Hello, and welcome to the Credit Edge, a weekly markets podcast.

My name is James Crombie.

I'm a senior editor at Bloomberg.

And I'm Julie Hung, senior analyst at Bloomberg Intelligence, covering consumer staples.

This week, we're very pleased to welcome Jim Schaeffer, global Head of Leverage Finance at Agon Asset Management.

How are you, Jim, I'm good, Thanks, Thank you for having me.

Thank you again for joining us.

Jim is a global head of leverage finance and serves as a portfolio manager for the various leverage finance strategies at Agon.

He's also responsible for stressed and special situations, securities, and all restructuring in bankruptcy situations for the firm.

Jim is a member of the Agon Asset Management Steering Committee that's a global macro and asset allocation strategies.

Prior to his current role, Jim served as a vice president at PPM America's Distress, Debt and Workout Group.

He also worked in corporate banking and investment banking positions at Wacovia, Bank of America and DLJ in Chicago.

He's been in the industry since nineteen ninety three and started with the Forum in two thousand and four.

Jim received his BS in finance from Miami, Ohio University and his NBA from the Warton School of Business at UPenn.

Thanks Julie, great to have you both here.

Before we start, I just want to say, you know, as we say every week here, credit markets are very hot, with bond spreads at the titus in three decades, as demand for yield rises and net new supply remains pretty thin.

The largest leverage buyout ever for electronic arts has dominated the headlines, signifying very buoyant debt markets, but at the same time we see a lot more distress defaults and bankruptcies.

The fallout from the blowoff of First Brands, a Cleveland based auto supplier, is spreading.

Investors are brushing off as idiosyncratic specific to the trade war impact on auto's, but there are signs that trouble in credit markets is a bit more widespread than that.

So Jim, what is your take.

Are you bracing for more trouble ahead and how do you reconcile such tight credit spreads with the stress that we're seeing, particularly among the weaker companies that have a lot of debt.

Yeah, I mean I am bracing for a little more troublehead.

I think it's just a very bifurcated market.

You have, you know, forty percent of the low market trading above par, and you have you've got you know, less than ten percent trading below ninety.

But that ten percent that's trading below nineties, a lot of it leaks below eighty, goes through alemy and restructuring, and it's very aggressive actions that occur.

It's to me, it's just the weight of hiring borrowing costs, especially in the leverage loan market.

If you take the two markets, the high yeeal bond market in the loan market, they're actually pretty different.

The overall they both have had decent earnings, you know, almost improving or flat to better earnings going forward.

But what you see in both markets is higher de fault activity, higher element activity, primarily in the loan market where you have private you have plan sponsors there, and the issue is it's the way to the hiring borrowing costs for longer and longer longer on these companies.

Not to mention the impact of tariffs and higher input costs.

The HYOD mark is not had to deal with that because they're fixed rate coupons, right, So we do expect more trouble ahead.

We do expect it.

We feel like it's picking up in these troubled situations like first Brands or the ones that but and I do think you're gonna see more.

And again, we have a slowing economy.

We know they're the client is slowing.

We know we're going to start to see the top lines wave a little bit, and that's why the Fed's acting.

So I do expect more activity.

And you know how we navigate it.

It's not easy because it's very bifurcated.

And you, like I said, if you've got so much trading pretty tight.

We spend half our days in the loan market, get up and talking about the wave of resets coming in, you know, repricing's coming in and seeing you know, the spreads going from three hundred to two seventy five and the other bottom ten percent loans dropping like a stone because they missed earnings in a very preemptive activity by plan sponsors, you know, either trying to bring money to the bars, trying to be you know, try to get that give them time and liquidity for priority in fees.

So it's a very unique market and you just got to be really focused, have a very sharp pencil, and really at the first sign of trouble.

Which way is it going?

Jim, do you think that in a lower interest rate market it's going to help because it seems like first brand, try color when you're looking at like the underlying issues like the auto sector.

You kind of touched on tariffs.

A lot of it goes back to the consumer consumer weakness.

So when when you're looking at a lower interest rate environment, that does help consumers with costs, but at the same time, it also helps with liability management, you know, refinancings.

If rates go down more as they're expected to, is that going to help you relax a little bit or is there something else that's going on in scale?

The answer is yeah.

I mean, you know, lower rates are going to be very helpful in the leverage loan market.

You know, you know, twenty five base points not overly impactful, but one hundred basis points is meaningful.

You know, it does give more flexibility to companies, it does reduce that borrowing cost.

But the reality is, like everything, it's like the first time that you get to the beginning stages of any sort of default crisis, recessionary period of time, it's the weaker companies that fall.

The ones who recovers are gonna be very low, and then over time the weight of it starts to build and build a building.

Is it gonna save all the companies?

No, Now you get cut to inner base points tomorrow, you still got the issue of it's tied to a consumer.

It's it's a chemical company and you're seeing China dumping EI.

There's something else going on, some other issue that's creating a problem for the company that's created to man issue, not just a cost issue.

So it's not gonna save it, but it's gonna go dramatically help that other ninety percent or that ninety five percent that sits like at ninety or above that they're wavering and the ones are getting more and more impacted.

Yeah, those are gonna help.

You're gonna end again.

The good thing about hot markets, or you know where we taught about the start, you've got pretty strong markets right now.

You had a pretty strong tentacle on both right both the low in the bond market that enables you to refinance a lot of stuff.

So if you can't get something refinanced in these markets, it's that bottom ten percent, that bottom five percent that they're gonna have trouble.

