YouSaid · the spoken record

Andrzej Skiba

lines on the record: 81
first: 2024-02-16
most recent: 2024-02-16
sittings or episodes: 1
sources: podcast

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“And we overshoot during the rallies because everyone is trying to reposition at the same time and cannot be really nimble about it. And that's something that we want to avoid as much as physically possible within our team”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Markets versus developed markets rather than being able to express views on specific issuers, specific companies, specific securities. In our view, the latter focus is much more valuable because our Blueberry approach has always been that I've got a much better control over those catalysts about working out what could be the drivers of every investment story rather than putting a crystal ball on the table and betting on is the market going to go up or down tomorrow. And the asset class has grown so much and so much money has been poured into our universe that you ended up with a situation when vast majority of players are just too big, too bloated and unable to reflect those views. And that just then exacerbates the beta moves. We overshoot during the”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Tend to win. And the last issue that is a problem within fixed income broadly, but it's more about the nature of our industry, is that asset managers and debt investors have raised an absolute ton of money since global financial crisis. So the space has ballooned in size. And what happens when you become big and bloated? Well, that means that your ability to maneuver through the markets, your ability to be nimble, your ability to source individual opportunities that make a difference in your portfolio diminishes a lot. You become a beta junkie. That's what we normally call that where you just have to bet whether things go up or down or bet on big kind of beta drivers of your portfolio, like investment rate versus high yield emerging.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“With inflation data that disappointed and could aggressively trade on the back of that, where in reality the key question is what you asked a while ago is about what does it mean for future rates? What does it mean for how far Fed can cut over the next few years? Because just one data print is just so much less important than a broader direction of travel. And we see way too much focus on kind of short-term noise and not enough debate about the bigger building blocks within the market. There's plenty of investors who debate these issues, but in terms of day-to-day trading activity, it's pretty clear that short-term factors tend to”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“I'm a fixed income investor myself, so it's difficult for me to opine how that You do have a lot of herd mentality, so you tend to have investors following a particular theme and everyone jumping on the same bandwagon in a similar fashion as it was pretty much consensus at the beginning of the year that rate cuts would be starting in March and we go as much as 150. So as you can imagine, when we were speaking to our clients, some of them were skeptical of our view that it's too much too fast and maybe now they wouldn't be saying that. So I kind of heard mentality definitely is something we do see a fair amount of. The other issue is disconnect that people make between the short-term catalyst and long-term catalysts. So for example, you can have a situation where market is processing a specific data release like today.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“In areas like CMBS, you might have to buy knowing that it could get worse before it gets better because of the broader sentiment within the space, but you should be money good on the other side of the trade. So for more patient investors, definitely, that is something that we like. And also in the context of our US funds, we allocate a smaller portion of those, for example, Core Plus strategies to that corner of the market to make sure that we're not too outsized given the risks ahead.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So for single asset, single borrower market, they issued debt securities, bonds as any other CMBS issuer would. They're just not in a conduit format where you have a whole mix variety of different asset types, but they are tranched and you can have exposure to different layers of a mezzanine structure depending on your risk tolerance. But that space is definitely less liquid. So those kind of investments you need to be more prepared to hold for longer before you realize your value. But as often is the case when market dislocation happens, that just creates medium-term opportunities. So in a more liquid markets like corporate credit, you can take advantage of those pretty fast. Market tends to adjust to news pretty efficiently, whereas”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Safer areas like warehouses or industrial properties rather than office. That's why the single asset, single borrower market within CMBS is more appealing in our opinion.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Rather than, for example, conduits, CMBS conduit market, which is a more traditional way of investing in CMBS, it would be single asset, single borrower market, where you have more clarity over who the issuer is or what type of underlying asset you are considering. Here at Blueberry, we have a lot of expertise within that space, but we feel that in the conduit space it's a little bit of a gamble because you essentially buying instruments with meaningful exposure to office real estate where you just have to bet that it's not going to be worse than you are estimating in terms of your pricing. And we think investors would find it much easier to pull the trigger on those opportunities where you're completely away from office real estate and have nothing to do with that and focus on”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“To a property on the other side of the street could have completely different future ahead of them. So it's a pretty labor intensive work to select the bad from the good.