.

That's exactly correct.

That's exactly correct.

And what we're talking about is how the funds that the companies have available in those funds in the pension pools. I'm not going to use funds because it's confusing, is not sufficient to cover what they need to pay in the future, or it has not been sufficient in the past, but now because of higher rates, they're catching.

And what we're talking about is how the funds that the companies have available in those funds in the pension pools. I'm not going to use funds because it's confusing, is not sufficient to cover what they need to pay in the future, or it has not been sufficient in the past, but now because of higher rates, they're catching.

Up, that's correct, So there would be the underfunded portion or the shortfall, so the rise in rates would help effectively shrink that gap.

Up, that's correct, So there would be the underfunded portion or the shortfall, so the rise in rates would help effectively shrink that gap.

And when rates were effectively zero for such a long time, companies were running short by how much.

And when rates were effectively zero for such a long time, companies were running short by how much.

Yeah they were they were getting, they were getting pretty big. So for that forty percent figure, that was over one hundred and forty billion just last year. So the yield on the double A index is hovering around six percent right now, and that's relative to five percent to start the year, which will provide a potential tailwind for financial risk profiles and adjusted leverage all us being equal, And that's important because raiders include those obligations in their deck calculations as these are a liabilities or obligations that are owed. So each company's sensitivity is different, so the potential upside can vary by company. So for example, a company I cover is Boeing, so their discount rate is about five point four percent, so that's a little over fifty basis points below where yields currently are with their sensitivity to just a twenty five basis point increase in that discount rate equivalent to an almost one point three billion dollar improvement in underfunding. So you know, with all the puts in takes, we calculated more and having of these liabilities for the OEM, which given some of the issues they're contending with now related to the max and pressure on delivers here in near term related to the app bole cet issue, the improvement can help drive some financial flexibility as they look to complete rework without incurring the potential for more negative rating activity.

Yeah they were they were getting, they were getting pretty big. So for that forty percent figure, that was over one hundred and forty billion just last year. So the yield on the double A index is hovering around six percent right now, and that's relative to five percent to start the year, which will provide a potential tailwind for financial risk profiles and adjusted leverage all us being equal, And that's important because raiders include those obligations in their deck calculations as these are a liabilities or obligations that are owed. So each company's sensitivity is different, so the potential upside can vary by company. So for example, a company I cover is Boeing, so their discount rate is about five point four percent, so that's a little over fifty basis points below where yields currently are with their sensitivity to just a twenty five basis point increase in that discount rate equivalent to an almost one point three billion dollar improvement in underfunding. So you know, with all the puts in takes, we calculated more and having of these liabilities for the OEM, which given some of the issues they're contending with now related to the max and pressure on delivers here in near term related to the app bole cet issue, the improvement can help drive some financial flexibility as they look to complete rework without incurring the potential for more negative rating activity.

Okay, so again you're throwing out indexes and double as and that sort of thing. I'm just going to ask the dumb question again, So why do we look at that index particularly? Is that what the companies in their pension plans are invested in or is that what the companies are raising.

Okay, so again you're throwing out indexes and double as and that sort of thing. I'm just going to ask the dumb question again, So why do we look at that index particularly? Is that what the companies in their pension plans are invested in or is that what the companies are raising.

Yes, so it's used as a proxy for what they could potentially earn. It's a high quality basket of bonds. So you know, as I mentioned earlier earlier, the big lever that they could drive underfunding wire lower also includes those returns on pension plan assets. So those moneies are invested in different types of assets which generate hopefully positive returns for the year, which would in theory increase assets and leus reduce your underfunding. So those returns could prove more muted this year based on our analysis of a sort of broad array of benchmark indicties with mixed performance across various asset classes, but that would still be better than the significantly negative returns that we saw in twenty twenty two. So we saw that sea of red which offset some of the benefits that were derived from the higher discount rates, which this year may not have such a sort of deleterious impact. So i'd highlight that you know the discount rates pension returns, they can vary based on asset allocations. In the case of Boeing, their investments are heavily weighted toward fixed income at a little over sixty percent the Moody Double A Index being a fixed income INDUSICY and equities near fifteen percent, private equity and real estate each under ten percent, and head funds the remainder, whereas a guy like AT and T, who was also in the list, is weighted forty five percent towards fixed income, eleven percent equities, thirty percent between real estate and private equity, and the remainder is sort of a hodgepodge of different asset holdings and.

Yes, so it's used as a proxy for what they could potentially earn. It's a high quality basket of bonds. So you know, as I mentioned earlier earlier, the big lever that they could drive underfunding wire lower also includes those returns on pension plan assets. So those moneies are invested in different types of assets which generate hopefully positive returns for the year, which would in theory increase assets and leus reduce your underfunding. So those returns could prove more muted this year based on our analysis of a sort of broad array of benchmark indicties with mixed performance across various asset classes, but that would still be better than the significantly negative returns that we saw in twenty twenty two. So we saw that sea of red which offset some of the benefits that were derived from the higher discount rates, which this year may not have such a sort of deleterious impact. So i'd highlight that you know the discount rates pension returns, they can vary based on asset allocations. In the case of Boeing, their investments are heavily weighted toward fixed income at a little over sixty percent the Moody Double A Index being a fixed income INDUSICY and equities near fifteen percent, private equity and real estate each under ten percent, and head funds the remainder, whereas a guy like AT and T, who was also in the list, is weighted forty five percent towards fixed income, eleven percent equities, thirty percent between real estate and private equity, and the remainder is sort of a hodgepodge of different asset holdings and.