That's your real sign because everyone else is trying to refinance themselves and trying to extend time and which you don't and kick the can down the road if they need to, and if you can't, that's where you got a problem.

So it's gonna save a lot from the future impact.

But those that are on the edge, they're gone and they're gonna You're gonna deal with them for sure.

In terms of the actual size of the problem, though, James, I mean, you know, we talked to out people and they seem to dismiss it as a very tiny piece of the market.

It's just triple c's and we can avoid them, and we've been staying out of them for a long time.

So it's not a problem for me because I'm you know, I'm in higher quality stuff, so it's easy to avoid and it's not gonna have any kind of riple efect.

We looked at the leverage loan market, for example, and only two percent of loans are trading you know, distress levels, so you know, it's at one point four trillion dollar market, so you know, who cares?

Why does it matter?

Well, it's a great question, and it somewhat of it matters because so much to the low market's controlled by colos, and that's a different animal, right.

Clos have a complete different trading dynamic.

They got much they're much more sensitive to downgrade risk.

And when you start to see, let's say the economy starts to slow and yeah, it's two percent right now, and those two percenter, you know, like first friends, can't be painful for the COLO market.

But when you start to see the agencies come in and say, okay, we're seeing as slower in economy, we're seeing the consumers slow and slower and spending.

Who's impact by this?

We haven't really gotten away from managing our input costs, you know, and that yeah, our barring costs are coming down, but slow enough.

So if you start to see a wave of a wave of downgrades, you know, because we're concerned about it.

You start to see earning slow EBITDAH, slow coverage, racials, delant decline, leverage trick up a little bit, you start to see more downgrades.

That puts tremendous seal pressure on for colos.

You saw I think two three billion dollars get downgraded Triple C LAT in the month of September.

That's weight on Triple C's because they're they're out there with already heightened leverage, and it become a bit of foreselling.

So that's the self fulfilling prophecy we worry about.

It feels like it's contained except for the names or two.

It's not and it's hurtful, but it'll expand because the agencies will kind of get concerned.

Downgrades will increase, those names will have a harder time refinance themselves become a bit for selling in the COLO market.

There isn't really a marginal buyer out there except do you get to the stress animal stressed investors there, and then that that becomes the whole wave of more and more Lemy activity.

And I feel like even though we talk with that, I still feel like right now I'm seeing Lemy activity pick up a little bit from our distress team.

It feels like there's more and more stuff out there.

We're talking about Lemy in that trading below ten percent or trading below season trading, the trainbone ninety dollars price and the last thing I'll say, which is, once alone goes sub eighty, it's like a seventy five eight percent chance it goes into restructuring.

So that that's the math of late.

So once it hits that slope and it gets down there, it seems to accelerate, and it's they're very proactive.

You know, there's a playbook out there that comes from from financial advisors, the attorneys and and plan sponsors are who said, Hey, I want to take advantage of this weakness to try to you know, get I have flexibility in my structure.

I want to extend maturity.

I want to take advantage of that and maybe maybe take some you know, get some discount or you know, take some some loans out of this, out of my thing, reduce my nav or my balance my loans by constructively doing an LME transaction and give me preference to those that have scale.

So there's a weird dynamic out there that we have to navigate.

So what happens?

Can you talk us through it in simpler terms?

Yeah, I'm just talking about S and P and Moody's.

You know, all the underlying loans have ratings and most colos, all clos have a limitation on how much they can own in triple C and below loans, and they can own more, but there's various things that occur if they over that threshold, and it usually is seven a half percent of the underlying loan portfolio and COO can be triple see or below.

So as you get more and more triple c's, you you tend to see managers try to sell off even if they get to you know, close the triple C or below, to try to reduce their holdings of triple C.

So if they get triple C and then they get into default, that's a whole nother decision they have to make, and they get too much of it.

There's various tests in COLO that you can violate that could change the way in which the CO distributes equity distributes distributions to the equity holders of a COLO.

It's structured in simplest terms, it's this colos in general want to limit the amount of triple C and below rated loans they own in their in their portfolios.

And as they get that builds, they're become a little bit of fores selling And that's kind of generically, what the what the what I'm talking about when I say the agencies, I'm referring to the S and P, Moody's, Fitch just rating the loans, and as they downgrade them, it creates problems for COLO managers potentially.

And the reason it matters for more than just the triple C bucket is because they are also avoiding single bees because of the downgrade risk.

Is that they're not necessarily avoiding single bees, I would say most COLO manager, because in a COLO you're trying to get you know, you're trying to get your way to average spread as high as you can relative to the risk you own, because that is what you have.

Your spread of your of your assets and your cost of your liability is the debt that's in the structure and the difference that generically goes to the equity in the form of distributions.

So you want to have as much of a differential between your way to average spread and your cost of debt.

So single bees fit that nicely.

There you know you're trum.

But as they get down to be three, I think as a manager, we've got to spend a lot of time focused on what is the risk of the downgrade, how comfort we are with that, Where that credit is going and that's the challenge of marketing in right now, you have a lot of B three's that might be trained at ninety five.

If they miss the next earnings, they might drop to seventy overnight, and that's the dynamic of challenge.

Or you could have or they could You could have the management proactively make a statement at earnings it says worry value in the capital structure.

And right then the agencies are going to downgrade it because they know what's coming.

There's gonna be some lie ability management exercise that's going to try to create time and liquidity for them in exchange for collateral priority and incremental fees to the to the lenders.

That's the issue right now.