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Warehouses, whether that's leisure properties or some multifamily residential properties, where you actually can gain access to good assets at attractive valuations and they're not exposed to some of the secular themes, negative secular themes like that in office. So if you are brave enough to wade into a market where people have lost a lot of sleep and the outlook for some corners of that market remains quite bleak. But if you're brave enough to step in and pick up assets that are less exposed to those most vulnerable themes, but still at pretty attractive valuations, we do see that appeal within across our portfolios, you just have to do a lot of homework because one property on one side of the street compared”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Away from the corporate credit space, we also would say that there are corners of the securitized market that are looking particularly interesting. Like we've seen a lot of pain, especially in the commercial real estate space. And it's been carnage in the office real estate space as it's being reminded to us on almost daily basis when you open the press. always creates opportunities for an active investor dislocations amazing because they create opportunities to buy assets at attractive valuations for the benefit of your clients and within real estate space while we are structurally very bearish on the office real estate like we've seen vacancy sorry occupancy rates not recovering almost at all there are other corners of the commercial real estate whether that's”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Is there anything else on the credit spectrum that you are excited about? I know you like duration. We talked about owning long-term treasuries that benefit as interest rates decline. But it sounds like you're not very enthralled with private credit. But any other products.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“That's it. That's exactly the situation. And in a way, that's what also allowed spreads in Hyield to be so well behaved in a face of an economic slowdown where you just have scarcity of bonds. And that means that at least from our perspective, there are corners of the market to avoid where things are just too rosy. And there are other corners of the market where you have good investment opportunities. So for an active investor, that's still fine, but from a generic investment perspective, accepting those spreads in 300 range is not what makes people particularly excited when they think about high yield.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So, high yield issuance was extremely high in 2020, 2021. It fell off a cliff basically in 2022 as interest rates rose up. You're saying that it's picked up slightly in the month of January, but to the extent that it's still lower than it used to be, it's not because there's a lack of liquidity. In other words, it is an issuer's market. They have control. And if they want to issue it, they can. It's not like investors are unwilling and there's fear in the market. No, investors want to do the deals in high yield. It's just companies don't need the money pretty much. Is that what you're saying?”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Of the pace of 2020 and 2021. And I bet you a lot of investors would gladly gain exposure to new investment opportunities as companies want to refinance. So if indeed yields start coming down and management teams will be pretty happy locking in more reasonable coupons, we actually could see a pickup in price. That creates issues within our universe, and that's where trouble starts. So for now, companies are in very good shape, leverage is low, they looked in low cost of funding in high-yield bond space, but they can't rest on the Laurels forever because those maturities will be eventually coming in 25 and 26, and you have to do something about that. It's just that in public markets, we have so many more avenues to address that when the time comes than in the private space.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Least for this year, yes, companies are sleeping soundly knowing that there's barely anything they need to address this year. But as we're moving into 2025, those numbers are picking up. So from the middle of 25 onwards, we are seeing quite an increase in maturities. They're still manageable by historical standards, but something that market will have to address. And in fairness, if issuers were proactive in refinancing 25, 26 maturities, that would be really welcome because the downside of companies being so busy in 2020 and 2021 is the fact that it's like crickets within primary markets, within high yield. So the volumes have declined dramatically compared to those previous years. And this year, they have picked up a bit, but they still weigh.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Andre, one of the most fascinating things you said in this conversation was about the high yield maturity wall. You can explain for the honest, when credit, most time a company defaults, it's because it's not because they miss an interest payment. It's because they miss the balloon payment at the end, the principal. And so the principal is due. That is the high yield maturity wallet. So you're saying that the maturity of high yield is so far out in the future and probably more so than close to any time in your career. Is that fair to say?”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So we would expect in the cycle for the curve to normalize. But again, it's very much contingent on continued moderation in inflation. That does not happen, then you have a likely scenario where investors start even worrying about the potential for rate hikes, which would pressure the front end of the curve. And that in return will spur fears of a more pronounced economic slowdown, reducing yields further out the curve and kind of fueling the inversion that we have seen within the markets when you had this balancing act between too high inflation and growth fears at the same time. So our base case suggests that we will normalize and cuts will be coming, but we need to see more income. That validates that because January prints were not the ones that Fed was hoping to see.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“And all those questions about whether the neutral rate is, whether 10 year will trade, whether Fed funds will be intertwined, and we will just watch data accordingly, whether indeed we're following the classic path of pretty aggressive rate cuts over the coming year, which would be a great boon to fixed income investors, or we need to settle for less over the coming years, which at the end of the day is not the end of the world. Because in that environment, Are you going to complain about getting paid 5, 10% kind of returns within fixed income on a go-forward basis? Probably not, but that still could have broader implications in terms of people's portfolios because the fewer rate cuts ahead, the more likely they're probably going to stay in money markets or short duration instruments rather than going further out the curve.