YouSaid · the spoken record

Dan Ivascyn

lines on the record: 78
first: 2023-10-26
most recent: 2023-10-26
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“The curve should be up more upward sloping than it is today. And I'd say in aggregate, it's probably slightly upward sloping, but it's flatter overall than it probably has been for a while. That's one of the reasons why we're able to find some of the opportunities we are in that one to two year part of the market. We were very, very active in the commercial paper market for the last sort of 18 months. And companies have stopped funding as much in commercial paper as they used to as it's gotten more expensive because, you know, most of the commercial paper issuers are investment grade. And so they started to say, all right, well, if rates are going higher, I'm going to start, you know, issuing longer debt. And it's not costing me a whole lot more to issue that longer debt than it is to issue the short debt. So the CP market actually is the activity levels have gone down as a result of.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Again, these attractive yields at the front end, I don't have to go out too far. And there are certain cases where I'm able to buy bonds that right now I'm looking at something I'm trying to buy right now that's a double B plus company at $7.3 quarter percent for 18 months. And they're 2029 paper also traded 7 and 3 quarter percent. So I go, all right, well, I'm happy to take that bird in the hand and stay at the short end without having to get paid seven and three quarters for the next 18 months. Because if I have to invest out to 2029 to get it in the same credit, I'm taking it off a lot more interest rate risk and spread risk out there to do that.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“So, from a spread basis, believe it or not, it's fairly flat. It's probably a touch tighter here at the front end than it has been. But we look at it, we like to look at things much more on just an absolute yield basis as to, you know, and where we're investing. I use spreads much more as a barometer for me to understand what the market's risk tolerances are and when we go into sort of more of a risk on or risk off. Are we in a neutral spot? Are we in a very risk-on market or very risk off? Right now, we're sort of still a little bit risk on, although it's been coming off in the last month, right? So we're moving back more into sort of the neutral phase as the markets overall have really been correcting here for the last 40, 45 days. But on an absolute return basis, what's interesting is if we can find”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Know the same way that we used to. I'm not sure that we do. So it's a little bit troubling. We also know that there's certainly going to be a lot more regulation coming down the pike, right? There's got to be on the back of something like Silicon Valley Bank and Signature and First Republic. Of course, there's going to be some more regulatory overlay in order to protect the depositors and or just the investors in general from something like this happening. So the banks are going to be required now to operate with much tighter risk controls, and that will reduce their overall returns and profitability ultimately. So net net, you know, I think banking is going to be in for a pretty tough road for kind of quite a while. It's not an area of real expertise nor focus for us from an investment standpoint.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“They have fewer lines of business that are going to be as profitable as they used to have. So securities underwriting fees are actually lower, which is disincentivizing them from making principal investments on that basis. So they don't want to own loans on their balance sheet. They just want to originate, collect the fee, and move on. So the durability, I think, of the franchises really starts to be called into question. Do we need them?”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, with Silicon Valley Bank. Yeah, Silicon Valley. And then First Republic was First Republic also bore a lot of that as well. But to see that much money come out that quickly, the structure of banking has changed. The ability to make and withdraw money on your cell phone that exists today did not exist in the days of the Wamu unline. So people used to have to actually go to the bank in order to get the money out. Today, they didn't. It just came out that rapidly. So that kind of was a real eye-opener to us about the risk in deposit taking institutions. And if things can unravel that quickly.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“They didn't. There were still assets, I think, in the, if I remember, I think the Hold Co. actually held up okay, but the OPCO's collapsed and did so. But I can't recall the ultimate unwind and the ultimate recovery in the Wamu paper. But what happened was $17 billion was withdrawn from the institution in, I think, 11 days. Something like that was a number. In the case of First Republic, the number was something like $40 billion in 24 hours.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“It's worrisome. It's worrisome. We don't have any investments at all in deposit-taking institutions because of that. We saw up close and personal. I saw what happened with Washington Mutual when it failed during the financial crisis. I watched that collapse. I was trading the bonds, both the OPCO and Holdco debt of that when it was kind of coming unraveled. It was amazing.