Latest / Bloomberg Intelligence / I Don't Think the Wise Investor Ever Waits in the Muni Market: Mysak

Transcript

I Don't Think the Wise Investor Ever Waits in the Muni Market: Mysak · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa A. Brahmowitz. Each day
• 0:11
  Speaker 1: we bring you the most important, noteworthy, and useful interviews
• 0:15
  Speaker 1: for you and your money, whether you're at the grocery
• 0:17
  Speaker 1: store or the trading floor. Find the Bloomberg p m
• 0:20
  Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com.
• 0:30
  Speaker 1: Chairs of Tesla right now down nearly five after another
• 0:35
  Speaker 1: tweet storm from Elon Musk targeting the Securities and Exchange Commission.
• 0:40
  Speaker 1: Eric Gordon is a professor at the Raw School of
• 0:43
  Speaker 1: Business at the University of Michigan in an arbor, and
• 0:46
  Speaker 1: he joins us. Now, Eric Gordon, why would Elon Musk
• 0:51
  Speaker 1: do this? I think because he can't not do it.
• 0:56
  Speaker 1: You know, the first two times Elon did this crazy
• 0:59
  Speaker 1: twee eating stuff, I'm scratching my head and saying, how
• 1:02
  Speaker 1: could the CEO of a public company be doing this?
• 1:06
  Speaker 1: But now if a day goes by, you know, I'm
• 1:08
  Speaker 1: surprised that he doesn't. Um. I mean, actually, Dana Hall
• 1:11
  Speaker 1: put out something great on the Bloomberg this morning. Here's
• 1:15
  Speaker 1: here's her opening line. Another day, another tweet storm from
• 1:18
  Speaker 1: Elon musk Um. I think he cannot control himself. I
• 1:22
  Speaker 1: think he doesn't want to control himself. He just uh,
• 1:25
  Speaker 1: you know, he's right, the SEC, everybody else is wrong,
• 1:29
  Speaker 1: and and he's gonna lash out at them, all right. So,
• 1:32
  Speaker 1: s Professor Gordon, what is the board's role in raining
• 1:35
  Speaker 1: him in? Because it's clear that he doesn't want to
• 1:39
  Speaker 1: rain himself in, but the SEC is going to penalize
• 1:42
  Speaker 1: him and the company if he does not. Yeah, and
• 1:44
  Speaker 1: so it's that ladder part. They're going to penalize the
• 1:47
  Speaker 1: company if he if this guy doesn't shape up, and
• 1:50
  Speaker 1: that's where the board comes in. The board is not
• 1:52
  Speaker 1: supposed to look out for Elon except to the extent
• 1:56
  Speaker 1: that that helps the company. They're supposed to look out
• 1:58
  Speaker 1: for the company as a whole, no matter what Elon says.
• 2:01
  Speaker 1: So when Elon says, you know, support me or I'm
• 2:04
  Speaker 1: going to quit or you know whatever he pulls, I
• 2:08
  Speaker 1: think the board. The board is the problem here. We know,
• 2:13
  Speaker 1: we know what the problem is with Elon. The question
• 2:15
  Speaker 1: is what's wrong with this board. Why isn't the board
• 2:18
  Speaker 1: taking action to support the company and at some point
• 2:22
  Speaker 1: to just protect the company. Professor Gordon, if someone that
• 2:27
  Speaker 1: you were representing in the world of business publicly described
• 2:31
  Speaker 1: the Securities and Exchange Commission as the short seller enrichment Commission.
• 2:36
  Speaker 1: What would you do? You know? Um, so I'm also
• 2:41
  Speaker 1: a law professor in an attorney, and I would advise
• 2:44
  Speaker 1: them to cut it out. Um, for a couple of reasons. One,
• 2:48
  Speaker 1: it's it's just ridiculous. Um, that's that's not what they do.
• 2:53
  Speaker 1: In fact, they gave him a very easy settlement. If
• 2:56
  Speaker 1: I were going to criticize the sec before offering such
• 2:59
  Speaker 1: an settlement, but just as a practical matter, I mean,
• 3:03
  Speaker 1: come on, when you're on the playground, do you taunt
• 3:06
  Speaker 1: the guy the big kid with the big stick. No,
• 3:09
  Speaker 1: you don't do that. Well, professor, I'd love to get
• 3:12
  Speaker 1: your opinion. You were saying, why isn't the board saying
• 3:16
  Speaker 1: cut it out? Why aren't they reading it? In more,
• 3:17
  Speaker 1: it's their fault, that said. If they were to push
• 3:21
  Speaker 1: Elon Musk out, or if something that they did caused
• 3:24
  Speaker 1: him to depart the company, what would be left of Tesla?