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Now, market is pricing around 100 basis points this year, more than 100 basis points cuts next year. And we think it's perfectly plausible that Fed normalizes to anywhere between that 2%, 3% kind of range and settles there. But there is a risk that inflation remains sticky, that their ability or willingness to categorically will be diminished. And we had that cycle back in the 90s way before I was doing what I'm doing right now when all the Fed was able to do is to cut rates by about 100 basis points and then add the rate hike ensued after that. So we will monitor whether there is an ability for the Fed to go more aggressively or not.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Of the current perspective that is being deployed by the Fed would argue, well, things are much better than was previously the case. And economists would have expected a much deeper slowdown, if not a recession with this level of rates. But the two things bail this out. Firstly, the fact that companies in the US were not firing people. There was an expectation of a meaningful spike in unemployment. And given how difficult it was to find labor force over the recent years, many, many companies decided we're not going to make layoffs. We're going to hold on to our employees even at the expense of our margins because finding new people to join is just so difficult, like job openings data was actually quite telling in that respect. So one part of the argument is that”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“The fact that, well, if the neutral rate was that low, how come is it that after hiking as much as Federal Reserve did, economy seems to be doing pretty fine and can live with that higher level of interest rates. So they are arguing that, well, maybe the neutral level starts with a three, if not higher. So it will be fascinating to watch as the answer to this question unfolds, are we just going to get a few rate cuts and then we stop because inflation kind of settles around 3% levels and just refuses to cooperate further and Federal Reserve rethinks what should be that terminal rate within this cycle. The proponents”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“I think this is by far the most important question that fixed income markets are facing ahead. And broadly, risk investors should focus on because there's a world of a difference if we get a few rate cards this year and then Fed stops compared to a world when they cut this year and continue cutting quite aggressively throughout 25 and beyond because they are so much above the neutral rate. academic debate about where the neutral rate should really be and while historically and for now it's still the case in official projections of the fed that level of rate starts with it too a lot of economists a lot of market participants are questioning whether that is still the case and the pointing”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Capital, when to do it, and when to feel that data is evidencing the trend for rate cuts is well entrenched. Because after the last few prints, the bond bulls are getting a bit concerned that the narrative is changing.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Treasuries need to go to 4% or less and similar kind of shifts across the curve. You need spreads to move 10, 15 tighter, which are not egregious demands, but more things have to cooperate to get to that 10% return from your starting point of a slightly lower yield than you have in high yield. But a lot of investors would still take that because the argument is on the risk adjusted basis getting tenure treasuries around 4% in the next 12 months and having spreads a little bit tighter is not a big ask. So actually, even though this outcome is less certain than within high yield returns, I'm happy to take that as we look ahead. So we're having a ton of debates here, as you can imagine here at Blue Bay with our clients and prospects about how to deploy”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Two levels which we felt were a bit too quickly too far, but now are becoming more rational. So we generally suggest to investors, depending on the risk tolerance, getting invested within either investment grade or high-yield spaces. And the difference between the two is such that in high yield you are more likely to see that double digit return because in high yield your starting yield is already quite elevated. So all it takes is a little bit of a rally within the space, avoiding defaults and just picking the more interesting corners of the market to generate that 10% return. Whereas in investment grade, a few more things need to cooperate. So rates need to rally. Let's say 10 years.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Hundred basis points of cards this year and the first cut happening in June rather than March earlier in the year. So from our perspective, you're actually getting to a point where if you're looking at your US aggregate like cork or plus type investments within the US, if you choose an active manager that can navigate the space well and pick the attractive corner and avoid the ones that don't leave much upside on the table, this is really becoming more attractive. And especially if you hit 450 on the tenure treasury, I think there will be a clamoring of clients trying to lock that yield, especially since a lot of investors felt they missed the party towards the back end of the year when we had this enormous rally within fixed income.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So look, we're not far from a point where when you're looking at five or ten year treasuries, those start becoming really interesting. We're looking at how much the market is pricing in in terms of the rate cut.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“A lot of money that still has not returned to the asset class will be put to work, both in terms of US domestic demand and also international offshore demand for public U.S. fixed income. At the end of the day, if you can create pretty reasonable scenarios when you get to 10% type returns, both within investment rate and high yield over the coming 12 months on the risk adjusted basis, that is an opportunity that many investors would not want to miss. But in our opinion, you might want to wait for a bit more clarity in terms of inflation data cooperating and the path of Fed policy to really pull the trigger because right now we're in a little bit of a limbo as data is not as supportive. As it was even a few months ago, and you have very heavy treasury issuance ahead of us as US government is trying to fund its ballooning deficit.