And then when when you're talking about liability and management, it's it makes sense.

You know, you extend your maturities, you buy yourself more time.

Kind of going back to what you just said, you know, you help your liquidity profile, your cap structure, but the underlying issue is the business and you know it kind of goes hand in hand, so you have to have liability management, but at the same time you have to have a plan to improve whatever you're you're producing.

You're selling to get your sales up to getting done up.

Now when you're looking at the current environment, the consumer is weak.

You know, you said that earlier that you know, we have this like parification of the consumer.

So what would happen if you have you know, extending maturities, but then the underlying consumer continues to stay weak.

Yeah, it's it's exactly the whole.

That's the whole game, right, It's like you're trying to identify we get all all these not all these, but all the every situation that comes into form.

Hey, company, miss earnings, the loans down, it's fallen in price.

We as a manager to evaluate, is this good business, bad balance sheet that's through some sort of sickle trough and we can see the path out of it, or is this bad business bad melting ice being highyields littered with melting ice cube businesses and yours Bettonhla, it's gonna take the ice cube to melt, right, that's just what it is.

They never leave high yield, that's the game.

So you've got to figure out what it is.

And we saw there, you know, eight o nine is a great example if you look back of so many, so many people just figured out the math to kick the can down the road.

It was such a recessionary trough that you know, we came back.

This is a lot different than that, right This doesn't feel the same way as that eight o nine capitulation big Trup.

It's a weird dynamic of terrorists and inflation and everything impacting geopolitical risk.

And you know China chemic a war going on right more independently going on that's affecting companies.

So we've got to be very good at identifying, hey, do I want to stay in a situation, And we got to do in the loans at ninety or ninety five, and now when it's at seventy because the seal doesn't like to sell things at seventy because you impact the part of it.

But so you got to do it then.

And when you get that lme side, then you have to decide can it does this make sense to go in it or not?

And that's the game.

It's it's so much more challenging right now because of what you cite.

It is a slowing economy.

There is in every sector is getting impacted differently by all elements geopolitically, So how do we figure that out.

We're trying to figure that out every day on these companies.

Is it a good business that we like and we can see a path, this is the path?

Are we always be right?

Probably not?

But and by the way, the activity that occurred two years ago, many of them are coming back for what you cite, which is, you know, we did, inflation didn't really improve enough, Their input costs haven't really got better, their revenues aren't really up.

There don't look a whole lot different than we thought with the projections we got or we did.

They're not as good as we thought they're going to be.

And so now we're it's kind of two point zero when now we're doing we do it again and the collateral has been shifted and you know all this stuff.

So yeah, it's a unique envinment and we've got to figure it out.

That's that's our job as portfolio.

Managed to be good at figuring out why we like that business in that point of stress, and that's tough.

Are there any themes across those?

I mean, is it autos, is it tariffs, is it consumer or is it just really everything you have to look at, you know, situation by situation.

You know, I think people always There are certainly sectors that you know, we mentioned chemicals, especially European chemicals, and what's going on there.

You know, autos anywhere you've got tariff impact.

I mean, you know cable, cable is always a cable, Satellites, wireless always a unique space.

You've got winners and losers.

And again that's where you find so many melting ice cubes.

You're in.

Some workout really well in some don't, and businesses are transitioning from cable and chords to different businesses, and you know, you've got technology and you're trying to figure out in the loan mark.

There's so many technology names.

You feel like, how is AI going to impact this business?

They're probably usually little old levered reletive in the loan mark to others.

So there are definitely very topical sectors generically that you have to look at and figure out, and it usually is tariffs, higher leverage, impact is something scalable like AI geopolitical risk, So you got to go through those.

But holistically, beyond that, it is kind of idosyncratic in a sense that even within sectors, companies are impacted differently how they control their input cost, how inflation hit them, where they stood from a leverage standpoint, what their flexibility is of structure, because we haven't even talked about stepping back.

The reason LM the activity really exist is because the structural flexibility in the underlying loan, syndicated loans affords them the ability to shift collateral, to deal with restricted payments, to give barrowers something, to give them more money, enable them to elevate their collateral position.

And that hurts other lenders, right, but it helps those that have the scale to be in the steering community or whatever that flexibility.

So if you've got three companies in the auto space and one has got tremendous flexibility, one has none, that might totally shape what lenards are willing to do to give them the time to even get to that versus just going into bankruptcy or whatever.

So very unique dynamic, the most unique market I've ever seen, because it's so everything is so unique to each situation.

But yeah, there's overriding themes and I mentioned on sectors that you've got to be very focused on.

For sure.

Food is another one.

We've seen higher input, you know, just the cost structure of food, which used to be kind of a staple of the loan market as a stability, you know, because we like stable, you know, pay your coupon kind of stuff.

And that's changed a lot too.

As the staples analysts like, we look at food a lot, look at beverages and kind of going back to what you said, even within the food sector, you do have different companies managing risks a little better than others.

So for sure, it's not like you could just say, Okay, the food sector, it's a safe bet.

When you're looking at food, there are or you know, even like consumer products, some of the companies are a better positioned to shift manufacturing to you know, within the United States, some can shift it to other countries not impacted by tariffs, and you do hear these tariff mitigation strategies.

Within the consumer staples sector, some are managing it a lot better than others.

Some have more pricing flexibility, some don't.

Some are going into this with a better net leverage position so they can handle it a lot easier.

Now, within the consumer staples, is there one sub sector that you guys look at more than others, Like, do you think one's handling it better than others?