• 3:28
  Speaker 1: You know, it might be a better company. So we've
• 3:31
  Speaker 1: said all along. I haven't said, but a lot of
• 3:33
  Speaker 1: people have said. Certainly, his fan club has said the
• 3:36
  Speaker 1: company is nothing without Ellen. If that's true, everybody who's invested,
• 3:42
  Speaker 1: everybody who's an employee, is in real trouble because he
• 3:45
  Speaker 1: could have a heart attack, He could be driving in
• 3:48
  Speaker 1: a Tesla and be using the driver assistant, hit a
• 3:51
  Speaker 1: truck and die. I mean, the company cannot be Elon if.
• 3:55
  Speaker 1: If that's the case, the board is at fault for
• 3:59
  Speaker 1: not sending up a succession plan, for not insisting that
• 4:02
  Speaker 1: there'll be a strong CEO, for not insisting that a
• 4:05
  Speaker 1: large public company have a team. Just you know, just
• 4:09
  Speaker 1: the admission that it's nothing without Elon to me is saying, well,
• 4:14
  Speaker 1: come on board. Why would you leave everybody at such
• 4:17
  Speaker 1: big risk but to play devil's advocate there, Eric Gordon,
• 4:22
  Speaker 1: if you're an investor in Tesla, you already know all this, right.
• 4:27
  Speaker 1: I mean, you don't have to own I mean you
• 4:30
  Speaker 1: don't have to own shares of Tesla. You can buy
• 4:34
  Speaker 1: a lot of other things if you don't believe either
• 4:36
  Speaker 1: the corporate governance is accountable or indeed whether the CEO
• 4:41
  Speaker 1: is going off the rails with his tweet storm. Yeah,
• 4:46
  Speaker 1: and I think that's a good point, and that's why
• 4:48
  Speaker 1: their investors left the stock has gone down, but it
• 4:50
  Speaker 1: hasn't gone to zero. It's still a very highly valued stock,
• 4:54
  Speaker 1: a highly valued company. And I think what's happened is
• 4:57
  Speaker 1: we've seen investors who have changed their mind said let's
• 5:02
  Speaker 1: get out, it's too scary. Leave. But there are obviously
• 5:06
  Speaker 1: a lot of investors who are left who are willing
• 5:08
  Speaker 1: to hold stock even now it is very, very high valuation,
• 5:13
  Speaker 1: and who would say, look, we are willing to take
• 5:16
  Speaker 1: that risk. And you know, that's how the system works.
• 5:19
  Speaker 1: You know. If some people don't want to take the risk,
• 5:22
  Speaker 1: they don't. If other people want to take the risk,
• 5:24
  Speaker 1: let them take the risk. Thank you so much for
• 5:27
  Speaker 1: being with us. Eric Gordon, Michigan University professor for the
• 5:31
  Speaker 1: Ross School of Business talking about Elon Musk and his
• 5:35
  Speaker 1: inability to control himself with respect to his tweet storms.
• 5:50
  Speaker 1: So let's take a look at what is going on
• 5:51
  Speaker 1: right now and ms A bond market. Earlier this week
• 5:54
  Speaker 1: black Rocks Immuni bond et F which has about ten
• 5:57
  Speaker 1: billion dollars of assets, so it's biggest one day withdrawal
• 6:00
  Speaker 1: in its history. And meanwhile, you've got the shares of
• 6:03
  Speaker 1: that doubt at the lowest levels of the year. Joe
• 6:05
  Speaker 1: meisac Come on, and here you're the person who always
• 6:08
  Speaker 1: is following every movement in the municipal bond market, covering
• 6:12
  Speaker 1: our Bloomberg brief focused on that market for us. Here,
• 6:16
  Speaker 1: what's your perspective? This is all just rates concerns run
• 6:21
  Speaker 1: all right, everyone, kind of uh, a little bit of
• 6:26
  Speaker 1: panic in the air maybe. So this week we had
• 6:30
  Speaker 1: yields on a ten year go up to a little
• 6:33
  Speaker 1: over to seventy, which is a place we haven't seen
• 6:38
  Speaker 1: on the tenure municipal bonds. What you're saying on tenure
• 6:41
  Speaker 1: municipal bonds tax exempt, tax free, uh so to seventies
• 6:46
  Speaker 1: level we have not seen in quite some time. For
• 6:50
  Speaker 1: most of this year, as our listeners know, the ten
• 6:55
  Speaker 1: year has been hovering in the two and a half
• 6:57
  Speaker 1: percent range, seemingly range bound, which is very unusual in
• 7:03
  Speaker 1: the muni market. It's plateau like that from February through September.