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Well, there's a lot of interesting stuff happening in the macro space. So I think this is a year when getting right calls in terms of direction of rates, in terms of what Federal Reserve will do, how economy will progress could easily lead to double-digit returns in your fixed income portfolios. So we generally advise our clients gradually to move further out the duration, gradually to move away from like money market investments and those very safe but capped essentially returns and be a bit more brave and go further out the duration curve within credit or securitized spaces. And we can talk about that in a second, we do believe that”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“To steer through that for the space, but there is a pretty stark difference in the relative strength of the public Hyold bond space and other parts of the market, which explains why the spreads within high yield bond space are not super exciting. So like from our perspective, some of the highest quality high-yield issuers within the public high-yield space, we really struggle to get excited about them here at Blue Bay. Like we feel that the trading at very small pickup compared to investment grade opportunities. And we just want to be paid more for risk. So we think it's a great time if you're an active investor where you look at the market and decide which are haves and which I have-nots, but stay away from kind of generic spread opportunities because those do not leave much on the table.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Federal Reserve can cut rates. But when it comes to private credits and leveraged loan spaces, you could easily point a scenario where, especially if the stagflation narrative gains more traction, where the fault outlook could lead you to double-digit defaults within those portfolios. At the end of the day, if you don't generate much cash flow and you're already highly levered and your ability to refinance will be more limited in this market, well, that's how trouble happens within leverage finance. So look, there are definitely more benign outcomes that could well happen. As I mentioned, if rate cuts are aggressive and economy slows down but doesn't do anything more ominous, that could be enough of support.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Obtained in a post COVID world not to spend on share buybacks or aggressive M&A, but actually to strengthen the balance sheet. So we have close to the lowest leverage since global financial crisis within the public high yield space. We're talking about less than four times. So when you compare that to close to six, seven times in a private credit space and maybe around six times excluding addbacks in leveraged loan space, that's quite a stark difference between the two. So we are pretty relaxed here at Blue Bay in terms of the default outlook for the space. However, we also recognize that that presumes the economy slows down but doesn't fall into any meaningful recession. That's our base case scenario. And we also assume that gradually”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“that is this kind of no maturities left for this year. We have the smallest maturity wall in the high yield bond space that we had in a very, very long period of time, like tiny fraction of the market. So maturities are only starting to kick in in around midpoint of 2025. So if rates do not come down, if financing conditions remain difficult, that would start becoming an issue as we traverse through the year and companies are starting to deal with their current liabilities, those that are less than one year to maturity. But generally speaking, right now, people are pretty relaxed within high yield. It also helps that companies in the public high yield bond space have used all the cash flows, all the extra cash flows.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Based on our data here at Blue Bay, we are seeing the fault rates in the public markets in low single digits and the fault rates within the leverage loan and private credit space more in low mid single digits. That is actually already quite unusual because historically the extra protection that you were afforded within the loan market or private credit space meant lower defaults than you would see in the public high yield space. But for many reasons that we discussed on this call, it is the reverse now and it's likely to remain so given that the risk profile of the leverage loan and especially direct lending spaces is much greater. So going forward, we believe that for high-old bond issuers, the fault outlook is pretty benign. And the main reason for”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“You have a broad set of problems that needs to be addressed at which point it is an issue and it's something that will make investors lose sleep not just within private credit but will have ramifications outside of the space or whether those are isolated incidents.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Any optionality, any other pockets of the market where you can address those issues are always welcome. But if here you have more of a broader issue where if rates stay high and economy continues to slow down and suddenly a lot of these companies start to struggle in a more visible fashion, that then becomes a broader problem, something that both the regulators and broader set of investors will have to grapple with because if you have an increase in a wave of restructurings within private credit, that will have implications for broader demand for leverage finance securities that will have implications for amount of capital that can be committed in other parts of the market as this space is struggling to deal with its problems. So all really hangs on whether”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Yes, I think you're spot on, Jack. So if you are forecasting a relatively benign period ahead when just a few companies have issues, something that is pretty typical that one or two, three credits have a problem. In that world, having the ability to get funding in a private credit space is really helpful because that's another avenue how you can avoid a default, how you can repay these obligations. But as we discussed earlier, the issue here is not that you have a few bad apples, is that currently you have a whole space where there's barely any cash flow generation because the suffocating under the weight of debt, the cost of debt that they have to service at this time in the rate cycle. So this is the challenge that you're facing where when problems are seldom”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Where you have those distributions funded by first lien secured loans within a variety of issuers. In a high-yield bond market, it tends to be much more seldom that we see this kind of activity.