Or is it more you're looking at okay, like tariffs, let's see how it's impacting like BMG Foods or Cody or you know some of the high yielding names.

Yeah, it's interesting you say that because I hadn't thought about it the other way, like I haven't ought about, hey, what are the ones handling it?

Well?

Because I spend so much time I'm always like, Okay, what's going wrong in these I never really thought about that.

That's what we do.

It's credit analyst, right, I.

Know, I am always like, So I do think that everything you said there is exactly the way I think about the world.

To James's question, which was like, it is syncratic, even within a sector that's got challenge, and so some names have just figured out the flexibility whatever they can manage within their input cost structure to do it.

So, whether it's and and the ones that can't, you know, like a del Monte or whatever, I mean, they you know, it just it's just so interesting and it is it is syncratic, and so I can't give you a theme necessarily, but generally speaking, I would suggest controlling input costs, controlling passed through and and and and and getting a bit sometimes lucky on how the tariff thing impacts you.

Is is the playbook maybe, but I I it's it's it is syncratic at its best, and I don't I never the ones the ones that are I mean anyone that is holding up well.

And honestly, for a while, I thought that the tariff stuff was kind of a little bit less impactful than I regionally thought it was going to be.

And again what happened and Liberation Day was kind of extreme in the way that we thought about it, and it gets pulled back and navigating all that, and it's hard exactly to determine what the outcome is going to be.

And maybe it was always a little bit better than we thought it was, but it was gonna be worse than where we started from a lot of these companies.

So then once they figured out and can figure hot to manage, and that's why we couldn't get any guidance, you know, after one in one Q earning, So it was just a guessing game.

Yeah.

I still feel that way though, that it's hard to figure out exactly what the tariff impact is because again, like you know what we were talking about, every company is managing it differently.

Everyone has different resources, different levers to pull.

Some are better off, some are more ahead of the game.

It feels like there's a bit of whiplash, like what's going on with tariffs.

They're implementing, they're baiting, pulled back.

Oh they are exceptions.

So it's from our perspective, it's been difficult to really pinpoint and make an overarching statement that, Okay, this is what's happening with tariffs.

We know that it's a headwind, but we're also hearing that some companies who have expected a worse impact after two Q earnings, they came out and said, Okay, it was a little better than we had expected.

So that that's a little you know, light at the end of the tunnel.

But I think it's still going to be a headwind.

You know, you're hearing like aluminium costs their heights, impacting companies that have canned goods.

A lot of the beer companies are impacted by this as well.

But I kind of wanted to circle back to you know, you were talking a little bit about the radia agencies before, and you know, investors rely on like rady agency comments and when you're looking at information given out by the company.

So when you're looking at like a first brand and they provide the financial information to the RAIDI agencies, So it's kind of like going back to the financial crisis, the radiing agencies will rate based on the information they're given, So how do you rely on that?

Like, you know, there has to be like some sort of like you you have to trust them at some point, but they're getting or they getting bad information.

You know, we're looking at like the even the Tricolor Holdings bankruptcy, the subprime we all know subprime is very, very risky, but we're relying on the radiing agencies to tell us, Okay, this is very risky, this is like X, Y and Z.

But then when all of a sudden they're you know, filing for bankruptcy, then you're kind of like, Okay, who got it wrong?

Is it?

From the company perspective?

With the radiancy perspective?

Like how do you manage that when you're looking at like ratings and trying to like pick which investment is you know you have your your yield, but also like it's a little safer I guess.

I mean it's it's it's sense eight or nine even before.

It's probably the biggest challenge of as fixed fixing some investors, right, because how much do you rely on the agencies?

You know, we as AT again, we have a pretty pretty strong research group, we feel, and we have our own independent ratings on credits, so you know, we're gonna take what the agencies give us always with the grain of salt.

Not necessarily grain of salt, but just like hey, we have through our own work on our own set, but we're all getting the same information.

So there's there's different opponents.

The first thing you said is if you're getting inaccurate or information, like the company is not giving you all the information that's necessary to give a fair evaluation, that's not necessarily on the rating sies, you know, it's it's kind of like they're like any analysts that gets data and makes it it makes there's you know, and gets has a set of assumptions within that data and then projects that word that what they think the company is going to do.

If that's inaccurate, well then that's different than hey, we just don't understand it, like we don't see the macro trends or the or the or the direction the business because we're not good to determine what are the united I always look at research and every business is there's probably three or four or five key things that really drive a path for a company.

You know, I used to always ask a question when I interview people, is how does this company make money?

Which is a really simple question, but it isn't actually in its core because like, if you really understand how a company makes money, then the key assumptions that are coming from the company will help you determine the path that where it's going to go.

And again, you know, I don't do research every day.

We have a team that does that, and they do it, we think, hopefully a pretty good job of regardless of the agencies tell them of saying I like or don't like this company.

That's our job.

Our investors don't pay us to tell them what to tell them, or the agencies missed it, that we missed it.

So we have we've got to come up.

We have our own ratings.

We have to ove a path.

We have determined it.

That being said, the agencies do play a really important part on especially in the COLO world, because like I said, so much is driven by how they rate credits and if they single B, triple C or what.

And that's a big dynamic and it can shift the landscape of the bank loan market given those those down grades.

So you have to, whether you like it or not, have some reliance or expectation of competency, which again I'm not saying they aren't competent.

I'm just saying you have to you have that expectation to go through that.

So it is unique dynamic.