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“What do you think on the financial sector, and particularly like banks, bank stocks, the business of banking where credits, losses are coming up, but from a very low level? And also, their deposits are going down, deposit costs are going up as private credit is eating their lunch, whether that's a good lunch or not, whether it's a lunch you want to have their lunch”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“These, where each of these guys are lending. Maybe there are some that are going to be extremely transparent. I don't know, but I'm not privy to the portfolio disclosures of a lot of these guys. And, of course, there are some that are going to be better underwriters, just like there are at any of the banks, right? So this is essentially what it's kind of turning into. The banks are no longer going to be in the game. And what's kind of risky for them is if these private credit guys completely usurp them, I'm not sure what purpose we have to have the banks out there in the leverage finance world at all. Right now they're just collecting fees for arranging and syndicating loans. Private credit guys might start doing that and competing with them. They may say, all right, well, we don't want to own this whole thing, so let's syndicate it out and let's see if we can get some of this out here to the CLO guys or some other cohort that wants to buy a piece of those loans.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Is like seven cents. It was the minimus, right? It was de minimis. Yeah. And so, again, going back to what we were talking about, there's always this latest new thing. Private credit is the new thing, right? Spacks were the new new thing for a while. Private equity was the new thing when it really started to explode and you had a few different situations that were producing really good returns here back in the early 2000s. Private credit is because you're getting paid a coupon, it's going to generate, they're going to generate some okay returns as long as we don't have significant credit events. The returns will be at least okay and they could actually be quite good. The only question is what's the portfolio quality look like? We just don't know. I mean, you don't get the same kind of transparency in knowing what each of them.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Well, there was an incentive. Look, the guys that if you funded us back, it cost the guys to start them probably a couple million dollars of their own money. So they were incentivized to try to find a deal. And the second thing was the The owner's share of the equity and of the economics that they got were astronomical. So if they found any deal, even if it didn't work well, they were still going to be able to generate great economics for themselves, forget about whatever anybody else ended up with.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it was nuts at the time. But that was the economics of the SPAC deals were just crazy. In fact, we had a portfolio company that one of our, that aCACs were kind of looking at. And we can't do this because it'll destroy the equity. And sure, sure as heck, you can see any company that's even some real legitimate companies that are out there that were bought by SPACs, they still trade with this SPAC taint on them. They all trade at discounts to what they're probably regular public market values would be just because they came as a spack, even though that might have been two, three, four, five years ago, that SPAC taint just stays with them forever.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“In my opinion, it just happens to be someone who's sitting here and been investing in these markets for all these years. And I've seen the fads come and go, right? We were talking about this when spaced were blowing up here two years ago. We're losing my mind as I'm watching this and going, okay. So you're going to launch a SPAC and you're going to make Shaquille O'Neill one of the SPAC guys. You're like, yeah. Well, let me tell me what Shaq's investment acumen is here that somebody should just give Shaq a bunch of money to go out and find a company and be on the board of this to do some kind of deal.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Good question. So I don't know. Somebody's made up somebody's spinning a better yarn that I can spin, I guess, about why the opportunity is so great. The industry we're in is full of people who are deaf marketers, right? They've been out and able to go out and market and spin a story and tell a great story and raise money and hopefully invest in such a way that their investment returns mimic the spin that they put on their story when they're raising money. And I think that's some of it here in what is leading people to private credit. But I do think that the fact that we haven't seen a lot of defaults will continue to bolster private credit. It's always going to be easier in the rearview mirror to say, oh, it was really good or it was really bad.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Year tragedy is 5% and six month treasury bills at five and a quarter. You can roll Treasury bills for a while and say hang out and get that. So that's my concern with private credit as an investment case today. The asset class, though, is going to be around. It'll be around for a long time. There are some guys in it that are very, very good. And then there are some other people in it who are visitors and they're sort of newer to the market. And I think they're going to have a harder time both sourcing deals and continuing to raise capital.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“You can invest in a public mutual fund, get 9%, and have daily liquidity. It doesn't make a lot of sense for me to tie up money in private credit that's much more opaque, hard to assess and analyze, very limited liquidity. When the public markets are now giving you a much more attractive view. And by the way, if you wanted to take no risk, go ahead. You can buy treasuries at over 5% at the short end. Today, the two year is.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Concept of private credit is it's extraordinarily broad. It's much broader than anybody thinks. I mean, I'm sure there are many, many facets of it that I haven't even seen out there. And, you know, I'm in the market every day. My concern about private credit is that some of it will work out fine. Some of it won't. And if you are an investor and you put money into a private credit fund that requires you to lock it up, well, you may get decent returns. But if you turn around and decide, all right, I want to get out. In order to sell it, you may have to go to a secondaries broker who will come in and bid you down 15 or 20% from the net asset value in order to get out. So you're going to give away a couple years of income to do that. And as I look at the Public markets where we live today. The high yield market here is almost a 9% market.