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“And more cheered up in terms of the prospect for rates cuts have decided that they could lock in lower cost of funding by renegotiating with lenders the margin, the spread that they pay on their loan obligations. Well, that is all typical for the space. However, the volume of that was quite overwhelming. And it's not the preferred activity, as you can imagine, that CLO investors see because the returns are getting diminished. What they were craving is more new investment opportunities to put money to work in the context of new CLOs that would be originating, new warehouses where they're investing. And that's why with better economic outlook, the idea of being accepting towards dividend distributions gained more traction. And we're seeing quite a variety of transactions.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Here, this is paid from debt, so the easiest way to imagine that is let's imagine a company that initially offered their securities when the leverage was six times. They've done well, they deleverage to four times. And rather than staying there, they're paying themselves a distribution to go all the way back to six times. And this way, the private equity sponsor is repaying some of the equity check that they provided in the initial transaction, boosting their return. So we're seeing quite a few of those distributions happening at this stage. And one of the drivers of the market accepting that because it's less common within the bond space is the fact that we had an absolute wave of repricings within the leverage loan space where issuers are more confident about the economic outlook.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. So, a lot of new origination is happening in the leverage load market or in private credit, high yield bond margin, mostly refinancing. I just want to highlight and make sure I got it right that you said a lot of private credit deals are used to finance, you said LBOs to leverage bio. That's private equity. And then dividend recapitalization. Is that when basically private equity investors pay themselves a dividend by borrowing money kind of? Because, you know, when Apple pays a dividend, it's paying it from its profits.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So it's an important part of the leverage finance framework, but we're not seeing a massive shift of investors from leveraged loan to the public high yield bond market or vice versa.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Do speak to each other quite a bit, but generally you have a situation where companies that have both bonds and loans within the capital structure continue to do that. And when there are periods when the leverage loan space is struggling with absorbing the amount of deal flow, then yes, you can see some opportunity for issuers coming with senior secured bonds into the hilt bond market and redirecting some of that pipeline into the high-yield bond space. But generally, we see the high-old bond market continues to be mainly refinancing market. It is less a destination for new financings, for new transactions, whether that's M&A or dividend distributions. And those are happening predominantly within the leverage loan and private credit spaces.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Managed to issue all the debt when they needed to a few years ago and had no need to come to the market. But the one that kept growing fueled by CLO growth was leveraged loan space. And now last year for the first time that space actually shrunk because all this money poured into private credit space meant that this space was stealing deals from the leverage loan space and those were being refinanced in private credit market or the LBO transactions were going straight into private credit market rather than leveraged loan space. And this had both upsides and downsides like the downside is the fact that there's less activity. But the upside was the fact that for some of the hairier stories, for some of the names that were more problematic from public market perspective to refinance, they were finding a home. In the private credit space.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Equity sponsors like the fact that with a shorter duration capital structure and a floating capital structure, it affords you more flexibility. They like the fact that the market was accepting of more aggressive addbacks. So that used to be the destination of travel for LBOs, for dividend recaps. And in recent years, as money started flowing aggressively into the private credit space, you suddenly have this situation where money needs to find a home and suddenly private credit was refinancing a lot of obligations within broadly syndicated leverage loan space. So last year for the first time in ages, leveraged loan space actually shrunk in size, high-level bond market has been shrinking for quite some time as issuers chose to be quite conservative. And as we mentioned earlier,”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“No one exists in a vacuum. And indeed, there is a broad impact across the whole fixed income universe through generally macro events. So, you know, where we are in the business cycle impacts all kinds of companies no matter how strong your balance sheet or not. But on a day-to-day basis, the biggest tag of war that we are seeing is between the broadly syndicated leverage loan space and private credit. And here you have this curious case where leverage loan space has been growing for years. It has actually outgrown the traditional high-yield bond market fueled by a lot of activity in the CLO space. And leveraged loan space hit around one and a half trillion in size. And that used to be the primary destination of more aggressive transactions, as we spoke about earlier.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Comes to investment grade. So as you rightly pointed out, people wanted to get back into the space and take advantage of more attractive valuations. But when you're looking at the hydro space, none of the money came back. You had outflows that were not followed by any meaningful inflows, and that continues to be the case, where all the money has gone into has been private debt. And that has been by far the biggest area of demand for investors with a greater risk tolerance in our universe.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Staggering numbers, and as I mentioned earlier in our conversation, some of that does not relate to direct lending. It could be other perfectly legitimate users like infrastructure investing or distressed investing, but an increasing share of that money flow related to direct lending in recent years, around the inflows were in that space. And in a way, that was the missing link for investors within more traditional high-yield space. Because when you're looking after the traumatic events of 2022, when not only stocks are a horrible time, but also fixed income had a horrible time. And people were shocked with double digit negative declines within fixed income. Well, half of the money came back in 2023 when it”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT