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And honestly, it feels like it has been a while since I had the pleasure of hosting one of our podcasts. I have been traveling the world, beginning with clients in London and Geneva the past week and such an interesting time to be talking to people, especially outside of the US. Today, we have a fan favorite guest back on the podcast, Carrie Canton. She is our US Bureau chief for LFI and we are going to be talking about the probably syndicated loan market.
Carrie, thank you for joining us again. Thanks for having me. All right. So, Carrie, can you believe that we are almost through the first half of 2025.
What a time warp the year has been feels like perhaps the longest and shortest six months of my life still trying to figure out how to process the never ending stream of news. You know, needless to say, some of this year's macro in market action has definitely brought some surprises. I would love to start with your assessment of the probably syndicated loan market health currently. What are some of the main factors driving the market?
Are we in good shape right now? So that's a great question. And you know, right now, if you look at the data, it looks like the market's right in suit. Right now is the last few weeks.
There was a pause in April, close liberation day, if you didn't do any deals. And then you should restart it to make your toes back in the water. And for really well-regarded, well-known names, the market is wide open. That being said, there's a bikercation, harder credits, investors have no use of green eyes and new CEOs come quite a talk with substantial dot changes, et cetera.
But I also think there might be some issues with the super terrace sensitive name would be harder to approach the market right now. So let's just say, even just the last few days, do you have medical concerns? Terrace inflation rates. All of this is very top of mind.
But it sort of seems like we're back open and, you know, are angels are making haywell the sun shots because if the market's open, you do so that's what we're seeing these days. Yeah. I mean, we're definitely seeing that within investment grade and how you'll bond world as well. It seems like there was a real pause on new issue activity kind of early in April.
And then as soon as the tariff pause went into place, it was like the floodgates opened in a pretty dramatic way. Now, June has been a little bit slower, especially for investment grade. It seems like we may not actually meet the monthly forecast for investment grade, which is a little bit of a surprise. But we have had some interesting geopolitical headlines and a lot of questions around what is this going to do, especially in terms of energy prices and disruption.
And then of course the midweek holiday last week with Juneteenth, I would note that we're recording this conversation in the day on Tuesday, June 24th, just for some context because I know that the headlines are fast and furious as of late. And who knows what is going to come out next? So Kerry, I would be curious to hear about investor sentiment. You know, is everyone back to just business as usual post that April volatility or is this kind of a waiting for another shoe to drop or are people just still confused?
Kind of like I am. So I feel like from away to some extent option, right? I think, you know, when the market will open to net, it seems like everybody's waiting to put that other shoe. There was going to be some new tariff news or some rain news or inflation news and our grief recovery was going to get started.
And as the weeks and weeks have gone on with more, you know, just the market will be open and deals continuing to go well and secondary holding it in on, I feel like people become more bold and that being said, I don't think anyone thinks we're really out of a wheelchair. And so it's sort of this, I wouldn't say speak the market's skiddish because it's not, but I do feel like people are aware that things could change. And I think that might be why we've seen some of these, you know, underwritten deals, using long-term, that aren't slated to close until later over here and they come in and they're going to deal now. And I think that's because, you know, hey, the market's open, get it while the market's going to be because I don't know that everyone has a ton of conviction for round-count things to look three to six months down.
Yeah, I think that's so true. That preemptive raising of capital, which was something that we saw a lot in the COVID years, right? In 2020 and 2021, a lot of companies were just raising cash for the sake of raising cash. They wanted to have some liquidity on balance sheets, especially at the height of disruption and say Q2 of 2020.
And that also did coincide with a pretty tremendous decline in borrowing costs as effective rates to zero instead of all those special programs. I think that interesting now we're seeing a very similar preemptive move to try to raise cash. One thing that I've been looking at lately is the commercial paper market and there's been a lot of borrowings in the commercial paper market as of late, which just indicates to me that, you know, perhaps management teams as they've withdrawn guidance or on a little bit more cautious on earnings trajectory amid so many different factors, not just tariffs, but also consumer, we're trying to build back those more chests to see, you know, how are we going to deal with some bumpiness in the second half of the year. And I think related to that is coming into this year, a lot of leverage finance people in the broadly syndicated loan market private credit markets were really hopeful that base rates would continue to come down.
