00:00Kay mentioned indigestion. There's very much an overhang of tech debt that needs to be
00:03digested by the market. And people have been saying that these bonds need to find their levels.
00:08Are we there yet? Or has the steady pace of issuance extended that adjustment process?
00:14Yeah, look, I think there's definitely some commonality between credit markets and equity
00:18markets in terms of the questions that we're trying to answer. But obviously, the tension
00:21between the magnitude of the capex and then monetization is a key question to both markets.
00:28But I think part of the reason why you now have that commonality is because this capex cycle is
00:33debt funded. And so every time you get the kind of revisions that we've seen in the capex numbers,
00:39there is almost like a one on one mapping between that and the future pipeline of issuance. And so
00:43I think the additional challenge for credit investors is to really try to find a little
00:48bit of a landing zone, not just for capex, but also for future pipeline. Concentration is an issue.
00:54You know, supply this year has been very concentrated, actually, within non-financials.
01:00If you look at the stock of bonds or if you take the investment grade index as a barometer,
01:05we've been there before. I think, you know, if you go back to 15, 14, the market was actually more
01:10concentrated than it is today. But certainly if you look at the flow, which is what's coming through
01:15the primary market, that has exhibited significant concentration.
01:19Colleen, let me put that question to you. What are you seeing?
01:23Yeah, I mean, I can concur with what with what Lofty shared. I think one of the key issues is
01:29not so much the absolute exposure in the markets at this point, but the concentration in the new
01:35issue flow. That said, like this is one of the most important thematic stories of sort of my
01:40investment career. So I think what we're trying to do is figure out what the best spots are for us
01:46to deploy in this in this story, because there's going to be winners and losers. It's not a trade
01:52that we can sit out, but we're doing a lot of really hard work trying to trying to figure out
01:57where
01:57we feel the most comfortable getting exposure in this new issue regime.
02:02Right. You look at hyperscaler bonds are now among the worst performers in every market.
02:06They were issued. Almost 80 percent of the sector's bonds sold since early 2025.
02:10Lot fee are currently indicated at a wider spread versus the first trading day. Google's century bond
02:15is now below 90 percent of face value when you look at the price. Is this kind of underperformance
02:21prompting active investors to underweight this sector? I mean, they steering away from it.
02:26I think it creates opportunities for sure. I think it does bring pockets of excess carry
02:31into the market. By the way, that's true, not just, you know, on the index side, but also if you
02:37look
02:37at some of the off index, you know, bonds. So on the private side, you know, it does bring
02:41opportunities. But I agree that eventually, you know, the key question that we need to address
02:46is the predictability of the pipeline. Once you get to a place where the pipeline becomes a bit
02:51more predictable, I think you'll probably see early signs of stabilization in the spreads.
02:57But it doesn't seem like we're there yet, Colleen. And if hyperscalers need to issue
03:01more debt, they're also doing so outside of the U.S. dollar market, which is already the world's
03:05biggest to other geographies. And those other geographies can't necessarily absorb the supply.
03:11Is the absorption issue an even bigger challenge in smaller markets like the U.K., Switzerland or Japan?
03:19Yes, it could be. But I think what issuers are doing at this point is looking for the best
03:24execution in the best market. So if they're confronting lower absorption in smaller markets,
03:31there are other markets, big liquid markets that they can continue to pivot to. And we've seen that.
03:35Right. As we've seen debt in the U.S. come across high yield structured products and NIG. So I think
03:41we'll continue to see issuers trying to maximize that opportunity set. Do you think insurance
03:47companies have hit their concentration limits on the sector? Well, no one really knows. But, you know,
03:52I always try to look at the history of the last, you know, 10, 15 years. If you go back
03:56to 15,
03:5716 at the time, as you may remember, we had a boom in M&A and a lot of those
04:01jumbo M&A deals were
04:02actually funded with debt. The share of the top 10 issuers in the I.G. market was actually higher
04:07than it is today. And so my guess is that we're not there yet. We're not at a point where
04:12concentration is becoming a problem. But people are definitely thinking about it. And, you know,
04:16what matters is not spot, but the fourth for the next six to nine months. But we've been there before.
04:21How do you hedge against this underperformance, Colleen? What's the best way to do that? Is it just to go
04:26to other sectors? Is it through products like credit default swaps, something else?
04:32I think, you know, from a credit analyst perspective, I think it's diversification.