• 7:08
  Speaker 1: Very unusual. And you go back years and years, rates
• 7:12
  Speaker 1: are always ratcheting around in the muni market reflecting supply
• 7:15
  Speaker 1: and demand. This year was very unusual. I'm not sure
• 7:19
  Speaker 1: you're going to see that sort of plateau ing again.
• 7:21
  Speaker 1: And you know right now, to seventy not bad. Headed higher,
• 7:27
  Speaker 1: one would think, alright, headed higher. If that's the case,
• 7:31
  Speaker 1: do you wait until rates are higher or do you
• 7:34
  Speaker 1: when do you start to see money come in? Uh?
• 7:39
  Speaker 1: I don't think the wise investor ever waits in the
• 7:41
  Speaker 1: meunia market, because you should. If you have a certain
• 7:47
  Speaker 1: amount of money that you're going to put to work
• 7:50
  Speaker 1: in the muni market, put it to work. Don't wait
• 7:54
  Speaker 1: people who who wait? Um, I mean there were people
• 7:58
  Speaker 1: who waited, you know, let's say, uh, seven or eight
• 8:01
  Speaker 1: years ago and they've missed, you know, seven or eight
• 8:03
  Speaker 1: years of tax free income basically. So I don't think
• 8:06
  Speaker 1: it's ever a good idea to wait. You might want to, uh,
• 8:09
  Speaker 1: you know, maybe you shorten up a little bit, but no, now,
• 8:13
  Speaker 1: waiting not good. But you know what, what kind of
• 8:16
  Speaker 1: rates what we see to attract much more interest? Yeah?
• 8:20
  Speaker 1: I think if you see the tenure go over three
• 8:23
  Speaker 1: uh well thirty basis points from now, I think you'll
• 8:27
  Speaker 1: see some strong interest then, Joe, I want to talk
• 8:29
  Speaker 1: about the technical factors because we were speaking with the
• 8:31
  Speaker 1: portfolio manager from McKai Shields yesterday who focuses on them
• 8:34
  Speaker 1: to put bond market, and he was saying, heading into
• 8:37
  Speaker 1: your end, you're going to see a lot of selling
• 8:39
  Speaker 1: pressure that liquidity could easily dry up as demand falls
• 8:43
  Speaker 1: for municipal bonds. What's your impression of that and how
• 8:46
  Speaker 1: does that factor into how high yields could go? Oh baby,
• 8:50
  Speaker 1: The technical factor UH to really keep an eye on
• 8:56
  Speaker 1: is supply overwhelming demand. So demand right now, we've seen
• 9:01
  Speaker 1: a lot of bidd lists out for a couple of
• 9:06
  Speaker 1: weeks now, and supply typically picks up in the municipal
• 9:10
  Speaker 1: market the last quarter of the year, So you're gonna
• 9:13
  Speaker 1: see a lot of bonds coming to market and they're
• 9:15
  Speaker 1: gonna have to pay up. It's just the it's the
• 9:18
  Speaker 1: nature of the beast. And then you know, back in
• 9:20
  Speaker 1: January and February, late December, you see a lot more
• 9:23
  Speaker 1: money coming back in money that's going to be looking
• 9:25
  Speaker 1: for a new home, which is you know, was our
• 9:27
  Speaker 1: theme for so much of this year. Joe, I'm wondering
• 9:31
  Speaker 1: if you could just speak a little bit about a
• 9:33
  Speaker 1: story that you wrote entitled Masked Man Preps for Showtime.
