00:00You pointed out that a quarter of issuance right now is coming from AI, mostly to fund data centers.
00:05Is this just an initial first wave as we try to catch up with the compute necessity,
00:10or is this just the dominant theme from here on out?
00:13You know, I think the number one theme that our investors are focused on right now is hard assets and
00:18the infrastructure build out.
00:20If you think about AI and the CapEx associated, we really think that this is just a generational opportunity.
00:26If you look at the U.S., we think you're going to need double as much power for data centers
00:30over the next couple of years.
00:32And the hyperscalers have said that they're going to spend $600 billion this year alone on AI CapEx.
00:38And so what we're seeing is that there's just a really big opportunity to finance this CapEx across all the
00:44markets that we touch,
00:45investment grade, bank market, high yield and structured products.
00:49But in the high yield market specifically, as you mentioned, it really has been the dominant theme this year.
00:54We're 20-odd percent of issuance, and we think that's going to continue.
00:58It's data centers, it's chip finance now, and it's power too.
01:02But that's absolutely what our investors want to focus on right now.
01:05And I know you have a panel on this later, so I would love a little preview.
01:07Because it's an interesting conundrum to say, yes, this is hot.
01:10We need this stuff.
01:12But what the world looks like in five years is so unknown.
01:15There are huge tails on both sides of this thing.
01:17Either it's a disruptive force that completely reshapes society, or we go too far.
01:22How is this market treating those kinds of risks?
01:24Are they being priced in yet?
01:26So, look, I think there are some natural checks when you think about the amount of development that can happen.
01:31Land availability, power availability, and then just the long lead time for a number of these items.
01:37So that is providing some natural constraints for the market.
01:40But what I do think you're going to see, particularly in the leveraged finance market, as we get more data,
01:45is differentiation based on track record, based on ability to deliver large projects on time and on budget.
01:52And if we have more data, we think that the market will start distinguishing more.
01:56But I think the backdrop is going to continue to be really strong because this is a generational opportunity to
02:02help with this CapEx build-out.
02:03What do you think fuels that differentiation to come into the market?
02:06Because at the moment, it just feels like a frenzy and that investors can't get enough and they have the
02:11money to put towards it.
02:12Yeah, so I think it's nuanced.
02:13I think it's lease structure.
02:15Do you have termination options if you're late in delivering the space?
02:18Who is your tenant?
02:19Are they investment grade?
02:20Are they non-investment grade?
02:22Where is the project located?
02:23How long is the lease?
02:25So it's very much a project finance type of backdrop.
02:28So we also have had a very healthy issue, especially this spring.
02:32How much of this has just been a backlog versus new robust activity in LBOs and otherwise?
02:38So, you know, Q1 was a big quarter for M&A, but a lot of it was focused on sponsor
02:43and strategic activity.
02:44More than 25% up in total, but very concentrated there.
02:49The sponsor backlog is actually relatively light right now as we look forward because so many of these transactions have
02:56been kind of financed in the IG market rather than the high yield market.
03:00So we've actually worked through a lot of the M&A backlog.
03:03I think that's positive for technicals as you look forward, given there's not a lot coming outside of AI.
03:10But I think longer term, we're optimistic that that sponsor activity returns.
03:14A lot of capital on the sidelines.
03:16DPI pressure remains front of mind.
03:18But haven't we had that for some time, Miriam?
03:20We have had it for some time.
03:21So what finally brings sponsors back to the table?
03:24You know, maybe it's the AI build-out.
03:26I think a lot of our sponsors have shifted their focus to these hard assets.
03:30We're seeing some activity in health care.
03:32We're seeing activity in industrials.
03:34So I think it's going to be in this hard asset sector and infrastructure build-out.
03:38Is there a sort of, I mean, usually it's crowding out when you talk about government spending, but is there
03:42any sort of crowding out when it comes to AI?
03:44Unless you're spending on hard assets, unless you're coming to the bond market with those types of debt offerings, is
03:50there not a lot else that's attractive out there?
03:52If you separate some of the AI infrastructure plays, what does the rest of the market look like?
03:56Well, look, I think you're going to see muted activity around software for a period of time.
04:00Even if you can distinguish winners and losers, there's probably going to be a large bid-ask between buyers and
04:07sellers for a period of time there.
04:08So I don't think we're going to see activity there.
04:10I do think we'll see activity around staples, around health care.
04:14Europe is getting more active for the first time in a while.
04:18So we think we'll be busy, but it's going to be sector-specific.
04:21So software still feels toxic.
04:23Is there any signs of that changing?
04:26You know, I think the market has stabilized around certain names, so I wouldn't say that it's toxic.
04:31I think it's more that you may not see big transaction activity until that gap between buyers and sellers gets
04:37closer together.
04:38And spreads remain tight despite all of the volatility, despite inflation figures.
04:43I know we're going to talk with your chief economist in a bit.
04:45Inflation figures that are the highest annually since 2023.
04:49The war in Iran is still going.
04:51The Strait of Hormuz is still closed.
04:53Credit spreads as tight as they are, is it just because everything is great with AI and the economy, or
04:57is there some complacency in this market?
05:00Well, you know, we are seeing bifurcation in the market.
05:02So if you look at the total credit spreads, to your point, we have basically retraced what we saw widening
05:08in February and March, really back to almost all-time tights on a, you know, going back to 2007 basis.
05:15But I think if you look under the hood, the market is differentiating.
05:18We're seeing a lot of desire for clean credit stories, and those names have really traded up.
05:24But if you look at software and if you look at other sectors that maybe are more sensitive to inflation
05:30and some of the effects of the war, I think those names have traded down.
05:34So I think the market is doing a good job of differentiating.
05:37But to your point, there's not a lot of supply coming.
05:39And so when you see a good new money name, people kind of do have to pile in right now.
05:43Is there a scenario where some of those more interest rate-sensitive sectors, that it spills over into the wider
05:48market?
05:48This was said also of software, that maybe it becomes like energy in 2014, that it has a greater impact.
05:54Are these things, can they remain isolated, or are there any concerns that it could lead to greater credit market
05:59ruptures?
06:00We haven't really seen that so far.
06:01So I think if you look at Q1, earnings were pretty strong across the board.
06:06I think the economy has been able to absorb a lot of these inflation considerations.
06:10That's part of why rates are higher now, because growth has continued to be strong.
06:14So I don't think we see anything that's systemic at this point.
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