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

“Yeah, the banks, if we fast forward today, the banks are loan arrangers. They tend not to be not lenders. They arrange loans. They collect a fee, and then they pass these loans on largely to CLOs. CLOs have grown in such grand scale that they are really the primary buyer of most, certainly most leveraged finance corporate term loans. If we think about the financial sponsors, as they look at, they're buying a company, they're trying to find how much capital do we have to put in? Where can we generate the highest IRR? And that would be with the lowest amount of equity capital. So let's see how far we can push. How much leverage will guys give us? How much will they require for us to keep in terms of skin in the game before they say, no, we're not going to lend anymore?”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“To discriminate against the things that we don't want to own and focus on the things that we do. And that's what we're so makes me so happy and we're so fortunate that the way our fund was structured 20 years ago allows us to do just that. And that's kind of why we only populate our fund with things that we want to own and we can eschew all the things that we don't.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“And I would venture to say that if they weren't part of the index, there are a lot of people out there that would say, I would not want to buy this in my fund and I don't want to own it because I just, either I don't like the sponsor, I don't like the structure, I don't like the company. But they're forced to do that. And it's one of the things that makes me happiest and certainly makes my partners happiest is that we don't have to do that. I mean, that puts anybody in a bad position. Imagine if you're running a portfolio in 15 or 20% of your portfolio is full of names that you don't want to own. But because you're being forced to compete with that index, you've got to own this stuff. So that's essentially what's happening out there in the investment world. Indexation has really hurt fixed income investors, I think, overall because it's taken away from many portfolio managers.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“First lien term debt, which is floating rate. So now that rates have risen significantly in the last 18 months, that part of the cap stack is costing them significantly more in terms of interest expense. So we've got a highly levered company and the wheel's starting to spin faster here because their interest expense is growing. You get into a period in the economy. We think these things are going to bust apart. If they do, the financial sponsor has lots of flexibility to do what they want to do. And we as bondholders would be just stuck sitting there waiting and saying, all right, not a whole lot we can do. We've seen some bad actors out there do things that are very detrimental to bondholders, causes bond prices to trade down sharply. We just never wanted to be in that spot. We like to invest away from that cohort for sure.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“So, we don't have to buy these bonds, but many of the high yield benchmark strategies, they're forced to buy because these are big parts of the high yield index. And so as you read in the paper about the coming problems in the junk market, as people like to call it, a lot of those problems will come out of that cohort. And it's because they're the most highly levered. at the time that they were issued with the future hope of these fabulous synergies from the acquisition or cost cutting that the sponsors were going to be able to put in place 90 of the time those never actually materialized to the magnitude at which they're supposed to and then we're left with you know a company that's got higher leverage than probably was stated at the time of issuance typically will have a large swath of”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Of the top five underwriting banks in high yield, and they conceded that it's not really even worthwhile to look at the documents of any LBO transaction anymore because the sponsors can pretty much do whatever they want to benefit their equity at the expense of bondholders and lenders. So with that in mind, I don't know why I would ever lend to a company that's owned by a financial sponsor whose incentives are nowhere near aligned with ours as a bondholder. They're going to look to take as much money out in the form of dividends and return it to themselves and to their LPs as quickly as possible. And it will come at my expense as a bondholder and my investors. So we see it over and over again. And we're very fortunate because we're not benchmark oriented.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“So, companies that are financed in the high yield market that are purchased by financial sponsors, whether it's KKR, Apollo, TPG, Platinum Equity, they've issued huge amounts of debt and make up a very large cohort of the high yield indices. And we have invested far away from them because we feel and have felt for the last five or six years that that part of the market at some point is going to bust apart because the sponsors have been able to tilt the tables so far in their favor that the historical covenants and documents, the way they were drafted to protect bondholders and lenders, they're like Swiss cheese right now. You can throw them out the window. In fact, I won't name people, but we just had breakfast last week with a couple leverage finance bankers from one.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“To find ways that we can upgrade the quality of the portfolio if we can. And that doesn't always mean in ratings-wise, sometimes the rating agencies are extraordinarily slow to upgrade companies, and there are some great companies out there that have very, very low leverage. So not a tremendous amount of financial risk of us not getting paid back. They just don't happen to be rated investment grade yet. But yeah, we're, like I said, we like to be positive on an absolute return basis. We're not looking to take a whole lot of risk. And one of the reasons the big areas of the high yield market that we have been staying away from have been very, very vocal about as being the riskiest out there is the debt that exists as a result of the leveraged buyouts.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“We did not keep anywhere near as big of an investment grade book when rates were low. We just never thought that there was any significant amount of value. There were periods in the past where we actually had moved and started to move more significantly into floating rate investment grade bonds. That was back in 2018, I believe, at a time when we started to see rates tick up. So we thought that that was going to be a fruitful place to invest. We had two taper tantrums in there. And then, of course, with COVID hitting, we went back down to the essentially zero rate regime again. So it worked out fine, but it just never, it wasn't quite as positive a return that we would have hoped for. But we're always looking.