Seeing Shift Back to Debt-Financed Investment: Cisar

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00:00How much are you getting concerned about the amount of debt issuance tied to some of these

00:04big tech companies? Hey, good morning, Lisa. So we are definitely seeing a shift away from

00:11cash flow financed investment, equity financed investment, back into intentional releveraging

00:17and some debt financed investment, which is very typical of that middle stage of the credit cycle

00:23where you start to see more M&A, more financial engineering, a bump up in capex and spending.

00:31And that does come with some additional concerns around where valuations are and are they

00:36appropriately reflecting the potential return on that investment. At this point, do you think that

00:41investors just throw caution to the wind as soon as they see the word artificial intelligence in

00:45any kind of prospectus? Well, I think it's a little bit of a more nuanced view than that. I think that

00:52people realize that AI is going to be a defining trend probably for the next 5, 10, 20 years.

01:00There is definitely sustainability and durability there. But there are a lot of open questions as

01:04to the magnitude of return on investment, the timing of that. And I think that people are looking at

01:10things like meta bond deals, which is still a pretty high quality issuer and thinking this seems like a

01:17reasonable place to continue to put cash to work, especially because that new bond sale did come

01:22with a pretty significant new issue concession, which is something that a lot of investors have

01:26not been getting this year in the primary market. So there's that balance of, are these valuations

01:32compensating me for the potential risk in a higher quality company? Now, if this were a single B or

01:39triple C related bond deal, I think that we'd have a very different conversation.

01:44Winnie, it's notable, though, that the debt being raised isn't just in the syndicate market.

01:48It's also private credit that's been participating in this, too. Meta also doing this, a JV with Blue

01:54Owl and Pimco that leans on Meta's credit worthiness without actually impacting Meta credit because it's

02:01off balance sheet debt. Is that concerning, especially with off balance sheet debt and that being used as

02:07a way to fundraise? Seems problematic in some areas.

02:10Yes, I think that off balance sheet debt is always a very appropriate Halloween topic. It gets your

02:16spooky senses rising a little bit because there is a historic track record of off balance sheet debt

02:23sometimes going a little bit sideways. Now, when it comes to the AI investment spend, there is just the

02:29reality that so much capital is being raised and needed to be put to work in such a wide variety of

02:37initiatives that some sort of diversification of financing does make some sense. Now, that being

02:42said, anytime we see off balance sheet, we're definitely taking a closer look, trying to ensure

02:48that we understand kind of the stream of cash flows and where the risks really lie.

02:54Well, for things like project finance in general, things happen, Winnie. There's force majeure.

03:00There are big events that disrupt, especially physical plants.

03:03Are those types of risks fully appreciated by this market?

03:08Yeah, that's a great point. Project finance can be a really challenging road sometimes.

03:14And I think when we look back at valuations and where they stand, the reality is corporate credit

03:20spreads are very, very tight. Now, that doesn't mean that they necessarily have to widen, but the balance

03:27of risks does seem to be skewed much more to the widening rather than incremental compression

03:33or tightening from here on out. And that does leave us a little bit more cautious just in terms of the

03:39direction of travel of spreads more broadly, as we have this mix of kind of broader macroeconomic risk

03:45with what's going on in the consumer complex, and then also just capital structure and balance sheet risk

03:50with how things are being financed, where the capital is flowing, and whether that return on investment

03:56is going to be realized in the relatively near term.

03:59If you have all of that and spreads are barely moved, Winnie, what would it take to significantly

04:05and sustainably widen spreads at this point?

04:08That is the question that every client is asking us. And I think that it comes down to some sort of

04:14acknowledgement that the fundamental picture is perhaps less healthy than what people are currently

04:19anticipating. Earnings expectations for 2026 are pretty lofty. The most recent earnings have come in,

04:26I would say, relatively well in aggregate, though we have seen some signs of pressure in some

04:31different sectors. Now, what usually changes that technical demand for fixed income is concerns around

04:38downgrades, around defaults, around the potential recession word. And I do think that over the next 12 months,

04:45there is that risk that some of these lofty expectations start to be a little bit disappointed.

04:52And that's where you start to introduce some of the conversations around what is the true fundamental

04:58trajectory of corporate credit. We've enjoyed a massive ratings upgrade cycle. Is that going to

05:03start to reverse and start to spook investors a little bit?

05:06I'm looking at a cuddly cockroach costume from Halloween cost that looks like it is definitely going

05:13to do the trick. Winnie, without government data, I'm just wondering from your perspective,

05:17is there any sign whatsoever that we do have that downturn that could potentially call a people's

05:22bluff? Yeah. So I think that when we look at the composition of economic growth recently,

05:29we do realize that so much of the momentum in the broader economy and also the market has been

05:35linked to AI spending, to tech spending, to all of those initiatives. When we think about the current

05:41health of the consumer, it's a little bit more of a mixed bag with the bank saying, Hey, we're not

05:47seeing a lot of signs of pressure here on the consumer. And then some of the consumer products

05:51companies saying, this is the worst consumer sentiment, the worst consumer environment that

05:56we've seen in a very, very long time. Trying to reconcile all of those things, I think indicates to

06:02us that the job market is going to be the linchpin here. We've already seen a pretty significant

06:07downdraft in the pace of job ads. Of course, we are flying a little bit blind as it relates to

06:13official economic data, but there are some substitutions there that would generally point

06:17to not a super encouraging labor market overall. And we're very much focused on those announcements.

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