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“They're just doing investments in, they could be in toll roads, it could be in gas pipelines, right? So they're very focused industry-wise. Others are more focused in terms of size and scale. So we have at the very bottom end, guys, only deals 20 million and under, or at the top, you have an Apollo or KKR or sort of blue owl who are kind of three or Aries, three of the big guys there who are looking to actually usurp the banks in their roles as the underwriters of LBO debt. And they said, well, what we can do is we can actually write billion dollar checks for you guys and provide you with that backstop financing you need in order to get your LBO done.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“A lot of yield around for traditional fixed income strategies, whether they were investment grade or high yield, these guys were able to produce returns that were in excess of that. And so they continued to attract more money. Defaults were low. They also were running a leverage strategy. So they were borrowing money as well as the money that investors gave them to kind of juice returns up. And some of them produced 10, 11, 12, you know, some cases even higher percent annual returns. So money's poured in there. Again, so faster than just about any other asset class I've seen in terms of the overall growth. Now, it's not all homogenized in the sense that some are very specific in the types of transactions they do. I've seen them that are an infrastructure fund.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“This is Aries Capital Corp. Yes, this is their business development corp the BDC, and it yields 10. So if somebody wanted that exposure to private credit and was a smaller investor, you can get it going to the BDCs, Aries or Prospect Capital. Many of these BDCs have been out in the market for many, many years. They've been consistent dividend payers. There's certainly been volatility in the underlying equity. There's good times to buy times not to buy. That's where it all started. And now we're in an entirely different regime where huge, huge sums of money is being raised and allocated privately in different types of vehicles. Some of these vehicles require people to lock money up for two, three, five. I've even heard as long as 10 years. And in the last few years, again, when there was”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“They borrow money in the markets. Yeah, but Aries borrows is an investment great company. It's got a $10 billion equity market cap. They've produced really good returns over a long period of time. The common stock there yields 10%.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“I mean, I don't even think I can put a number on it because there's so many pockets of private credit. You have the original, I don't want to say the original, but in the last 15 years, the main bucket of private credit has been the BDCs. And BDC's business development companies that like an Ares Capital as one, those are the most visible and they've done this for a long time and financed these companies on a private basis.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“That these guys are trying to grow because many of the private equity shops realize I can't raise as much money in private equity. Some of these smart people actually really get that I'm not going to be able to produce those kind of returns anymore. So let me give them credit option that's going to be slightly lower return but more stable. And there's an awful lot of money that's flooded into that market very quickly as well.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Private equity world is going to kind of going through the same thing because there used to be a few dozen private equity shops. There are thousands of them around the world right now and they're all scouring the market and looking at the same companies. And they used to be able to buy companies and negotiate and buy companies. Well, now the way they buy them is in an auction. If you're buying them at an auction, chances are you're not getting a bargain. You're competing with a whole bunch of other people who have the same financial incentives as you do, a lot of smart analysts doing work, figuring out where we can finance this. And all you're doing is trying to, you know, outguess the other guy as to what it is that I would have to pay to get this into my portfolio. So I'm not particularly sanguine on the outlook for private equity as an investment, as an asset class. The next thing that's coming along is private credit and private credit is just a natural offshore.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Do. You can't get as much leverage. What happens overall? Hedge fund returns, they become more disparate. Some guys do really well. Other guys do really poorly. So what happens? Well, they're not as special. When you have 20 hedge funds out there that you can invest in, you can command two and twenty very easily. When there are thousands and they're no longer that special, why would I pay two and twenty? Somebody really had something unique, I might pay for it, but everybody else, no, I would pay a lot less. And that's essentially what's happened in the hedge fund market. It's gotten very commoditized. There are still pockets of the market that where guys still do quite well and are able to command those fees. But overall, you see the returns kind of dissipate. The guys that produce great returns aren't true hedge funds. A lot of those guys are taking big directional bets or leveraging big directional bets.