When in the past these pension funds were actually running underfunded and there was a big gap. How much was the credit market penalizing them for that? Did it matter?

When in the past these pension funds were actually running underfunded and there was a big gap. How much was the credit market penalizing them for that? Did it matter?

It does matter for some of the some of the bigger guys, because obviously, at least from a credit standpoint, you know, if you hypothetically had a bankruptcy, these obligations would be sort of perry pursue with senior and scure bondholders, which is sort of our bread and butter here at BI Credit. So you know, that's definitely something that you need to keep an eye on to understand that those are also technically creditors of the company outside of just what you would traditionally think of as a bondholder or somebody who has loans.

It does matter for some of the some of the bigger guys, because obviously, at least from a credit standpoint, you know, if you hypothetically had a bankruptcy, these obligations would be sort of perry pursue with senior and scure bondholders, which is sort of our bread and butter here at BI Credit. So you know, that's definitely something that you need to keep an eye on to understand that those are also technically creditors of the company outside of just what you would traditionally think of as a bondholder or somebody who has loans.

So when you flip it now and you're looking at the gap closing, how much are credit markets rewarding these companies that are closing that gap.

So when you flip it now and you're looking at the gap closing, how much are credit markets rewarding these companies that are closing that gap.

That's a good question. It couldn't. I can't pinpoint it down to an exact sort of science.

That's a good question. It couldn't. I can't pinpoint it down to an exact sort of science.

Is there relative value though in the companies that are benefiting most potentially, you know, they have less of a risk because they're to funk outs have been closed, Therefore they are for better value potentially.

Is there relative value though in the companies that are benefiting most potentially, you know, they have less of a risk because they're to funk outs have been closed, Therefore they are for better value potentially.

Well, certainly from a credit standpoint, because you would certainly be improving your financial risk profile all else equally, you would have lower adjusted leverage, all sort of driving relative value views on some of the bonds, as those would be obligations that were once larger are now smaller.

Well, certainly from a credit standpoint, because you would certainly be improving your financial risk profile all else equally, you would have lower adjusted leverage, all sort of driving relative value views on some of the bonds, as those would be obligations that were once larger are now smaller.

So higher rates are actually good. I mean, they've been hammering bonds across the board because of duration, but higher rates in this context are actually good for some companies.

So higher rates are actually good. I mean, they've been hammering bonds across the board because of duration, but higher rates in this context are actually good for some companies.

Or the silver lining behind the surgeon rates that we've seen ysa shrinking of these liabilities.

Or the silver lining behind the surgeon rates that we've seen ysa shrinking of these liabilities.

You mentioned a few of them, Are there any other names that stand out?

You mentioned a few of them, Are there any other names that stand out?

So Steve Flynn, who's part of our team, our TMT team, put together some work looking at relative impacts within the TMT space, so AT and T could stand up benefit as obligations owed at year end were the highest with Intel co and that account for forty five percent of the sector itself, with leverage ratios inclusive of pension shortfalls having the biggest potential impacts for guys he covers like Paramount or Lumen given their relatively lower absolute ebitabase and Mike Campalone, who's part of our consumer team, rates to guys like Kroger and Albertson's, which have a pending acquisition in both maintaining significant multi employer pension plans as well as some shelf insurance liabilities and some leases, which altogether can increase the adjusted debt that raiders look at by over eight billion, So we could see some potential improvement there in terms of those adjusted figures. So hopefully that gives a little bit of flavor to everyone listening on the importance of looking at the ads and rates and the potential impact on financial risk profiles.

So Steve Flynn, who's part of our team, our TMT team, put together some work looking at relative impacts within the TMT space, so AT and T could stand up benefit as obligations owed at year end were the highest with Intel co and that account for forty five percent of the sector itself, with leverage ratios inclusive of pension shortfalls having the biggest potential impacts for guys he covers like Paramount or Lumen given their relatively lower absolute ebitabase and Mike Campalone, who's part of our consumer team, rates to guys like Kroger and Albertson's, which have a pending acquisition in both maintaining significant multi employer pension plans as well as some shelf insurance liabilities and some leases, which altogether can increase the adjusted debt that raiders look at by over eight billion, So we could see some potential improvement there in terms of those adjusted figures. So hopefully that gives a little bit of flavor to everyone listening on the importance of looking at the ads and rates and the potential impact on financial risk profiles.

Yeah, and this closing of the gap, does it continue at this pace?

Yeah, and this closing of the gap, does it continue at this pace?