There's not a lot we could do in this situation, like first Brands, I'm not We'll see, you know, it's the jury still out as to was there something that was maybe misunderstood or not fully given clarification that would have been helpful not only from from not only from the agencies, but the auditors too, right, I mean, there's more to the story there.

We'll see that one maybe is not too much at their thing.

But again sometimes they're just they just missed make the same mistakes that we are human beings, I think.

But we have to the point of all that is it's our job.

It's our job at Agon to make have understand the companies make the decisions in terms of whether we want to be an investor or not and if we think and we spend a lot of time answering the question do we think this coming is gonna get downgraded and why or not a lot of time before it gets downgraded.

There's also the to the two bankruptcies that have been in the market recently.

You know, we we've talked about our first brands and Tricolor.

It's the auto market, and I think that there's tariff impact, and especially with Tricolor, there's a big like who they were lending to that that was that was a big issue.

And what we heard from you know, Constellation Brands this morning or last night, actually the Hispanic consumer.

It's it's a big market and they're not out there.

They're not they're not doing social gatherings.

It's affecting beer sales.

When you're looking at the underlying business is and you know, it's fascinating how much of an impact this cohort has on consumer purchasing when you're looking at investments.

Is that a consideration for you guys as well, just going that deep into like who is the underlying consumer?

Yeah, oh for sure, you have to.

I mean, we're we're such a consumption driven economy, right, so so much what we do in it at the you know, at the first, second, third driven it is is consumption driven.

It's a bit I mean, you know, it's a basis what we do.

So if you don't understand who the end user is and you mentioned concession brands and gathering a certain cohort of people, and we're losing sales, whatever it is, pick your company, you know.

And I always joke about in that joke, I always say, like, you know, we're nothing more than a self fulfilling prophecy.

The US economy is that another we use the FED and other means to try to sort of provide a put option on it to keep it propped up.

But again I've said for years, like our our economy is driven by the fact that if you have a job and you think you're gonna keep it, you're gonna spend your money.

And if there's something in your mind that gets you concerned about spending your money, you're gonna pull back somewhere or the other.

And so much of our economy lives paycheck to paycheck.

We watch the markets every day day, but so much does and so the types of consumption patterns and the that are going to occur in those companies that are gonna impact it are gonna slow because look at yeah, gas prices are higher.

You have my clothing price or higher, my food prices are higher, and I'm not.

My wages probably aren't as high.

So my higher cost structure at a consumption level is gone up.

What do we expects gonna happen.

We're gonna have to spend less.

We have to buy less units.

That's just simple, right, So yeah, absolutely you could expect to slow to some slow down at that core consumer.

So you know, maybe those buying hounds in Naples, Florida are a lot different than those buying homes in the middle of Ohio.

You know, the whole dynamic of life is different.

And so yeah, you have to look at who the end user is.

You have to make an assessment of it and determine is this you know, inflationary weight, is the slightly higher costs to whatever it is, how is it going to impact our end user?

Because again, at the core, we are a consumption drive economy in the US at at score and we have to recoon.

I mean, it just is what it is.

So you have to make the determination I'm not and it's not it's not easy because it's you have.

The hardest thing about the market as an investor, as I said, is that you've got spreads.

I think it was looted at the top, spreads you know, pretty really tight.

You've got equity marks at all time highs and spreads, and we are absolutely numb to any I mean, the government shutdown doesn't even exist in the world of the markets, right, It's it's irrelevant, not it doesn't even all these things that we're just numb to as investors.

Yet at some point you got to step down and like, Okay, what's gonna hell?

You know, where are we really going here in this?

And that's a channel.

That's what we have to do as research analysts and investors figure that out.

Is there anything on the horizon that might flip it, Jim.

You think, I mean flip it in the sense.

The massive move wider and spreads back to what people might considers.

I think, you know, let's take us high yo.

We always to say US high Yo doesn't live below three hundred and spread for a super long period of time.

Ever, Yeah, and we're sitting you know, into sixty land, right, So it depends what index you're looking at so just ends what you're referencing, so that let's call in that generic land.

So it's like a spring getting wound tighter and tighter and tighter.

It won't take a lot to move it wider.

The quest and it will happen, will be there are points a time where it's going to move wider, whether it's geopolitical, whether it's next earnings that we show more you know, weakness that you know, not this sort of like meander and the long earnings, but some weakness in that a few more bankruptcies, there'll be something there always is that.

The question is really not that it's going to go wider at some point, it's what happens when it goes wider?

Does you know?

Is the FED cutting and the and you we as very say, you know what, I'm gonna buy it, I'm gonna support it at because spreads are now three fifty and then default and I think the I mean, you know, we still you know if you look at default and at the end of the day, it's about the faults right long term you know, high the high market is operated at well below long term default averages.

You know, we're in the in the two percent range.

The low market's a little bit higher if you count the l on the activity, it's slightly higher than long term average.

It's a different average because now there's so many loan only structures.

That's very different than it was loan and bond.

But whatever.

So that's what you have to look at, is is this whatever that dynamic gonna be, and when the spreads widen it is is the probably defaults aligned with where the spreads are.

And if they are, then you'll probably see some buying committed from investors.

If not, it'll continue to widen up, and then you'll see and as it widens out what happens.

This is the self fulfilling prophecy.

It gets hard to refinance yourself.

But let you know, companies have a hard time going to the markets because they're they're now concerned, oh, instead of financing you at six percent, it's gonna it's gonna cost you nine.

You know.

That's and then all of a sudden you're like, oh my god.

You see the companies being forced in these really tough situations.