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Haven. And so when we created this fund, it was created by Carl and the founder of our firm John Osterweiss to be the only fixed income fund that our investors would need. So we could actually have the flexibility to move into different parts of the market depending on what the cycle was doing. Now that the cycle we think is headed closer to recession, we're starting to shift more into higher quality investment grade and out of the high yield sector and certainly within high yield we've invested far away from the riskiest parts of the high yield market and continue to do so.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“They'll compare us to multi sector bond funds and even to some alt credit funds. So we have some, we have data and scatter plots that show where we've performed against all those cohorts over a 20-year history. And we like what it shows. It shows us being above, at least in the middle, sometimes above on the return profile and far to the left, meaning much lower in terms of volatility and risk. I think it's a good combo to have those characteristics of return in a fixed income portfolio because most of the people that are investing in fixed income are doing it to provide a stable component of their overall investment portfolio. If they want to add risk, they can certainly do that in equities or in commodities or some other asset class. Fixed income has historically been there as a more safe.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“That sometimes approximate the yields on the longer dated paper. We can't lock those yields in for quite as long an amount of time, but that's okay. If I can get 7 or 8% on a one or two year high yield bond that has seven-year paper that's also yielding something similarly, we like that because what we've done is we've eliminated a lot of the spread risk that we would have had, spread volatility and or spread widening. It'll impact the longer bonds much more dramatically than it'll impact ours. So in a rising rate environment, the natural way that we invest works really, really well because we don't have the exposure anywhere near the magnitude that most of the index-based funds do out in that longer part of the curve.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Banks and investment banks keep fewer and fewer and fewer positions on their books. There's much less of a proprietary bias, and therefore they don't get in the way. So what they're looking for are people like us to be the liquidity providers for their clients on the other side. Somewhat similar happens in the high yield market as well, because that typical high yield investors are also benchmark oriented. And same thing happens when they get something that's going to be not either falling out of the index because it's getting too short or they have an opportunity within the capital structure to buy the same name but extend maturity, extend duration, and look for a little bit more beta or bang for their buck, they'll exit the shorter maturity paper, which is kind of what we like to buy. What that enables us to do is buy these that yield.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Need a certain amount of beta, and what they like is to try to get the names in there that are going to most closely track that index or outperform it. When they start to see things that roll down on the maturity schedule and get inside two years or even down to one year, that security can become a drag for them on their performance. So a lot of times what they're looking to do is exit the less index sensitive names and add more index sensitive names. We are the beneficiaries of that because we can opportunistically be at the front end and say, okay, we can be a liquidity provider for you that allows you to get out of the names that you want to exit if they happen to be names we like and then reinvest your cash elsewhere. So in years past banks and investment banks would take that position. But as we've”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Indexation model, right? So typically mutual fund managers have a particular silo or sleeve in which they're operating, whether it's high yield or investment grade. Not as many have this broad mandate like we do. And if you're an investment grade manager, what you're trying to keep pace with is the ag or some investment grade index. Yes, exactly. Most of those indices tend to be longer term, right? They'll have an average duration of somewhere in, you know, it could be five, six, seven, which means they have bonds that have 10-year maturities. And many investment grade issues are even 20-year maturities. So investment grade portfolios that are based on that index”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“In the six, and in some cases, as high as 7% yields. Now that's not everywhere, but we have to hunt and find individual securities and really kind of scrounge around and scrape and accumulate positions in that space, kind of a couple million bonds at a time. So not like I can just sort of push a button and say, oh, that looks good and wave it into the portfolio. There's some limited liquidity features in some of these names, but in other cases we find securities that have a couple billion dollar issues and liquidity is actually quite good. What tends to happen is if you think about market structure, market structure is what allows us actually to do what we do and to do it well because most of the marketplace is focused on an”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“The last 15 years because it's been the most attractive part of the market. So, what we like to do, the three of us are probably as chicken as it comes from an investing standpoint. But we like to find the most attractive part of the market and then look for the least risky way to play that. So we're always looking at how do we truncate downside? How do we eliminate downside? Because if we're investing in things that provide us with a fair yield, we're not necessarily looking to sort of step on the gas and play it from the most aggressive end. That's not what our investors want us to do. They like to sleep at night. We like to sleep at night. They don't want to worry that one day we're going to come in and the fund is going to be down a few percent. That's just not the way we've ever invested, and nor will it be any way that we do in the future. So one to two year investment grade paper, we've been able to find.