00:00Let's start with the public credit market. The high yield credit spread is finally starting to widen, Megan, after some high profile corporate collapses, fraudulent loans at regional banks.
00:09Is a slowing economy, though, especially the parts that serve lower income consumers, kind of the bigger threat?
00:15So, well, first of all, thank you for having me. So we're still our confidant on the economy, actually.
00:21And in terms of some of the spread widening and high yield, we see it as an opportunity to add.
00:26So we have seen following some of these headlines, investors have de-risked.
00:31It means they've reduced some of their exposure to riskier parts of the market.
00:36Spreads have widened. And the reason behind some of that de-risking we think is more related to the two bankruptcies that recently happened, some of the headlines around regional banks.
00:45The exposure in public markets to those to those areas we think is relatively low.
00:51So think about subprime auto subprime consumer lending and auto lending, less than two and a half percent of the high yield index.
00:57And so it's not an area we think can drive weakness in public markets.
01:01And actually, U.S. high yield to us looks attractive here.
01:04Michael, what about you?
01:06Yeah, absolutely. I think Megan brings up some some great points there.
01:09It's it's a smaller part of our market when we're talking about some of these things that are happening.
01:13But but obviously, I think it's incumbent upon investors to to work with managers who are sort of picking through, you know, the index, picking through the individual credits.
01:23I think some of the earlier guests that just came on were talking about, you know, this is a labor intensive business in terms of picking through these companies and sectors.
01:31But to to some of Megan's points there, I think that, you know, particularly in the auto sector and the subprime credit space, as well as some of the risks that are out there.
01:41I think those are things that investors really need to roll up their sleeves and do work on and pick managers that are are doing that level of work.
01:49In 2020, 2021, where rates were really low, rock bottom, Megan, companies went on a borrowing spree.
01:55There is now a wall of leveraged loans maturing as lenders become more concerned about underlying assets and the state of borrowers.
02:04What's your sense of whether companies will struggle to extend or refinance this debt?
02:08So far, they've had a very easy time refining debt.
02:12And if you think about the maturities that are due through 2026, the high yield market has already addressed the majority of those.
02:19So there is a bit of runway there.
02:21And think about issuance back in September, if issuers want to come and refi, they're able to do that and at attractive, attractive spread levels.
02:30So so far, we have not seen any of the recent headlines feed into capital markets activity.
02:36And it seems to be still opportunities to to refi for those that want to.
02:41But a lot of that borrowing, Michael, moved to the private markets, which limits supply in public credit while demand remains pretty strong.
02:48So is the big picture of high yield spreads remaining again near those historically tight levels kind of distorted as a result?
02:56Well, it's a little bit debatable whether or not it's distorted, but I will say that the markets have become higher quality.
03:02So a lot of the, you know, the private credit market taking some share, if you will, from the I'll pick on the leveraged loan asset class for a little bit in terms of where it's been taking some share.
03:12It has been on those smaller companies, those B3, B minus rated credits.
03:17And again, you know, to some of the reasons that justify tighter spreads overall is generally speaking, the market has gone up in both quality in terms of absolute rating category,
03:27as well as gone up in quality in terms of larger, bigger scale businesses being involved.
03:32So I think that has has had some impact.
03:35But I think one of the things we just frankly haven't seen to really drive supply has been large scale leveraged buyout activity.
03:42Obviously, there's there's one out in the market right now that's that's going to set some records here, but it's a much larger business, much bigger company.
03:50And, you know, when you look at the capital structure, that business, they're also bringing correspondingly a much larger equity check than maybe we saw in 2021 during some of those sort of boom LBO years.
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