Credits come in and say I'm gonna, I'm gonna, you know, shortening your payables because I'm worried you can't deal with your near term maturities.

The greatest thing in the in many of these markets are we you know, we are able in so many points of time to deal with that wall of maturity is very effortlessly and to kick it out out out to twenty eight, twenty nine, thirty.

Once you get inside of a year, year and a that's when people get concerned.

If more and more move in and there's not that winner to refinance, that's the problem.

So it's not that spreads will widen, something will occur, it's what's the where is there a buy in that because we think that it makes sense relative to the fall probably and that's gonna driven by earnings expectations.

And again it can spiral either way.

Right, Although this market has taken a huge amount of news without any any move at all, and without every time it's widened, you know, going back to COVID, it's been brought back pretty fast.

I mean the first snapback was because the Fed came in and offered to buy everything.

But after that there's been this kind of you know, there is a bit of widening.

Even on the Tariff's day there was there was significant widening but it snapped right back, and you know, it just seems to be this belief that you know, either the Fed's got your back, or the Trump government's got your back, or something's gonna support it no matter what.

Maybe there's an element of too much demand for not much net news supply.

But you know, I'm just wondering, what makes you think if if you do that, that you know there you know, we know that there are these problems at the triple C level.

We know that there are these blow ups going on, But what makes you think it might be a big issue for credit markets?

Or why?

Why why should investors pay more attention to those those things that everyone kind of tells us just isolated.

Well, I think I do think that when you look at every individual company, I think, as I said earlier, we're starting to see more and it feels like more and more companies just hitting a wall, probably more of the loan marked in the highal bond market, just feeling like they're, you know, they've got to deal with maturities they've they've kicked, they've already done all in the exercise is once you know, our economy is slow and their revenue number aren't quite grown as much as we think their earnings aren't bad.

So for me, what I really focus on is quarter to quarter earnings.

Like I'm going to look at right now, I know the Feds there and we're going to see rate great cuts and it's going to be supportive, and so we could certainly grit we're I was talking this sarm about and we could grind along in here for a while, you know.

But I think you've but again, the number of instances of these companies missing earnings, loan dropping twenty in an lme you got a problem.

They might pick up a little bit in the loan market and then see where that goes.

But I'm really focused on three qure earnings again, just like every quarter, are we starting to see more and more sol space again, the economy is slowing.

We know that the Fed's cutting, the economy is slowing.

Inflation isn't all way were they want to be, so you're still dealing with higher costs.

We don't know the full effective terrorists yet.

There are a lot of geopolitical uncertainties, and like I said, there's a lot of noise out there that we just don't seem to care about too much.

Whether it's garbage shutdowns, whether it's national debts, whether it's you know, global geopolitical risk or whatever it is.

We seem to not be too concerned about it because we haven't had to be.

So I can't predict what's going to be the event that's going to move markets wider, but it will at some point.

It's a quick to me.

It is syncratically looking at our portfolios.

It is looking at the next round of earnings and talking about, Okay, what are we seeing, what are the trends, what's the guidance, do you have a handle on their input cause us and where we from them from a refinancing standpoint.

If those situations start to pick up more, then I might be back on the show and in three months saying yeah, three months ago I was concerned.

Now I'm more concerned.

But I did.

I did.

I wrote something this week to our our senior management, and I said, I wrote, I am more concerned about sort of restructuring activity, recessionary like mark conditions than I was twelve months ago.

And yet some would say all the markets are better, but actually just the weight of what we've had to go through in the last year.

On the companies is not necessarily better.

And now we're starting to see the economy slow, the consumer is slowing, and that's always fear I'm gonna lose my job, fear my borrowing powers shrinking, whatever it is.

So that's where I'm at right now, and I'll be you know, we'll continue to tread very cautiously, and most of our portfolios tend to be a little defensive honestly because of it.

You know, you're Euro based insurance company.

The insurance companies.

According to the private credit people love private credit at this point, and we've had a lot of discussion on this show about the relative value between the two public and private.

There are a lot of concerns about the lack of transparency, the extra risk, the increase in payment in kind and non accruals and all that stuff in the private market.

But I'm just kind of wondering what your view is of the two.

You know, do you do you look at private as an opportunity?

Well, I don't interact.

I don't do a lot in private credit, so I'll start with that.

I mean, I'm I'm on the leverage finance side, doing basically you know, more on the public side.

So I'm not going to perfectly speed to it.

For a while, we saw private credit being pretty aggressive and coming in at certain spread levels and being all caught almost helpful to the probably syndicated low market and taking out more challenge credits.

And I think the probably syndicated loan market and even the high art probably was somewhat appealing, but you're losing supply and we couldn't compete because where spread levels were, it was appealing to the private credit investor they could get the types of returns they needed.

As you've seen spread levels come in as we have.

I don't know, but in your you're seeing more.

At least in my mind, I feels like we're seeing more things come back to the public markets of some of those names in lev fin world.

And I think because they can get you know, they now have they the sort of gave up liquidity and diversification of the lender for better spread and and maybe you know, they needed it in that time of more challenge.

Now they maybe feel better, like I want to go probably sing because them to get better execution, more liquidity, uh, better terms and maybe tighter spread in the broadbly syndicator low market.

So it' seem to come back a little bit in that regard.

I worry about private credit, like you said, because we don't exactly know all the underlying default risk in there, and as a distress guy by background, I always worry about that anytime you don't have full transparency, it is what it is, right.