Now, so far, we haven't seen much of a shift from the Fed. Although I would say there's a growing small number of federalists who are saying that July perhaps is in play from a rate cut perspective, but the Fed in general is still forecasting just two 50 basis points cuts in 2025. They also bumped up the inflation forecast in the most recent summary of economic projections. And so, you know, another 50 basis points of cuts, well, helpful especially if it's done kind of proactively and not necessarily responding to a significant economic shock will be nice to have for a left in.
I don't know that 50 basis points is that much of a game changer for the financing dynamic and the cost of capital. Do you think that issuers and investors in the broadly syndicated loan markets are still hoping for more than 50 basis points of rate cuts in the next six months or are people just kind of coming around to rates are going to be higher for longer? Maybe the Fed's going to be unhold longer. Are people thinking about the trajectory for interest rates and how that impacts the loan market?
You know, I think most folks are sort of in the latter camp. I think the idea, I think people are kind of expecting rates to be unchanged or just like the lower. I don't think we're expecting a fundamental shift this year. I mean, that means that obviously different people have different opinions.
But just when you talk to people about, okay, hey, the MAL deal market, what do we expecting to be expecting the perspective financing costs? It doesn't seem to me that just given that there's so much uncertainty right now that it's difficult to see, you know, with the messaging from the Fed and why not, you know, that it doesn't feel like a year. Maybe this is my period. But that it doesn't feel like a year to me that we see, you know, a year of rate of time.
So I think surprise many times as you. Yes. I mean, I feel like I'm surprised every time I open up my laptop and log into Bloomberg with some new headline. And I think it's really important to think about the drivers of rate declines.
It always tricks me as curious that people are saying, oh, we need the Fed to cut, we need the Fed to cut, we need the cost of capital to go down. And there are a handful of instances where the Fed has been able to ease rates proactively and that has helped credit spreads to stay tight. But those instances are far fewer than the Fed having to be really reactive to something in the market, say the unemployment rate is taking higher or we're starting to see some stress in funding markets and that usually means that spreads across investment grade down to the loan market are going to gap wider. Now I realize that today, base rates are pretty high at least four market participants who have only been around for the past 10 to 15 years.
When we started talking to people who were around in the 1990s or the 1980s, base rates are not at all high. And so I think that that is giving people a little bit of a sense of security that, you know, if the Fed cuts by 200 basis points, credit spreads are not going to gap out by 200 basis points in aggregate. Maybe you'll see some widening, but actually the cost of capital will be reasonable. But I think if the Fed is cutting by 200 basis points in a tight timeframe six months, I think spreads are going to be pretty gap-y for a at least a period of time.
And that would have some meaningful implications on borrowing costs and the trajectory of things like downgrades and defaults, which have been non-existent or very limited in scope during this Fed rate hiking cycle. And I do worry that that could catch some people on off sides. We still have a relatively low probability assigned to such a Fed move lower about 35 percent. But it is something that we're giving a lot of thought to because today's consumer confidence number came in much lower than anticipated.
Maybe tail sales, not a great number overall. It feels like some of the consumer demand destruction that people were concerned about is starting to slowly creep into the market. And then I would also say just looking at the main employment report, you know, earlier in the month and June, people saw that as a pretty strong report. It was better than expected in terms of job ads.
But one thing that really stood out to me was that the labor force participation rate came down. And that's not usually an indicator of a strong and healthy economy. You don't want labor force participation rate to be declining because that is usually consistent with people getting frustrated and dropping out of the labor market, which is much more indicative of more stressed conditions for people who are looking for jobs. And so I do think that there are a few little things that we need to be keeping our eye on that are perhaps indicating that things are not as well as a lot of the aggregated hard data would indicate.
Another thing that has been curious is at the beginning of the year and really after the the Trump election, every sell sites, revenue team, every investment making team was really excited about the prospects of the NNA and LBO wave. And it seems like every time we chat, Gary, we're still waiting on that MNA and LBO wave to come back to the probably syndicated loan market, especially now LFI. You guys do an amazing job of tracking a lot of these technicals. You have a forward loan calendar, a net loan calendar apparently, a net loan calendar.