• 9:39
  Speaker 1: That was an interesting piece, isn't That's something I just
• 9:43
  Speaker 1: set the scene for people so they understand what you're
• 9:46
  Speaker 1: talking about. Back in April, in Illinois, there was a
• 9:49
  Speaker 1: lawsuit filed by a whistleblower unnamed UH who described the
• 9:58
  Speaker 1: pricing of variable right to and Obligation bonds. Said that
• 10:02
  Speaker 1: the remarketing agents, which are basically Wall Street banks UM,
• 10:08
  Speaker 1: who set the rates on these bonds, we're not really
• 10:11
  Speaker 1: doing their jobs. They were setting the rates too high
• 10:14
  Speaker 1: so they wouldn't have to remarket the bonds, and this
• 10:17
  Speaker 1: resulted in damages to the issuers of these bonds. So
• 10:22
  Speaker 1: in Massachusetts, in August UM, the Supreme Court in Massachusetts
• 10:29
  Speaker 1: rule that whistle blowers, if their file lawsuits, have to
• 10:33
  Speaker 1: be named if the individuals not entities. So the entity
• 10:38
  Speaker 1: which is called Atli's Fund in Illinois UM has to
• 10:44
  Speaker 1: refile its case naming the whistle blower. And they recently
• 10:50
  Speaker 1: got an extension and that's where it is now. But
• 10:54
  Speaker 1: very curious, so many people want to know who is
• 10:57
  Speaker 1: this masked man for woman? Do you have any idea?
• 11:01
  Speaker 1: I do? Would you like to? Alright, just fascinating case.
• 11:08
  Speaker 1: Now the RDO market variable rate demand obligations, that's a
• 11:11
  Speaker 1: hundred and fifty billion dollar market and this is a
• 11:17
  Speaker 1: sort of I haven't seen one of these attacks on
• 11:20
  Speaker 1: the industry. Uh, and certainly you know more than a decade.
• 11:24
  Speaker 1: I mean, you did have a big rigging um and
• 11:28
  Speaker 1: you know, swaps investigation after financial crisis around that time.
• 11:34
  Speaker 1: But you really have to go back to the yield
• 11:36
  Speaker 1: burning business of the mid ninety nineties yesterday for you. Well, yeah,
• 11:43
  Speaker 1: joe My Sak, thank you very much. Joe My Sac
• 11:46
  Speaker 1: Bloomberg editor for the Bloomberg brief on municipal markets. Thank
• 11:51
  Speaker 1: you very much for being with us cyber security and
• 12:05
  Speaker 1: hacks China using a tiny chip to hack into US companies,
• 12:12
  Speaker 1: though many of those US companies, such as Apple and Amazon,
• 12:15
  Speaker 1: have denied the contents of Bloomberg Business Week cover story.
• 12:21
  Speaker 1: Here to tell us about this topic is Malcolm Harkins.
• 12:24
  Speaker 1: He is the chief security and trust officer at a
• 12:27
  Speaker 1: Side Clans and he joins us. Now, Um, Malcolm, maybe
• 12:32
  Speaker 1: you could just tell us what does the chief security
• 12:35
  Speaker 1: and trust officer at CYD Clans do and then comment
• 12:39
  Speaker 1: on this Bloomberg Business Week cover story. Please. Yeah, not
• 12:42
  Speaker 1: a problem, and it's actually silent. I beg your pardon. Yeah,
• 12:45
  Speaker 1: no worries. So, as chief security and trust officer at Silence,
• 12:49
  Speaker 1: I'm responsible for our internal security controls and compliance efforts,
• 12:54
  Speaker 1: and really trying to make sure our infrastructure and uh
• 12:58
  Speaker 1: base of capability for how we operate our company is
• 13:03
  Speaker 1: adequately secured and protected against a variety of risks. Okay, So,
• 13:08
  Speaker 1: given the fact that you also served in a similar
• 13:10
  Speaker 1: role at Intel, can you put us into give us
• 13:13
  Speaker 1: some insight into just how big of a risk it
• 13:16
  Speaker 1: is if this is true that China is indeed possibly
• 13:19
  Speaker 1: even implanting tiny microscopic chips in the hardware that they
• 13:25
  Speaker 1: could use to have a backdoor entrance to a number
• 13:28
  Speaker 1: of different servers. Well, for me, and given my prior
• 13:31
  Speaker 1: role at Intel and being in the compute ecosystem for
• 13:34
  Speaker 1: decades now, supply chain compromises has been a long time concern,
• 13:38
  Speaker 1: not only for myself but many in the industry. And
• 13:41
  Speaker 1: so there are nation states that have the capacity the
• 13:45
  Speaker 1: capability to actually do these type of things and implant chips,
• 13:50
  Speaker 1: or change software programs, or do other forms of manipulation
• 13:57
  Speaker 1: that would affect the foundation of computing, such as what
• 14:00
  Speaker 1: was reported by Bloomberg the other day. Malcolm, there's a
• 14:04
  Speaker 1: report that there are going to be new cybersecurity rules
• 14:08
  Speaker 1: put in place in China beginning November first, police officers
• 14:13
  Speaker 1: in China will have the authority to physically inspect businesses
• 14:18
  Speaker 1: and remotely access corporate networks. Do you believe that that's
• 14:23
  Speaker 1: consistent with the reporting about a chip that may have
• 14:28
  Speaker 1: been implanted by the People's Liberation Army companies in the
• 14:34
  Speaker 1: service that Lisa was referring to. Well, it could be
• 14:38
  Speaker 1: the case that they created that chip in order to
• 14:41
  Speaker 1: have that slow into Chinese organizations for that purpose. But
• 14:47
  Speaker 1: the other aspect of it is one of lawful entry.