If you have higher for longer? That's would certainly mean that the rates that you set can sort of be a more steady state. But well, I guess we'll have to see what the what the future brings through through mid decade.

If you have higher for longer? That's would certainly mean that the rates that you set can sort of be a more steady state. But well, I guess we'll have to see what the what the future brings through through mid decade.

Okay, So just to wrap things up, Mat, I mean, what else are you looking at right now? You cover a huge range of industry, But what else should we be paying attention to? What's on your radar?

Okay, So just to wrap things up, Mat, I mean, what else are you looking at right now? You cover a huge range of industry, But what else should we be paying attention to? What's on your radar?

What else is on my radar right now? I mean, we're sort of in the thick of it with earnings. So I think one of the more interesting stories is the sort of retheon and the large defunded buyback that's sort of doing so. I would expect them to be coming to market here pretty soon to sort of turn out the bridge loan that they took out as part of their accelerated cherry purchases. They sort of grind through the powdered metal contaminant issue that's sort of grounding some of the GTF engines and accelerating some of those infections. So it's probably one of the more interesting stories going on.

What else is on my radar right now? I mean, we're sort of in the thick of it with earnings. So I think one of the more interesting stories is the sort of retheon and the large defunded buyback that's sort of doing so. I would expect them to be coming to market here pretty soon to sort of turn out the bridge loan that they took out as part of their accelerated cherry purchases. They sort of grind through the powdered metal contaminant issue that's sort of grounding some of the GTF engines and accelerating some of those infections. So it's probably one of the more interesting stories going on.

But raising debt to payback stockholders. That's not good for the bonds, is it.

But raising debt to payback stockholders. That's not good for the bonds, is it.

No, Generally, that's not a good thing. That's why the BAA one tile plus ratings are now moved to negative outlook to and to ensure that the GTF issues don't materially spread beyond what's already assumed and more importantly that ratheon. When they accelerate these cherry purchases, they'll turn around and then deleverage the balance sheet through mid decade, in line with what is sort of expected by both Moodies and S and P.

No, Generally, that's not a good thing. That's why the BAA one tile plus ratings are now moved to negative outlook to and to ensure that the GTF issues don't materially spread beyond what's already assumed and more importantly that ratheon. When they accelerate these cherry purchases, they'll turn around and then deleverage the balance sheet through mid decade, in line with what is sort of expected by both Moodies and S and P.

Do we worry about a downgrade for them in the short term?

Do we worry about a downgrade for them in the short term?

In down grade, they've already gone to negative outlooks, So I think right now they're probably okay. I think it really becomes a question of funding mix when they turn out the bridge one that they have, how much short term debt do they expect to have in order to pull a lever to be able to deleverage the balance sheet and have absolute production. Some moody is expecting somewhere around five billion dollars, which would be half of what the total ASR is. And then you have some maturities which is a little around three billion dollars, but they could also pay down. And there also have some pending asset sales which could bring in another three billion in pro seeds. So they certainly have levers that they could put in place and then pull to de leverage of balance sheet. It's a matter of the magnitude and how quickly they want to want to do it.

In down grade, they've already gone to negative outlooks, So I think right now they're probably okay. I think it really becomes a question of funding mix when they turn out the bridge one that they have, how much short term debt do they expect to have in order to pull a lever to be able to deleverage the balance sheet and have absolute production. Some moody is expecting somewhere around five billion dollars, which would be half of what the total ASR is. And then you have some maturities which is a little around three billion dollars, but they could also pay down. And there also have some pending asset sales which could bring in another three billion in pro seeds. So they certainly have levers that they could put in place and then pull to de leverage of balance sheet. It's a matter of the magnitude and how quickly they want to want to do it.

We'll definitely be keeping an eye on raytheon and we'll be keeping an eye on your research and analysis. Mac pointed with Bloomberg Intlligence in New York. Thank you so much for joining us, Thanks for hammer appreciate it. Look forward to having you back on the show very soon. And thanks again to Tristram Leach with Apollo, as well as Lisa Lee from Bloomberg News. Read all of Lisa's great credit scoops on the terminal and at Bloomberg dot com, and please do subscribe wherever you get your podcasts. We're on Apple, Google and Spotify. Give us a review, tell your friends, or email me directly at Jcromb eight at Bloomberg dot net. That's j c R O M B I E as in my surname and the number eight at Bloomberg dot net. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge

We'll definitely be keeping an eye on raytheon and we'll be keeping an eye on your research and analysis. Mac pointed with Bloomberg Intlligence in New York. Thank you so much for joining us, Thanks for hammer appreciate it. Look forward to having you back on the show very soon. And thanks again to Tristram Leach with Apollo, as well as Lisa Lee from Bloomberg News. Read all of Lisa's great credit scoops on the terminal and at Bloomberg dot com, and please do subscribe wherever you get your podcasts. We're on Apple, Google and Spotify. Give us a review, tell your friends, or email me directly at Jcromb eight at Bloomberg dot net. That's j c R O M B I E as in my surname and the number eight at Bloomberg dot net. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge