Time now for our Wall Street Week daily
segment. The host of Wall Street Week, David
Westin, joins us. David, your show kicking off at 6 p.m.
Eastern Time here. And I know you had a sit down here with
the really key person here in the private credit space.
And we know this is really kind of been the dominant conversation really for the
last couple of years as we look toward further rate hikes and somebody you know
well, you talked to her just like last May actually morning before she actually
this investment partners. And we talked to her, given that we saw
the jobs numbers today and what might be coming from the Fed later this month,
what that may mean for credit, where credit is and where it's headed.
We generally do with levered credit. And I think that we are of the view that
there are likely to be one more hike. Maybe there's two more hikes.
And I think that that in general, we're sort of closer to the end of some hikes
than obviously we are at the beginning. So I think we're coming to the tail end
of the hike cycle and and people are starting to now look at 24 and, you
know, when when is the Fed going to cut and what's going to what what are that
what are the indicators they're looking at that would make them cut?
So when I checked it this morning on the Bloomberg, the spread for high yields
just to take high yield was something like above 450 basis points.
Where do you expect that to be going? Is that where we end up or is that going
to continue to rise and if so, when? Yeah.
So I think you got a big push and pull, which is that base rates are pretty high
and north of 5%. And and then you've got spreads that are
actually not that wide and perhaps not representative of the of the risk in the
corporate credit market. And I would actually say that's true for
investment grade as well. I think investment grade is, you know,
140 over plus or minus. And now yields in the sort of low to mid
four hundreds over. So I think our view is credit spreads
are not indicative of risk necessarily. Yields all in are reasonably wide.
So that's the that's the trick. And I would suspect that you'll see
spreads go a little wider, primarily because we do think you're going to
continue to see some margin deterioration for levered, number one
and number two. We do think we're in a in a bit of a
longer sort of higher for a longer rate environment which which will pressure
cash flows as well for corporates. Take us through how it works and credit
the mechanics of it, because I've seen some reports that there may be a delayed
response because some companies and this is both for investment grade but also
for high yield or leveraged loans locked in rates, you know, at a lower rate
that's coming due in the next couple of years.
I'm told a fair amount of money's coming due and it may be a little difficult to
get it refinanced. It acceptable levels.
Yes, I'd sort of take that into two pieces.
So in general, you got a bunch of fixed rate bonds, whether that be investment
grade or high yield bonds that were issued at a different moment in time in
the market when the five year and the ten year were significantly lower.
Those fixed rate bonds are a real asset right now in the in the current rate
environment. I think on the on the second added
spectrum, you've got the loan market, which is a large, large market which is
all anchored on a base rate plus a spread.
And so as that base rates move from 1% to north of 5%, that's hurt businesses a
lot. So if you think about sort of corporate
balance sheets, you know, an incremental 400 basis points of cost of leverage on
their debt stack that is loan related has been pretty painful.
The second part of your question is maturities.
It actually happens to be that the sort of quote unquote maturity wall is
reasonably benign in the next year or so.
But as we look forward, if we're if we are living in a kind of longer or I say
higher for longer environment, eventually these companies have to
refinance. And eventually that cost of financing is
going to be a lot higher. The only other thing I would say is in
some of the instances with the higher market in the loan market, there are
folks who have hedged their rate exposure from day zero.
That also is obviously a real asset today in today's environment.
Not a ton of them, but some of them did. We've had a heard a lot of talk by
economists about the recession. It's been predicted for a long time now.
It seems to be getting put off into prediction.
Do you think that the market in particular that spread that we talked
about earlier, is that accurately reflecting what you think of as the
possibility of recession? No, I mean, if you look at the media and
how you spread over, I guess if you say post-crisis and you sort of take out
Covid, there's lots of ways one can slice these numbers.
You know, the median how you describe is north of 500 basis points over that has
been in a, you know, 2 to 2 and a half percent GDP environment.
Today we're in the low to mid four hundreds in a pick your number on GDP
zero. The estimates are all over the map, but
you know, 0 to 1 and a half percent. So so definitionally, you know, that's
that's not our path. Do you position yourself as an investor
to be able to buy credit? Are you expecting essentially prices to
come down so there are bargains to be had out there?
Do you are you building up dry powder? I think I think there's places to add
risk right now, because I think that overall in the loan market and in the
high yield market, even in this securitized credit market in general,
yields are sort of 8 to 10%. So I think in a lower growth environment
with a higher rate environment, potentially a sustained higher inflation
environment, tightening financial conditions.
I actually think in that 8 to 10% zipcode, that's a pretty good place to
try to earn yield. However, I do think that
I think credit spreads are not indicative of it.
I think a lot of that yield is coming from base rates, over 50% of it in most
instances. So I think you kind of got to be a
little bit careful in terms of where you are.
And I suspect you're going to have moments over the next sort of
12 months where there will be some good amount of volatility.
And that volatility can come from a variety of places.
But I think you'll continue to see some margin degradation.
And I think that probably gives you some moments to add more risk as well.
But I think, you know, short duration, well-capitalized businesses are a pretty
good spot to live in that in that zip code of 8 to 10%.