• 14:50
  Speaker 1: And if they've passed a law that said the Chinese can,
• 14:54
  Speaker 1: under certain circumstances access a company's network access their devices,
• 15:02
  Speaker 1: they don't necessarily need to have a chip to do that.
• 15:04
  Speaker 1: They could do that by just showing up to the
• 15:05
  Speaker 1: front door and making that in essence lawful entry and
• 15:10
  Speaker 1: then demanding access to those systems. It's like, I guess
• 15:13
  Speaker 1: I'm trying to understand, Malcolm, whether we're sort of overblowing
• 15:17
  Speaker 1: the potential risk here of some of these international uh
• 15:21
  Speaker 1: cyber scrutinies or cyber hacking. I guess I'm trying to
• 15:24
  Speaker 1: figure out, especially given the fact that these chips that
• 15:26
  Speaker 1: we were just talking about have been put into the hardware,
• 15:29
  Speaker 1: and you know in servers that were in the Pentagon
• 15:32
  Speaker 1: for example, as well as the big tech giants in
• 15:35
  Speaker 1: the United States. What's the worst case scenario here? And
• 15:38
  Speaker 1: do you think that people are getting a little more
• 15:40
  Speaker 1: concerned that they need to be well? I think the
• 15:44
  Speaker 1: concern is real. And at that foundation of computing, it
• 15:47
  Speaker 1: would be like having rebar in the cement that that
• 15:52
  Speaker 1: isn't appropriate, or having the wrong cement mix. And at
• 15:56
  Speaker 1: that foundation level, if you have this type of compromise,
• 16:00
  Speaker 1: in that type of vulnerability, everything above it in the
• 16:04
  Speaker 1: compute stack, and therefore the business processes, the communications, the
• 16:08
  Speaker 1: sensitive secrets is now at risk. You know, Microsoft has
• 16:13
  Speaker 1: what they call a transparency center in Beijing where officials
• 16:18
  Speaker 1: can test products for security. Apple is building a data
• 16:23
  Speaker 1: center in the Southwestern province of China to comply with
• 16:28
  Speaker 1: rules that require cloud data from Chinese customers be stored
• 16:34
  Speaker 1: in China. If one of those companies or a company
• 16:37
  Speaker 1: that was thinking of doing business in this way in
• 16:39
  Speaker 1: China came to you, what kind of recommendations are guidelines
• 16:43
  Speaker 1: would you offer them well first and foremost in those situations,
• 16:48
  Speaker 1: and for a lot of multinational companies, it's a it's
• 16:51
  Speaker 1: a business decision and a business choice. If you want
• 16:54
  Speaker 1: to grow and you want to enter the Chinese market,
• 16:57
  Speaker 1: you have to comply by local laws in if those
• 17:00
  Speaker 1: local laws then require certain testing or other things, then
• 17:05
  Speaker 1: that's a business decision. Do you want the revenue and
• 17:08
  Speaker 1: you want to be in that market relative to the
• 17:11
  Speaker 1: compliance requirements. And then you also have to think about
• 17:14
  Speaker 1: then the implication of those local laws in terms of
• 17:20
  Speaker 1: the risk to the rest of the business or the
• 17:22
  Speaker 1: risk to your customers, and and so it really becomes
• 17:25
  Speaker 1: a calculus decision in terms of the revenue and the
• 17:29
  Speaker 1: potential risk, and then how you navigate those choices. Malcolm Harkins,
• 17:34
  Speaker 1: thank you so much for joining us a really important
• 17:36
  Speaker 1: topic and important perspective. Malcolm Harkins is chief Security and
• 17:40
  Speaker 1: Trust Officer at Silence. He was the former he probably
• 17:43
  Speaker 1: was in a similar role at Intel. Talking about what
• 17:46
  Speaker 1: we've been seeing and what Bloomberg reported yesterday with respect
• 17:50
  Speaker 1: to China implanting microchips in some of the hards are
• 17:54
  Speaker 1: used by many companies. We've talked so much in the
• 18:07
