00:00Joining us now is Amanda Leinem, Goldman Sachs chief credit strategist.
00:03It feels like everywhere you look, there is this conversation,
00:06concern about concentration risk happening,
00:08whether it's in private markets or public,
00:11which PIMCO, of course, looks at both of them,
00:13whether it be equity markets.
00:14And because of that, you are now starting to see some of the spreads widen,
00:17whether it be loans, whether it be CDS,
00:19on some of these AI-related companies.
00:21Is there a real pushback happening in these markets?
00:24And if so, is that pushback warranted?
00:26Well, good morning. Thank you for having me.
00:28I would say, yes, the concentration theme has come up
00:31in a few different facets in the credit market.
00:33One, as AI-related issuance broadly has accelerated in the credit market,
00:37investors are becoming more mindful about the various exposures they have,
00:40not just in their credit portfolios, but also in equities.
00:43And because credit investors don't share in the upside of our equity peers,
00:47we tend to pay more attention to the concentration risk.
00:49I think some of the pushback that you're seeing in other markets,
00:53I would separate that from the AI narrative,
00:55and a lot of that is just the software narrative,
00:57where some of these software refinancings are coming through the market.
01:01And keep in mind, many of these transactions were kind of struck
01:04in the 2021 era of very elevated valuations and very low rates.
01:08And so some of these capital structures just need to be right-sized.
01:12We tend to not pay a ton of attention to maturity walls across the credit market,
01:16but here in loans and in private credit, the 2028 maturity walls do matter.
01:21So we do expect to see more differentiation from the investor base as these different business models flow through.
01:26And it will really be up to investors to determine how much of this is right-sizing a capital structure
01:31and how much of it is actually parsing through potential business disruption risk from AI.
01:36Well, is it pushing investors one way or another into different kinds of capital structures
01:40as they try to figure out which is going to be the safest and yet bring you the return?
01:45I think for issuers that are looking for certainty of financing, customization, kind of a bespoke solution,
01:52the private markets are where they gravitate more.
01:54And I would say there's a lot of demand from investors in the private markets.
01:58By Prequence estimates, there's $4.5 trillion of dry powder globally across all those strategies.
02:03So that's pretty meaningful.
02:04I think for solutions that fit more cleanly into a syndicated transaction,
02:09right now those markets are still a relatively low cost of capital.
02:12And so that's a good solution.
02:13I think what is most striking from our perspective is this kind of interplay across asset classes that we've sensed
02:19because our view is that debt financing will play a larger role in this AI build-out.
02:24So that openness and receptivity of the credit markets has become more relevant for equity investors.
02:31And our high-level view is that we're not concerned about access to capital,
02:35but we just don't expect, for example, the U.S. IG bond market to do all the heavy lifting of
02:40the financing
02:40and that it will be a more nuanced conversation across markets.
02:43Well, you've talked about this, that we have an overlap in borrowers in both syndicated credit and indirect lending.
02:50You're seeing them use both channels.
02:52One of the things you also point out with that, that especially in direct lending,
02:55I'm assuming this is what you're referring to,
02:57that the standard measures of credit risk have kind of changed.
03:02Well, what are the more important metrics to be looking at in this environment?
03:05Sure. It's a great point.
03:06So a lot of investors will look at default activity and kind of missing the nuances under the surface
03:11that in private credit we can have covenant defaults that aren't necessarily the case in the syndicated market.
03:16Really, the first default is a payment default.
03:18Those have very different outcomes.
03:20So for that reason, we focus more on realized losses in private credit.
03:23And then in terms of signposts to watch, we focus on things like non-accrual rates and payment in kind,
03:29so basically paying your debt with additional principal as opposed to cash interest.
03:33The high-level view is that through the first quarter, so that's the most recent data that we have,
03:37we're seeing a modest uptick in non-accrual rates, and it's very consistent with the view
03:42that this is a market of dispersion but not widespread market disruption.
03:46That will be key to watch.
03:47However, just like liquid credit, private credit is very growth sensitive.
03:51So right now, the growth backdrop is arguably good enough for credit.
03:55That will be key.
03:56And then beyond that, kind of this left tail that we're watching,
03:59both in liquid and private credit, of companies that aren't yet kind of growing into their capital structures,
04:04even a couple of years after the pandemic now,
04:07that will be, I think, where we would be most focused in potential signs of stress.
04:11How old sanguine are you?
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