Can you talk a little bit about where we stand right now in terms of that MNA LBO cycle? And if there are any specific factors that you are looking for to maybe change, the dynamic is there any reason for optimism for dealing to open back up. So my colleague and I understand, we joke that the environmental event and I have to be in three or six months away from the past three years. And so I think in the beginning of the year, our post election, people were very optimistic.
I know we're headed in no reason office, perhaps regulatory environment is more friendly. We're ready to come down and we can see finally, I don't think anybody was expecting like a 2021 title in LBOs just given the rate dynamic we're not going back there. But you know, and I think people felt very good at it. But then with all the uncertainty and headlines, you know, it's very hard for parties to agree on a price with this lack of visibility.
And also from the LBO perspective as you're probably conversation earlier, which is if you the rate dynamic for LBOs, and that's a business generator, it's not a free cash flow. There's really so much people that are up with business with me once over taking around the price. So I don't get the sense that people are super optimistic about M&A for the year term. Now, how this sort of plays into the technical is this sort of unusual environment in which, so we have a few different calendars.
But one of them is the net net calendar, which basically what we do because the long market is sort of in the market, there's no, if a company is downrated to a junk or upgraded to IG, the name doesn't mean that we need them. If I'm a company that got upgraded, they had to do a refinancing and IG bond like lies, someone it causes downrated. It's not like a company has it for money, it doesn't just do it. And also just give them heavy payment rates and the asset class because it's a lack of real protection.
Essentially what we try to do is we try to track obviously under the deals that are, you know, and interconning the deals that are obviously in market. And then we also try to track it in. And so, you know, if World Pay is being bought by Goldman, that's 5 billion plus of institutional loans in just the US that are being going to be paid. And for America gets bought by saleships.
And so we, when we look at it, we have, right now, I think it's running about negative 12 billion at this very moment, but we basically more than slightly to be repaid that are in market world. And so this one sort of explains the very friendly technical that I was just asking why the market is so strong now is there's just too much cash chasing two dollars. And I think this is not a problem that's particularly unique to the world. But that's sort of where we stand.
And the one thing I will say that has helped is that the salesite has been very creative in generating new money opportunities, which is an oching deals from other asset classes. Cesar is making it say, you right now with a billion dollar term on being and it's refinancing. We're all like a $3 billion dollar dollar. And these are just historically going to provide it.
We've also coached a bunch of names for private credit to generate new deals. And of course, you know, unsurprisingly, there have been a lot of dividends for issues in the right space with the contract record because, you know, the slowdown in MMA sponsors do, you know, our infrastructure return Apple L.P.s. And dividends are a way to do that. And there's driven to be a lot of demands for, you know, we see a lot of financial land on companies, people know, and, you know, particularly if they track record of you, you have a really different dividend and they really have to price it in very, very low premium to where they exist in real trades.
You get it done because investors are comfortable with the name. They're kind of saying, hey, we did it. So, you know, that's sort of several what we've seen. But I don't know if you've heard around them.
And it just, it just still seems pretty uncertain. And it's not that there's nothing. We do see deals announced here and there. It's not, it's not a total term.
You look at last year's activity. It was definitely better than 2022. You know, we're watering out the 2022 and 2020. But you know, it doesn't strike me as a groundswell of deals.
What are you hearing this with me? Yeah, this is a great question. And what we've found is that delectivity is trending alongside 2024 type levels. So not the surge in M&A that I think a lot of people were optimistic about coming into this year.
But also not that dismal environment of 2022 and 2023. But I think this just really highlights the expectations versus reality. And so from an M&A perspective expectations were much more optimistic than the reality, which is not a terrible reality, but it's just not nearly what expectations were going to be. And on the flip side, when we're thinking about the Trump's hair volatility that we saw in April, it seems like the expectations then were very, very bad.
And now the reality that we've seen since April is actually pretty good. And from a fundamental perspective, from an influence perspective, you know, we've seen very limited net who she supply across a wide range of markets. Not just about the syndicate of loans base, but also investment grade in US and Europe. How yielding US in Europe, we're seeing a decent amount of new issues apply, but just most of it is kind of productive refinancing or slapping cash on balance sheets and going to address a mature East leader.