  Speaker 1: past a few weeks about leveraged loans and how they
• 18:10
  Speaker 1: are looking riskier than they have in the past, given
• 18:13
  Speaker 1: the amount of money that's flowed in. Joining us now
• 18:15
  Speaker 1: to talk about that is Beth McLean. She has portfolio
• 18:18
  Speaker 1: manager at PIMCO and she is absolutely one of the
• 18:22
  Speaker 1: most important people in the loan market. I would say so,
• 18:23
  Speaker 1: but thank you so much for joining us. We really appreciated.
• 18:27
  Speaker 1: So let's just start with all of the news articles
• 18:30
  Speaker 1: and headlines that have basically come out talking about how
• 18:33
  Speaker 1: the UH leverage loan issuance is going gangbusters, and how
• 18:37
  Speaker 1: deal terms are getting loosened up, and how risk is
• 18:39
  Speaker 1: building and how setting up for a fall when the
• 18:42
  Speaker 1: market turns. What's your perspective on that, well, I think, um, first,
• 18:47
  Speaker 1: thanks Lisa, thanks for having me today. Um And and
• 18:50
  Speaker 1: there definitely has been a lot of press about some
• 18:52
  Speaker 1: of the negative developments in the loan market. But but
• 18:55
  Speaker 1: I do think we need to keep it in perspective
• 18:57
  Speaker 1: a little bit. Um. You know, first, I'd say that
• 19:00
  Speaker 1: across all of leverage finance have have gotten a little
• 19:03
  Speaker 1: bit looser, so it's not exclusive to loans. But then
• 19:06
  Speaker 1: we have to keep in mind that loans still are
• 19:08
  Speaker 1: senior secured top of the capital structure. So while we've
• 19:12
  Speaker 1: we've seen some erosion in some of the protections as
• 19:14
  Speaker 1: far as UM you know, tests on indebtedness and and
• 19:18
  Speaker 1: looser restricted payment baskets, etcetera. I think what that just
• 19:22
  Speaker 1: signals to us is that it's very important for us
• 19:24
  Speaker 1: to do our diligence to really you know, focus on
• 19:27
  Speaker 1: that bottom up credit work factor in what different scenarios
• 19:31
  Speaker 1: might develop given these areas of flexibility and the documents,
• 19:35
  Speaker 1: um and and then make the choices on which credits
• 19:37
  Speaker 1: we are comfortable can survive, uh, you know, even in
• 19:40
  Speaker 1: a weaker economic environment with that type of flexibility. But
• 19:44
  Speaker 1: but I think it's it's very important not to lose
• 19:47
  Speaker 1: sight of the fact that you know, loans still our
• 19:49
  Speaker 1: senior secured top of the cap structure um and And
• 19:52
  Speaker 1: then secondly, and I think this is a point that
• 19:54
  Speaker 1: that people have overlooked, is you know, we're not seeing
• 19:58
  Speaker 1: levels of leverage that we saw precry in late oh
• 20:01
  Speaker 1: six early oh seven, the big l e O s
• 20:04
  Speaker 1: had you know, over of debt and leverages high as
• 20:07
  Speaker 1: ten to twelve times UM. So far this year, the
• 20:10
  Speaker 1: biggest deal we've seen was a fourteen billion dollar deal
• 20:13
  Speaker 1: that came a couple of weeks ago. But We're leverage
• 20:15
  Speaker 1: was still only around seven times, So I think when
• 20:18
  Speaker 1: we look at the risk in the market, you have
• 20:20
  Speaker 1: to kind of look at that holistically. Where are we
• 20:22
  Speaker 1: versus leverage. The terms might be might be looser, but
• 20:25
  Speaker 1: the leverage is lower. And then again it's critical for
• 20:29
  Speaker 1: us as active managers to do the work and do
• 20:31
  Speaker 1: the diligence and make sure we're picking the right credits. Beth,
• 20:34
  Speaker 1: I wondering if you could just comment on something that
• 20:37
  Speaker 1: I've noticed. And I don't know whether this is a
• 20:39
  Speaker 1: trend or whether this has always been there, but I've
• 20:41
  Speaker 1: just been paying closer attention, but the emphasis on advertisements
• 20:46