You know that they're in you have the ability in that world to take credits and kick the can down the road kind of as long as they've got liquid they're willing to put into companies that we you know.

But that worries me a little bit about the market, honestly, And I think as you get into more and more of a slowing economy, you know, in rates coming in and hard of them to get returns and they you know, their expectations for their investors are higher.

There's certain some certain spread levels they can't really go below.

So I don't know what that means.

And it again, it's a it's a huge business.

It's a very good business.

Uh, we just haven't been I have just not been involve with it.

So I look at it from the perspective of my world seeing how it's impacted us as a competitor, you know, as taking credits out and now coming back and maybe why.

So somebody had asked me, like I was out of golf outing and he kind of leaned over and he was just talking about private credit, and you know, he was kind of just suggesting, like when is this hype gonna slow down?

Do you think that eventually, you know, the market's going to move back to public markets more or there's we're going to strike a balance somewhere.

I mean, I think there's always gonna be pretty semi in place for private credit because, like you said, I mean, I think the lack of volatility of market price is pretty appealing, you know.

So I think that that is what you know, you know, if you're an insurance company or a lot of companies that have to deal with that, I think there's an appeal.

Is is like at anything else there euphoria takes to a point and when it blows up, then you'll reassess and you'll want liquidity and transparency probably.

So, I mean, I think that's always the case.

Right, We've we've done this stuff before.

It's you know, we we we just rhyme.

It just how we rhyme and what we do and what the you know, anytime.

I always say this, and I you know, through my life of a distress guy, anytime you see money move in scale and access in any area, it usually is going to create some problem.

You know, take any recessionary period of time in your life and look where money moved in scale, in euphoric levels into anything.

It's almost always the reason why the markets.

I mean, I can go back to one o two and look at the influx of money in the long haul cares, you know, or or the global cross and the world the long call heres and the deal regulation of the power markets and all the build of the power plant you know, the the gas fire power plants, and led to huge problems in those sectors that led to that kind of recession.

We had no one oh two.

We all know what happened, oh eight oh nine, right, we know what the the incredib amount of capital flowing in to the real estate worlds and mortgage works and all the derivative transactions around it.

You could always find the thing that goes in.

So yeah, anytime you see investors going in scale, you know, if there's a shock event, it probably resets the mind of how much should be allocated there, and that doesn't mean it's bad.

It means you know so well, but we'll see who knows.

You know, I'm interested in your view, just sort of relative value right now.

And also in the context of a global portfolio.

You know, you're a European based ensure.

There was a ton of excitement about Europe when Liberation Day was announced here, and you know, suddenly everyone realized that they needed to be more diversified geographically, but that didn't seem to have legs given you know, the relative scale of US versus all other markets.

Just wondering how you kind of globally position yourself to get the best value.

Also in the context of very tight spreads on quality debt and very chaotic and risky stuff on the other.

End, you know, I think both of them, I worry more about leverage loans in the sense of having you know, more risk of default, more risk of continued problems.

More so in the high YEELD market.

From evaluation perspective, both trade pretty rich.

I mean, just if you look at it on paper, both high you'll probably trades richer given history then the low market.

But low marks got more risk in it, I feel like, and you're getting higher you're getting higher spreads in the low market.

If you ask you right now what I feel better about, it's probably the high yeal market.

It depends me the timeframe because I don't think they're going to have the impact of the weight of LME stuff on them.

And again the low market.

As we're going to cut rates, you're going to see outflow activity in the low market, because that's just the nature how it operates.

You get outflows when rates cut.

You know when when the fed's cutting because your your base rates low sofas going lower, whereas high yields not.

You're sitting there kind of meandered along at your spread levels and so and that spread differentiation is have been flowed in for a while.

Loans were very compelling, and we kind of moved it back.

But I'm looking at it right now a little bit more of like I know the I know my spread gain or my sorry, my yield gain on the low market is going to be declining.

At the same time, I feel like there's probably a little more risk at a FAULD activity and problems in there, so probably from a stability champ like high a little bit more than loans.

That being said, both of them, I think trade at kind of richer levels, so relative history, and so you got to I would try, I always say tread cautiously.

They've been a good carry trade, and I when I'm involved in as allocation in our firm, we set this.

I've just set both in a neutral stance for a very long time, just because they've grind along.

It's been a great carry trade.

And it just has been a good carry trade in both cases without really taking a lot of risks to it.

But I would between the two, I've liked Hyota a little bit more.

The loans right now, just because they worry about that default thing of why we're having rates come off and hitting that that spread benefit kind of you're losing that a little bit.

And on the Europe versus US, or US versus other parts of the world in terms of credit, where do you see opportunity?

Well are we are we talking like high ye credit or like broad credit?

You know, the whole world finance.

I mean, okay, so Europe is Europe spent up?

You know, for a while it was better trade than the US, right, I mean, you know, if you look at the two markets, they're different markets.

They're very different.

That the European higo market is much smaller, the European sealed lever's low market is much smaller.

They're more higher, they're a little higher quality.

In general, they trade a little differently they were.

So we did, like, you know, we we've got some global hyo products and we're out overweight Europe and it worked out pretty well.

But while we're overweight Europe, we were generally sitting kind of out carrying index.

So really stay in front and trying to out carry the index.

I think that differential is changing a little bit.

I mean, they're both child politically in such weird places a relative to each other right now what they're doing from a rate standpoint, and we sit kind of neutral in them right now relative to the broader ass allocation standpoint.

So I don't have a big feeling.