04:36And you alluded to it. It's in two ways. One is, you know, looking for opportunities in broader
04:42sectors that are not so concentrated in this theme. And number two within this theme is looking for the
04:47opportunities where we feel really comfortable, whether it's with the structure, the terms, the
04:52collateral, et cetera, you know, to make sure we're investing in those deals, you know, rather than
04:57taking a broad exposure to the AI theme. And of course, when it comes to AI, we've only gotten
05:03SpaceX so far. There's also Anthropic. And we know that the bankers there are meeting with investors
05:08before an expected listing in the fall. Are we going to see Anthropic follow the SpaceX playbook,
05:14a massive IPO followed very quickly, Lotfi, by a massive debt raise?
05:18I don't know. I don't have an answer to that question. But the playbook of the last, you know,
05:22six months suggested that might be a possibility that eventually, you know, an IPO might be followed by,
05:26by, you know, by, by debt raise. But I don't have a clear answer to that. Yeah.
05:30I mean, hypothetically, how much would an Anthropic have to pay up to access the market,
05:34given the underperformance of SpaceX secondaries?
05:37That will depend on the timing and it will depend on their ratings. But I think, you know,
05:42you can certainly draw a lot of lessons from the price action of the last two to three months.
05:47Let's talk about data centers. Colleen, what's our current view of data center funding? There's
05:52there's a lot more questions being asked now than just a few months ago.
05:57Yeah, and we're and we're doing the work to try to figure out where the best opportunities are.
06:03One of the benefits that we have, you know, having active research, active fixed income research,
06:08and not only that, but a breadth of teams to work with is that we can step up and look
06:11at the
06:11relative value across these markets where issuers are bringing data center deals. So we don't just
06:17have to look, is it cheap, cheap to, you know, cheap to the issuer? But is it how does it
06:21look across
06:21the, you know, structured products versus investment grade? And so the key questions that we're trying
06:26to answer there is who's owning the residual risk? What does that residual risk look like? And making sure
06:32that the opportunities were select account for that risk.
06:37Latfi, what about you?
06:38Look, this is one of the best environments for active management that I've seen in my entire career,
06:42just to be clear. And so I would very much concur with what Colleen said, which is
06:46doing the credit work, looking at the structures, making sure you have,
06:50you know, a certain level of downside protection for bondholders as keys, but certainly not all
06:55deals are created equal. And again, I'll go back to what I said earlier, which is
06:58this is bringing a lot of pockets of excess carry into the market and eventually will lead to more
07:04dispersion and hence more, you know, a greater sort of opportunity set for alpha generation at the
07:10single name level. I also want to get in here. One last question about M&A, because we had the
07:15news
07:15that the Paramount Skydance Warner Brothers deal is not necessarily going to go through. It's been put on
07:19pause for two weeks because the federal judge says it violates antitrust law. People make money
07:24trading on these kinds of situations, Latfi. How do you position for this? What do you think
07:29potentially could happen here? Well, I don't have a view on this particular deal,
07:33but I would say that if you go back to December at the start of the year, I think expectations
07:37were
07:37very high that, you know, you would see a finally a pickup in the M&A cycle and that a
07:42big chunk of those
07:42transactions would actually be funded in debt markets. In the end, here we are seven months later.
07:48The biggest story has been the AI CapEx cycle. It's completely overshadowed, you know, M&A supply,
07:54but under the surface, it's actually happening. You know, the share of M&A supply has increased and
07:58I think on a forward basis, it would also continue to increase. But these are sort of, you know,
08:03event risk type of situations and they bring more dispersion. Again, you know, this sort of
08:08strengthens the case for credit selection and doing the work. But when you look at the index,
08:13you know, the IG index has been oscillating around, you know, 70 to 75 basis points. But underneath the
08:20surface, I think there's a lot going on at the single name level and that's where your alpha edge
08:24comes from. Colleen, do you see anything in M&A that you can exploit on the credit side?
08:30Well, I think on, for instance, the high yield side, M&A has been a little bit more present in
08:34the
08:34market for the first half of the year. I don't think the team expects that for the second half of
08:38the
08:38year. I think I'd concur with what Lofty said, like that's part of the power of selection and credit
08:43research is really trying to do the deep credit work and find the opportunities, whether they're
08:49coming from a situation of restructuring or coming from, you know, big synergies in the future. You know,
08:56those are the kinds of things we're going to be looking at.
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