  Speaker 1: for individuals who have mortgages to pay off those mortgages
• 20:51
  Speaker 1: using home equity lines of credit, and that the reason
• 20:55
  Speaker 1: I bring that up is because one obviously the lines
• 20:58
  Speaker 1: of credit tip we our adjustable rate, whereas mortgages tend
• 21:02
  Speaker 1: to be fixed rate. What do you see there? So
• 21:06
  Speaker 1: the mortgage market is not my area of expertise, but
• 21:09
  Speaker 1: I'll tell you, I think that's just another symptom of
• 21:11
  Speaker 1: you know, potentially re leveraging in the system. Right, So
• 21:14
  Speaker 1: if if we are in fact seeing a trend of
• 21:17
  Speaker 1: increasing home equity line usage. Um, I don't think that's
• 21:21
  Speaker 1: necessarily I wouldn't think about the recent terms of floating
• 21:23
  Speaker 1: versus fixed rate debt in that space. But more is
• 21:26
  Speaker 1: that just an overall releveraging um that you know, that
• 21:30
  Speaker 1: that we're seeing across you know, corporate credit, mortgage, other spaces,
• 21:34
  Speaker 1: and that's certainly something to watch. You know. One thing
• 21:36
  Speaker 1: that that some people talk about the loan market is that,
• 21:39
  Speaker 1: as you said, it is senior secure debt in general,
• 21:42
  Speaker 1: but second lean sales, which is basically more subordinate debt,
• 21:47
  Speaker 1: have increased more and there are a lot of companies
• 21:50
  Speaker 1: that are turning to the loan market instead of the
• 21:53
  Speaker 1: bond market. In other words, there is no other debt
• 21:55
  Speaker 1: below it that with they would default on before defaulting
• 21:58
  Speaker 1: on their loads. I mean, how does that play into year,
• 22:00
  Speaker 1: into into your currncern or view of the market right now? Sure?
• 22:04
  Speaker 1: I think I think at least actually you highlight probably
• 22:07
  Speaker 1: what we see as the biggest risk in the market,
• 22:09
  Speaker 1: which is there has been um a shift from loans
• 22:13
  Speaker 1: with bonds beneath them in the capital structure too, maybe
• 22:17
  Speaker 1: loans with just the second lean or even loan only
• 22:19
  Speaker 1: capital structures. So because capital structure. Subordination is probably the
• 22:24
  Speaker 1: most critical component of what your recovery will be when alone,
• 22:28
  Speaker 1: if alone has to restructure that is, that is certainly
• 22:32
  Speaker 1: very important. So, whether it's a second lean or a
• 22:35
  Speaker 1: high yield bond, if you lack that subordination, um, you know,
• 22:39
  Speaker 1: that's where you could that's where you could get into
• 22:41
  Speaker 1: trouble in in some of these instances. So how much
• 22:43
  Speaker 1: lower do you think recoveries are going to be on
• 22:45
  Speaker 1: loans in the next downturn, just going forward versus the past? Sure? Well,
• 22:52
  Speaker 1: In fact, moody is put out a piece a little
• 22:53
  Speaker 1: while ago where they um, you know, they highlighted the
• 22:57
  Speaker 1: risk of loan recoveries flipping to you know, in the
• 23:00
  Speaker 1: sixty cents on the dollar range versus you know, high seventies,
• 23:03
  Speaker 1: low eighties, which we've experienced before. I think it's hard
• 23:06
  Speaker 1: to put one number on it though, because again the
• 23:08
  Speaker 1: market is somewhat bifurcated. You may see lower bond like
• 23:11
  Speaker 1: recoveries on some of these weaker loan only capital structures,
• 23:15
  Speaker 1: and at the same time you can still see very strong,
• 23:18
  Speaker 1: you know, eight cent and above recoveries on companies you know,
• 23:21
  Speaker 1: the larger liquid companies with a more robust capital structure,
• 23:25
  Speaker 1: so I can kind of see where they get to
• 23:27
  Speaker 1: that average of sixty area. UM. But it's going to
• 23:31
  Speaker 1: be very distinct amongst managers and again depending on how