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“You're short, the junior asset and the capital structure. You've got this positive convexity where you're able to short stock more stock as it goes higher, buy it in as it comes lower, trade along that convexity and capture volatility and lever that strategy up very, very highly to produce incredibly high returns that were non-correlated with the market. Bunch of assets came flying in. And those used to be two and twenty strategies, right? The two and 20, 2% management fee and 20% of the returns that the manager used to be able to keep. People would give them money on those terms because the returns they were producing were fantastic. More money comes to the market, opportunities shrink over time. What happens? They have to start looking into different asset classes, other ways to sort of generate returns. It's not as easy to.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Be a generation of private equity partners and principals who've done fabulously well for the last 10, 15, 20 years. They're all going to sail off into the sunset and live well and hand the keys off to the next generation. And the business will evolve into something else. But if you look back, think about the hedge funds, right? Hedge funds the same thing happen. I was very fortunate to be at the very, very forefront of sort of the hedge fund, evolution and creation. My years, my partner, Carl and I both worked together when we met, we were working in the convertible bond business at Merrill Lynch back in the 90s. And that was when the hedge fund game really started to take off because convertible ARB is a natural, it's a fantastic product for the hedge fund community because you're along the senior asset in the capital structure.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Pension funds and CIOs of big state funds and college endowments, allocating to new money to private equity. And I said, you know what, you guys are looking in the rearview mirror. The returns of the past are not here. The minute we've gone from zero to five percent on the 10-year, the ability for these guys to generate those 20% plus IRRs is gone. They can't do it, right? Because there's a lot more money out there in the market. It's chasing these deals. The deals are very competitive. The prices that they'd have to pay to get to actually get companies to sell are too high and then they can't put the amount of leverage on them to generate the types of returns on the underlying equity that they would like to. And the cost of that leverage is higher. So they've got so many things that they're facing headwind-wise. And I think what you're going to see, there's a...”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“My personal feeling, okay, and I think the housing on days for private equity are done. I just think they're done. Would I go out and say private equity is toast? No. But look, we've had a 20-year run. Private equity guys have done fabulously well. You can note. What I do know in all my years in this business, I've operated in a few different leverage strategies. And you cannot run a leverage strategy the same way when you've got 5% interest rates versus when you have zero. The leverage strategies just have to give up the return. So private equity is a leverage strategy. It works great at very, very low rates. It doesn't work as great when rates are this high because they just can't generate the IRR. So anybody who's allocating money, I constantly read about, excuse me, I read about...”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Paying down some of that debt as it's gotten much more expensive and/or terming it out depending on the price to try to just get it out, extend it out much farther into the future. But today it would have cost you three or four percent a year and a half ago to do that. And today it might cost you seven or eight.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Some may have hedged, but not a large component. A friend of mine who works at a pretty big lending bank in the southeastern U.S., and they do a lot of revolving credit facilities, it told me that on their book, they lend the revolver side of the business. They're not lending term loan Bs. But he said on their book, I think his number was under 15% of the companies that had borrowed in the terminal B market had swapped out their floating rate exposure for fixed. So there's a large group. And as I said, we've seen it. We just look at the quarterly numbers. And the quarterly interest expense numbers go through the roof. And there's no offset on the fixed side for them in terms of the swap. So it's gotten much more painful. And if your business has been good and you've been able to generate cash, then the thing that you should be doing is.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so some companies hedge, and the best hedge is just to issue long duration rather than issuing floating and having to enter the swaps. But what about that market we were talking about earlier, the LBO debt market companies that were taking private by private equity?”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Come to market, there'll be ways around it. There's so much cash that's out in the market, whether it's public markets here or private credit. If you're a good company, you're going to figure out a way to get yourself financed. And there's going to be somebody who's going to be willing to do it for you. If you're a lousy company with too much leverage, you may have some problems”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Fantastic job financing their business. So these double B companies did is they took all their near-term financing risk off the table and extended that out and bought themselves a lot of runway. Part of the reason why you say things haven't broken is many companies did in fact see this coming and position themselves for a higher rate environment. They knew that the end of free money was approaching. And those that did really set themselves up well and created an awful lot of flexibility. The ones that didn't that are reading articles today about the refinancing wall that's coming and everybody's worried about the refinancing wall. We've heard about refinancing walls, walls of maturity that have been out there for 30 years. There's always a wall that's coming up.