I think, if you ask me, I worry more about Europe from a recessionary standpoint, just because the input costs stuff and everything how it affects it that I do the US, So I a little more there, but that's been the better trade as it compresses.

I think the US is the better.

But I don't think any of them, they're all in the same it's all the same story, which is spread levels are pretty rich relative to where we could go economically in the future, and as we've got a slowing economies.

So I'm not sure I would get a table and pound for any of them to say this is the most compelling trade out there.

I think there are probably better things to do than jump on the high this leverage finance bandwagon.

But that's kind of where my head's at.

I got.

You know, I probably may maybe I had lean more towards Europe for a while then I thought it was a good trade.

It's probably shrinking up a little bit so.

And yeah, you have so many cheerleaders for credit, particularly the risky credit.

You know, people using the words like Goldilocks and you know, all sorts of It's almost like a Chuck Prince still dancing moment, given all of the bad stuff that is going on around us, and there is I think when it comes down to it, for a lot of people, it's this sense that if things get really wild, then the government or the FED will step in and save you.

What do you think of that?

Because you can't fight the FED, you can't fight the US government, and you as an investor you're going to underperform against your peer group if you don't, you know, somewhat join the bandwagon.

So so how do you kind of like make sense of that?

It happens in every business cycle wherever in right, every time you get late into a cycle, people always run a triple cee credit because it's the last place to get yield.

It's almost and it's common.

It happens, and you the question how long does it last?

You know, I can, oh, you know, going look at O five, O six into oh seven, how long that lasted?

Where we just grind along?

The triple CED's got so incredibly tight?

What's weird?

You know?

The higher market triple seeds are not a big in either market.

They're not a big piece of the indices, but they're important from return dynamic, and they've kind of stalled out from return standpoint a little bit because they've run so far, and that's where your problems are.

And so if you get a first brand with some of that, it really, you know, takes down your returns a little bit.

But uh, I would tread cautiously because I think in all situations, as it compresses, what you're giving up is less and less and less and less reletive the broader market, but it's hard to avoid.

So it's not as if I will tell you we generally are underweight lower quality portions of markets right now because we don't think we're getting paid for the risk we're taking.

In those names, they're veriosyncratic, and the ones that don't work really don't work.

And the ones there's there's a and also with even within Triple ce Land, it's incredibly bifurcated.

There's ones that trade very tight and should be upgraded probably or just trade tight, and ones that are very very wide.

So you got to look within that confined to decide what you want to do.

My view of it is, I think you're not getting paid to take that risk in the current market, and I'm happy to go to investors explain why, because I've seen these markets unwine in many situations.

And that's the one that winds out five six hundred basis points more.

When you see something to turn, it's in those credits, and then there are great you know, there's great buying opportunities to lower quality credit and great selling opportunities in you're and usually you're told to sell when everyone's buying and it's grinding really tight.

So that's how I look at it.

I mean, I've seen too many markets where you get caught hole in the bag on that, you know, eight h nine.

You know, it's a great example fourteen fifteen.

In energy, there's just different periods.

I wouldn't call COVID like that because it was sort of uniform and you know, hard to explain, and you know, dealt differently.

But generally there's areas in the market, so it probably will keep grinding a little bit tighter.

But what you're getting paid to ride that probably not as beneficial it was six months ago.

So at some point you need a lightening into the trade.

And we have we been underweight it.

So you know, if you do, though, think that we're near an inflection point, you know, potentially triggered by third quarter earnings, that might send spreads wider.

What's the hedge?

I mean, the CDX is very cheap right now.

Obviously you can go into quality, but everyone's buying quality debt.

I mean, is there some kind of hedge for this other than just you know, hiding all the cash under the bed.

Probably cash is the best hedge if you really better, I mean, I don't we we don't really run long short like that in our strategies, and we can't.

There's really not much you can do in colo land, you know, other than other than just be defensive in your portfolio positioning, you know, on the high od side, we just try to build a little bit cash or be more defensive in our names.

And we're we're asked by clients to be invested in high yield, and so that's the reality at the at the ass allocation level we do.

We are defensive on our position in there, trying to trying to take it, you know, trying to recognize that.

And again I don't know when the inflection point is going to be.

Just always think in markets, you know, you're trading at these types of spread levels.

You could grind along and we probably will a little bit here, but there'll be something that I'll move as wider.

And then it's the decision of what you want to do.

I'm not sure what it's going to be.

You know, it's obviously not the government shutdown.

It could be some other reason.

Gieoflick at risk.

I decided they're three cure earnings because I think it from an investors standpoint to an asset class that will get them looking and say, okay, I'm more and more concerned about in default risks and slowing fundamental picture in these companies than the kind of meandering It's fine, earnings are okay, we're good reality, and am I going to start to get more even more visibility and the input of things like Trent tariffs and stuff on companies more in scale that could psychologically change you know, where we are from a spread level standpoint, But again I think from our perspective, it's probably holding a little more cash, try to have a little more dry powder where we need to, and just being a little more defensive and expecting because where spreads are, I mean, if you just look at history, you know, it would tell you that it's you know, we're we're pretty we're pretty tight and relative to history and spreads.

Well, great stuff.

Jim Shape for the global head of Leverage Finance at Eggon, many thanks for joining us on the credit edge.

Yeah, thanks love for having me.

And of course I'm very grateful to Juliehung from Bloomberg Intelligence.

Thank you again for joining us.

Thanks James for even more credit market analysis and insight.

Read all of Julie's great work on the Bloomberg Terminal.

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