• 23:35
  Speaker 1: people are positioned in their portfolios, which is why you
• 23:38
  Speaker 1: know it's it's again one of one of the key
• 23:41
  Speaker 1: themes you'll hear from us at PIMCO. Y active management
• 23:44
  Speaker 1: and bottom up credit research is so important because we
• 23:46
  Speaker 1: need to make sure we're in behalf of the market
• 23:49
  Speaker 1: that has the eighty recoveries, not the fifty recoveries. Can
• 23:52
  Speaker 1: you speak a little bit about the current liquidity that
• 23:54
  Speaker 1: exists in the marketplace right now? Sure? Actually, you know
• 23:58
  Speaker 1: that's one of the bright spots I'd say frankly, Um,
• 24:01
  Speaker 1: the loan market has now surpassed to trillion dollars. It's
• 24:04
  Speaker 1: closing in on being the same size as the high
• 24:07
  Speaker 1: old bond market, and I think we see you know,
• 24:09
  Speaker 1: similar liquidity in in in the loan and the bond markets. Um.
• 24:13
  Speaker 1: But again it's it's it's somewhat distinct in different portions
• 24:17
  Speaker 1: of the market. For some of the there has been
• 24:19
  Speaker 1: an increase in smaller issuers and some of those smaller issuers,
• 24:23
  Speaker 1: those deals tend to get sort of tucked away and
• 24:25
  Speaker 1: don't trade very often. But particularly in the larger corporate space,
• 24:29
  Speaker 1: the large liquid names that do have a diverse capital structure. Um,
• 24:34
  Speaker 1: we we see pretty good, pretty good liquidity in those markets.
• 24:37
  Speaker 1: How do you think that loans are going to fare
• 24:39
  Speaker 1: as rates rise, especially if it does kind of constrain
• 24:42
  Speaker 1: lending conditions? Well, sure, I think, Um, you know, loans
• 24:46
  Speaker 1: are are one of the few bright spots for fixed
• 24:48
  Speaker 1: income in a rising rate environment. Because we're floating rate
• 24:51
  Speaker 1: and prepayable, we don't have the duration impact that you
• 24:54
  Speaker 1: might see in in investment grade and high yield markets.
• 24:57
  Speaker 1: I think that's one of the reasons you do see good,
• 25:00
  Speaker 1: good flows coming into the market. Um. So, I think
• 25:03
  Speaker 1: as long as the rate path continues to be a
• 25:06
  Speaker 1: gradual rise with a more moderate endpoint, I think loan
• 25:10
  Speaker 1: should share actually pretty well. And again, keep in mind,
• 25:13
  Speaker 1: loans rates are rising because the economy is pretty strong, right,
• 25:17
  Speaker 1: We've got a pretty steady US economic backdrop, We've got
• 25:20
  Speaker 1: strong earnings still coming from corporates with still a pretty
• 25:24
  Speaker 1: positive outlook there. Um And so in that during this
• 25:28
  Speaker 1: tra directory where rates rise on a gradual path. That
• 25:31
  Speaker 1: means things are pretty good in the U. S economy
• 25:33
  Speaker 1: and things should be pretty good for credit broadly, um,
• 25:36
  Speaker 1: you know. And then it's it's more if we get
• 25:39
  Speaker 1: to the end of the cycle, what happens, then that's
• 25:41
  Speaker 1: where we think about, you know, again, some of that
• 25:42
  Speaker 1: credit selection being in the right names when when that
• 25:45
  Speaker 1: turnaround happens. But for the foreseeable future, with with rising rates,
• 25:49
  Speaker 1: that's actually a pretty pretty good place to be in
• 25:51
  Speaker 1: the loan market. Thank you very much for being with us.
• 25:54
  Speaker 1: Beth McClane is portfolio manager for Pimco talking about the
• 26:00
  Speaker 1: bridge loan market. Thanks for listening to the Bloomberg P
• 26:06
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 26:09
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 26:13
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 26:17
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 26:20
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.