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“To see where these are the buyers of those bonds, they're balled two and seven A to 2030 that were issued in 2020. Those bonds are now trading at 77. So those guys have collected three years of coupon, you know, so-called a little under nine points. And they've lost 23 points on the bonds. So down 14 points. Now, those bonds are WB plus rated. They're going to pay off. And that's a fairly interesting piece of paper. The duration's too long for us to be invested in, but if we were in a different interest rate regime, I'd find that to be very fascinating to be able to buy this debt at 77 cents in the dollar, then I would feel very strongly that I'm going to get paid off. But the coupon is so low.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Throughout 2021. And they started to issue, there was this trend in high yield. They started to extend, so historically high yield was a five to seven to eight year market. They started to issue some 10-year bonds. And the 10-year bonds were largely the only people that were really able to get it were the stronger credits, so double Bs. And some of these were four type coupons. Some of them were three-type coupons. There was even one issued by Ball Corporation, the guys that make... Metal containers and cups. They did a 10 year bond with two and seven Ace coupon. We said, Great for them, that CFO should get paid a fortune because that's going to be fantastic financing for them. And here we are fast forward today. I want to say the buyers of those bonds, they were part of an index, right?”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Some have, some have nowhere near as many as they thought they would. And you would think here when the Fed started raising rates and say like, all right, gosh, any CFO who has a huge floating rate component should be out here looking at swaps. Problem is, is the minute that happened, the cost of those swaps started to get very expensive. They're like, oh, we're not going to pay for that. We'll just ride it out because, you know, this won't go so far. Because that's essentially what happened. The cost of those swaps became very expensive. So if you didn't do it at the time, you had the opportunity to, you just left it alone. But there were actually some, you know, the guys who actually did, if I think about a cohort that did a great job, a bunch of double, high B or double B rated companies came to market. Late 2020.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“So those, I've been struggling to find where is the pain of the higher rates. And it sounds like we were talking about it right now. That's where the pain is. What if any hedging goes on with these companies? They're taking a lot of interest rate risk because interest rates go up, their cost is going to go up. Do they enter in some sort of swap to protect against that risk or what? I've tried a little bit to find that and I haven't really found much.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“I started this podcast actually pretty much exactly two years ago, and that was at a time when interest rates were at zero and pretty much the entire time that the Federal Reserve has raised interest rates, folks have been telling me that the economy can't handle it, that something's going to break. But we sent here two years later, interest rates are at 5.5%. Not a lot has broken. Nothing systemic has broken. And now with the benefit of hindsight, everyone knows it now. Very few people knew it then. But the households turned out their debt with very low coupon mortgage they refied in 2020. I've talked to people who have 2% mortgage rate. Corporates, they borrowed a very long duration so that that investment grade market issued, as you said, 30 year, 50-year bonds. I remember Amazon reading about Amazon borrowing 40 years.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Well, if you were levered seven times and all of a sudden rates have now, you know, screamed higher and you had a lot of term loan debt, you're not covering your interest costs all that easily anymore. And that seven times starts to get really, really painful in the current rate environment. So I think what we're going to see going forward, and we've already started to see it, is a lower tolerance for highly leveraged transactions. And that's really where the financial sponsors live. So we haven't seen, if you've noticed it, we haven't seen a lot of M&A activity and certainly not a lot of issuance in the high yield market by these LBO transactions. It's largely because they can't figure out how can we get the same amount of leverage that we had in the past and make it work and still generate the IRRs on the equity that we're buying.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“High yield companies and leveraged companies cannot exist for long periods of time at six times leverage. Now, we were in a market environment where they were paying 10 or 11 percent on their day. He said, but six times leverage, it just eats you up. The interest costs eat you up too fast. If you get to that point, you've got to really do something quickly to get yourself back in shape. And six times was sort of always in a store problem area. We saw some LBOs getting done at 9, 10, 11 times leverage, real leverage, not what was necessarily what they call this adjusted leverage because there's a lot of these adjustments to EBITDA that financial engineers use now. Very, very fancy and good for them, but we don't necessarily buy a lot of the adjustments that they want us to sign off on. But it was much easier to do that at very low coupon rates.