And that technical combined with the return to influence that we've seen has really pushed spreads meaningfully tighter, much tighter than we were anticipating. And I think much tighter than a lot of clients were anticipating because it seems like every conversation that I have with investment grade investors, high yield investors, loan investors, no one is particularly concerned about cash balances. And most people tell me that the pain trade is for spread to continue to move tighter. And so that technical seems to be driving a lot of markets across investment grade, down to loans into CLOs.
One thing you noted was that we're seeing private credit deals being taken out by the brothers and kids loan market again. And I think that LFI did a great job at April kind of reporting on credit credit hoping that this would be enough volatility that they could absorb some of the deals. So, you know, it seems like that competition for deal flow is very much alive and well in BSL and credit credit right now. It very much is.
But I feel like the dynamic is more similar than it was in the beginning of the year in which the lower spreads on offer in BFPS L are compelling. That being said, it's not always that kind of dry. You do see names in the institutional market as well, and particularly, you know, there's a few kind of trend lines about around that point. The lower market is the private market is evolved.
So that, like, back in the day, you know, not even going back that far. You know, 2018, 2019, there were, there was a market for $500 million. There was already dedicated to market. And as a private credit market is grown.
We just see a lot of issues. You got a 26 maturity in 2019 deal with the 26 maturity that was $300 million. There's a premium for some high $500 million because they're less of us. So, you know, a lot of these borrowers were sort of seeing jobs.
I'll also say the private credit market also remains open for some more challenging situations or a bar where they might have one good interest. See the private company journey. They might have a compelling story. It's a type of thing that, you know, particularly the sponsor back company relationships in that space too.
And see that go there. And then there's sometimes there are deals that, you know, they want to do, if they want to take a very big advantage. Or do you really explicitly draw or, you know, frankly, in this, I, you know, I don't know that. I would have been saying this, but interest is still in hell.
You know, it's really hard. So there definitely are teachers in juicy some names exit. It's not all one way, but I mean, it's quite, I do feel like the optimism in private credit land is faded a bit with respect to, you know, coaching assets. Because at the end of the day, for a lot of borrowers having a lot of costs and capital is, you know, so we'll see.
But that's not going to continue to play out. But I would expect to see more private credit deals with an asset that comes particularly with a lack of an day. for opportunities. Yeah, absolutely.
As someone who used to be on the investment thinking side, one thing I know is that even in deal flow from an M. They perspective that's later than expected, thinkers will always find something to pitch to their issues. And so just be reassured that so long as the capital markets up your open, there's going to be something coming your way. And it is a little scary that you're saying pick interest is relatively attractive.
You know, the prevalence of pick interest, especially right out of the gate in the private credit market is something that comes up quickly when I talk to clients in the public markets as a, is this something we should be worried about? Should we be concerned that private credit is getting to the point where it is over saturated and perhaps becoming more of a liability to public markets rather than serving as that crucial liquidity to public markets that provided in 2022 and 2023. We've generally taken up pretty constructive view on the existence of private credit. It's just another evolution in the broader leveraged finance world.
But that doesn't mean that nothing can go wrong and we're clearly monitoring the default cycle there. Some of the pushes to opening up the private credit markets to retail investors or trying to have a more active trading dynamic and an asset class that has historically been less liquid and that was, you know, by design in a number of ways. So definitely still focus on those moving pieces within private credit and any potential threat that it may play to the public markets and broader fundamental health of the credit markets. Well, Carrie, I think that for usual we covered a lot within the world of BSL and private credit a little bonus there.
Good luck in writing your next quarterly recap. You'll have to just wait till the very last minutes given how much things are moving on a minute to minute basis lately. If anyone has questions for me or Carrie, you can always reach out to us on the credit sites slash LFI websites using the asking analyst feature. If you're not a subscriber reach out to your sales rep and we can try to direct you to the right place.
Carrie, thank you so much for joining me today. Thank you for having me. It's always a good decision. Always so fine to talk all things, 11 and BSL.
All right. Thank you. Enjoy the rest of your day. Thanks for listening.
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