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“And as a result, it plays into our way of investing, which is bottoms up security by security, bond by bond, company by company. What we just wrote about in our quarterly outlook was the gift horse that we feel that the market's been giving us recently and continues is in the one to two-year investment grade part of the market. Number one, we do think that eventually the Fed's tightening here will lead to a recession. I don't know when. I don't know how severe, but we do think that there will be a recession at some point. With that, it behooves us to continue to sort of increase the quality of our overall book. We can go and buy whatever we'd like. And we've largely stayed in yield.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“You're speaking my language. I've been one of the people that said, saying for a long time, and we say it to our investors all the time, this is a market of bonds, not a bond market. Every single security is different. Every document is different. The intentions of each of the borrowers is different.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Food prices have actually sort of abated somewhat. Chicken prices are actually down. They've been down sort of quite a bit off the high. So there are areas where we have seen prices correcting. Some of the other commodity markets as they relate to sort of China's consumption of industrial metals, commodity prices have come down. So we're seeing that in aluminum, copper, some of those other things that aren't part of the, necessarily part of the EV component package for EV batteries. Most of the rare earths and things in that cohort are still quite elevated.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“The experiential services part of the economy continues to inflate and probably at a rate that I would think is somewhat unsustainable, but we shall see. Famous last words, right? I don't want to call the top. But we're seeing signs of some of that inflation abating in certain places, but the cost of, I mean, oil today is up another 3%. So gasoline out here in California is just about $6 for everybody, which is a crazy high number. People have to pay it.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Don't have a hard, fast target. It's kind of a moving target. I think I joke around with my partner Carl. When we were at three, he said, oh, you know, at five, I'd be buying. Well, now we're at five. He goes, well, maybe it's six. It's all dependent really on the tone of things around us, right? What we're seeing in terms of inflation. We continue to see signs of inflation, various pockets all over the place. We were just talking yesterday about concert tickets. The price of the Taylor Swift concert tickets were out of control. The $300 face value. And then by the time people actually get them in their hands, we're paying $1,000 for that. That seems incredibly, incredibly high to me. Same thing with sports tickets, you know, tickets to ball games, you know, entertainment. The younger generation is much more interested and intent on experiences.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“So, duration is interest rate, risk, and credit risk is the risk that you don't get paid back. So you have Bob and we've dodged a lot of the losses on the duration front by sticking to the short term of the market. And even now with the 10 year at 5%, if the economists were to come into your office now, knock, knock, and say, hey, 5%, now's the time. You're not saying that now you want to wait until the Fed cuts.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Know, you know, we don't have a crystal ball and we're not in the business of making bets. And for us to make a call like that would be making a big bet. As if we're wrong, there are still some significant drawdowns in capital losses that you'll take in the short run on trying to get the exact top of the market and figure it out. So our thinking is that the Fed has been very clear all along in their intentions. They want to be data dependent. They will continue to hike until they feel like the data signals that they can sort of back off and ease off. However, once they do turn, we think they'll be equally transparent and clear about their intentions to actually bring rates down. And at that point, we'll start to probably get more comfortable extending some of the duration out further into the market.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“We've Dozens, maybe more economists that we've talked to and met with have told us 3%. Now's the time to extend duration. And it was three and a quarter. And then three and a half. And then four. And, you know, more recently, four and a half, there is a very well-known. Economics advisory firm that was in our office recently, and they came and said, You know, now's the time to be extending duration. Everybody's trying to make a call. And that was 4.5%. Here we are knocking on the door five. So where does it stop?”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“It just so happens that over the last 15, 16 years, ever since the financial crisis, everybody just assumed, right, we're in this really super low rate environment. And most of the professionals in the market have operated only in that kind of regime. So my two partners and I, I guess some would call us old-fashioned. I don't really like to use that term because it sounds kind of dusty and old. I think we're just pretty careful in particular and realize that it was very clear that there was going to be significantly higher rates, that the Fed was going to have to do something dramatic to turn off the spigot here of just free money and was fueling inflation that was running out of control. So seeing where we've gotten to today doesn't really surprise us. I mean, we've been saying for a long time we have not been willing to extend duration out into this.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“It's been pretty remarkable to see the magnitude of the drawdown, not terribly unexpected, but the magnitude because people have just gotten so conditioned for so long to very, very, very low rates. And that's not been the norm over my career. And if I look at the arc of my career going all the way back into the mid 80s, we just went by the 36-year anniversary of the crash of 87. I was in the markets working at that time. And I wish I had the, I have a printout saved somewhere of all the stock price moves that were on my machine that day. It was pretty remarkable. That happened because we had an environment where long treasuries were over 9%. And so it's not unusual for me to see us approaching 5% on the 10 year right now.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT
“Good morning, Jack. Thanks for having me. It's been an interesting time the last two years, for sure. We are inundated with just a plethora of opinions from lots of different people and different angles, and everybody's trying to call the top of the market and what we should be doing next.”
2023-10-26 · Forward Guidance · Duration Remains Unattractive, Says Veteran High Yield Bond Investor · IDENTIFIED FROM THE TRANSCRIPT