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Yes, is a measure of sort of financial security and financial well-being. And when high yield companies who had historically been issuing bonds at 10 or 11 percent all of a sudden were able to issue at 5, 4, or even 3%, it's much easier to have this huge spread in which you're covering your interest. So you went from two times interest coverage to five times. Wow, these guys can handle this debt load really easily. So what then happened is we had what I call leverage creep. And in leverage creep, an old friend of mine told me about, I think it must be 25 years ago now, he said, you know.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“They're quarterly resets, usually quarterly resets every now and then. Some can be semi-annual, but they're generally quarterly resets on those. So as rates go up, you just start to see ticking along the way. You'll see the cost of that capital. We see it in all the companies that have significant amounts of term loan debt outstanding. We just looked over the last year and a half at the interest expense and interest expense numbers have gone up astronomically. So one of the other important parts here of why this has happened is when we were in a market environment that was very benign, very Fed was very accommodative and money was very easy. the ability for a high yield company to have significant interest coverage, right? So, you know, what is your interest coverage? How much times are you covering your interest expense?”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Across that massive plan. That's what we kind of concern ourselves with as we look at each individual security and say, are we getting the right amount of protection here if we don't have it in the form of covenants, then we need to have it in the form of very low leverage or in a really defensible business. And it certainly does make us get more and more and more vigilant and rigorous in our analysis of each one of our companies.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Mirroring the index. It's all they're providing. So they don't have, they don't ever look at the world as how they win or lose. They just are trying to help you keep pace with an index. And as a result, it makes it easier to issue debt with fewer and fewer covenants. So it hasn't been a pleasant path. My partners and I are, you know, I say I'm like the Lorax out there from Dr. Seuss, right? I'm standing up there screaming this structure stinks. This is horrible. You know, we shouldn't allow this to happen because as a bondholder, I'd love nothing more than have great protections out here for myself and for all my other fellow bondholders because that protects all our investors and protects the asset class. And if the asset class deteriorates to nothing more than a coupon and a promise to repay, you know, that doesn't necessarily lead to a whole host of great outcomes for everybody.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“We had a very long run of extremely low bankruptcies because financial conditions were so easy for so long. Rates were incredibly low. And as a result, Bond holders became more complacent. Now, some of the indexation in the market also has played into that, right? Because somebody at BlackRock has got a fund that's benchmarked against the high yield index. And this big multi-billion dollar LBO deal comes with a lot of debt. He can't really say, you know, I can't buy that. I don't want to buy that. I've got to buy it because it's a big part of my index. If I don't, I'm essentially short that name to the index. The combination of indexation and CLOs has eroded these financial protections. Passive is another, you know, the ETFs, they have no vote essentially. They won't vote on covenants. They won't negotiate or argue about covenants or lack thereof because they don't really have any kind of financial interest. They're just sort of mimicking.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“And you can get that for the most senior secured part of your capital structure. And that might take you from zero down to as much as historically the banks would only want to lend to you one and a half to two times leveraged through their term loan A's. Well, in the CLO world, that's kind of disappeared. And now we've got three and a half, four and a half, sometimes even five times leverage at the term loan level. Great for the financial sponsor because that's as cheap as cost of capital, but not so great for the bondholder who then starts at five times leverage and beyond and then has to be part of that whole cap stack. So the evolution though really was precipitated by the growth in the CLO market. And then just over time, you know, some of these deals were fine. Bankruptcies were low.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Fast forward to where we are now. The CLOs don't have that same stick. They don't have the same incentives to call people in. So the sponsors said, wow, let's do as much as we can in this term loan market because it's the cheapest funding for us. We can sell it to these CLOs. They'll just keep raising new funds. So they're just going to keep rolling this debt. You know, we never really have to worry about paying it down. We just keep it out there. And it's the cheapest cost of capital for us. And that's what happened during the entire post-financial crisis period. Very inexpensive. LIBOR fell to essentially zero. Now, in some cases, you know, the lenders would require a 1% LIBOR floor. But let's say, you know, they'd say, all right, LIBOR plus 350 if you were a, you know, B plus rated company, you could get 4.5% term loan.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“So as the CLO market really took off, the sponsors said, well, this is actually kind of great because we used to have these maintenance covenants that we'd have to maintain with our bank and said, oh, if we get over five times levered, they're calling us back in and saying, all right, we're going to have to do something. We're going to renegotiate. Bank's going to do something to trap cash and prevent us from having the flexibility we want.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT