Welcome to No More, Risk Better, a Credit Sites podcast. Across the global strategy team, we aim to make sense of the macro and the micro, highlighting opportunities and the risks facing the fixed income markets. As the macro makes headlines, we leverage our network of experts across fish solutions to better understand economic trends, rates, gyrations, geopolitical events, and how these factors impact corporates. At Credit Sites, we understand that credit investing comes down to picking winners to generate alpha and avoiding losers.
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This is Winnie Cesar, Global Head of Strategy at Credit Sites, and today we have back a fan favorite, the U.S. Bureau Chief for our sister company, Levton Insights, better known as LFI. Carrie Canton, thank you so much for joining me today. Thank you for having me, Winnie.
All right, so Carrie, we are recording end of day, Tuesday, March 4th. It has been a wild day in the markets. We had a massive sell-off followed by a big reversal, rally in equities, rally in credit. We might end up the day back in a positive territory in equity markets, which is wild.
And U.S. pressure yields, importantly, are edging back higher after that massive collapse in yields that we've seen over the past few weeks. And, Carrie, I think that that's going to be really important for the BSL versus high-yield story this year. But let's first rewind.
Let's kick it off with a little bit of a recap. What has happened so far in the broadly syndicated loan primary market? I know last year you had your hair on fire all year, a massive deluge of deals and repricings. Is that keeping up that healthy pace or more than healthy pace, or has the pace of supply started to moderate?
The pace of supply has definitely started to moderate. January pretty much kicked up. We're December left off. It was the busiest month for launch volume ever with over $200 billion launch.
As a reminder to those of you who are not super close to institutional loans, loans have very weak call protection generally only for six months and only applicable if you refinance it with another loan at a lower interest rate. So when spreads continue to be tightening, you just see issuers come back for repeat deals. So December post-election, the loan market had the same risk-on sentiment that was seen across markets. January kicked off this way, but February, things began to change.
It was a combination, if you recall, feel like we were in the same spot about a month ago with the tariffs going up again. There was certainly some concern around that. It was also, from a technical perspective, there was more new money supply, which moderated, you know, gave investors a little bit more leverage. And so as a result, volume actually, launch volume is about $89 billion, which it actually doesn't sound slow for an asset class that's only about $1.5 trillion, but compared to the insanity of, you know, December and January, it felt comparatively slow.
March so far has been interesting, I think, as it's been interesting across the board. Things are weaker. I wouldn't say people are, you know, panicking, but things feel weaker. And I think this week could be an interesting test for some repricings we have upstanding as secondary prices often.
Yeah, so I would love to follow up on that point, because we've had a few really interesting deals this year that have not actually cleared the market. And you and your team have written comprehensively on this. A number of clients have asked me about that. You know, is this a sign that perhaps the VSL market has gone too far?
Is this a fundamental concern about the health of these issuers? What are you seeing in terms of these deals that are having a little bit more of a challenge? And how is that kind of informing your expectations for what may transpire over the next few weeks? Well, I think what we saw happen is that we had four deals that were shelved in February, three of which were repricings, which are purely opportunistic.
And I think for deals where, you know, as I was saying, investors have more leverage to push back, and you come to market seeking a spread cut, and you have enough investors raise their hand and say no, you have to plug the hole with other investors, and sometimes that just doesn't happen. And so I think in situations where people, the issuers may push the envelope a little too far, the buy side would be able to say, no, we don't want to do this. Then there was another M&A-related situation that was sort of a more difficult credit. It came over from private credit, and they wound up going back with a private credit solution.
But it definitely does signal, and that's why I'm watching some of these repricings this week, it definitely does signal that investors will put their foot down, and there could be more deals that fall by the wayside, particularly if secondary losses continue. Yeah, I think that that makes a lot of sense. And that's kind of how we've been talking about it to clients, especially when you factor in just the composition of the loan market. So many of the buyers are CLOs.
CLOs have to make the math work, right? There's only so much that they can handle in terms of spread compression. Or am I thinking about that wrong? No, you are thinking about that correctly.
And, you know, one thing we point out is liability spreads in CLOs have contracted significantly, but that's only for the deals that are done now. So if you're looking, and CLOs, unlike loans, generally have a two-year non-call structure. So anybody who came to CLO last year, that doesn't necessarily mean that something, the ARB works for a deal, that price in January, it doesn't necessarily mean it works for a deal, that price in July. And so, yes, there were definitely, there was some pushbackers.
There was one very large repricing. It was a B3 credit that was trying to go for 275, and they wound up getting walked back to 300. And I think that dynamic definitely does exist. I mean, CLOs are roughly, you know, two-thirds of the loan investor base, so it's a very big deal when looking to pricing.
There are certain deals, you know, depending on the composition. I mean, the first issue were actually, XBO Logistics get a deal done at S plus 175 with a pretty tight step down to 150. It was the first deal we ever saw with a step down like that since we've been in business since 2016, who are a 175 deal. But that deal tends to have a very bank-heavy lender base, so there are definitely going to be deals that are exceptions.
Another very well-rated deal like QVIA is that with the repricing that they upsize the sector. So what happens for one borrower isn't always applicable across the board. Yeah, absolutely. So I guess another theme that we are really paying close attention to is the one of animal spirits.
I think that after the 2024 election, everyone was looking at the incoming administration thinking, wow, this is going to be really friendly for consolidation, for M&A, for LBOs. And it seems like every sell-side desk put out a very lofty forecast for issuance, a big pickup in M&A, LBO pipeline activity. How are you thinking about those expectations and what we've actually seen year-to-date? So those expectations have definitely moderated.
I feel like at the end of the year, people were truly optimistic about M&A, LBO generation in 2025, which is really much needed because after last year, with a record repricing volume, what we really need are new money transactions to better balance out that technical. Unfortunately, a couple of months in, I think with concerns around tariffs, inflation, and now people talking about stagflation, I think the visibility isn't quite as good. And I get the sense that sell-side players aren't as optimistic about M&A deals, at least for the time being. And I feel like, you know, we've been saying M&A activity is three to six months away for two years, and I guess I feel like we're back in that spot.
From the strategic perspective, there was also definitely some more optimism around that point, you know, but again, it just sort of seems a little bit challenging. And also, you know, I don't know what you guys are, what your exact forecast for rates are, but while three months so far is 100 basis points-ish or highs, where we've been hovering around 430 basis points all year, it hasn't been going all over the place like a 10-year. You know, for LBOs, that's still pretty high. And so I think it's going to be an interesting dynamic this year that we'll see how things play out.
But unfortunately, that enthusiasm has reached. Yeah, I think on the rate side of things, the loan market from an M&A and LBO perspective is in a really tricky situation because we have seen long-end rates post some massive volatility with the 10-year Treasury moving, you know, 60 basis points lower from year-to-date peaks and we're only at March 4th, whereas the front end of the curve is holding steady because most people think that the Fed, at least in the near term, the upcoming March meeting, is probably still on hold. I know that there's a lot of repricing of Fed expectations that have happened this year as well. As of this morning, there were 80 basis points of Fed cuts priced into the market, but that may reverse again now that we've seen an announcement around a German fiscal deal.
If we see any sort of walk-back in tariffs, there's just a lot of moving pieces on the rate side of things. And I think the way that I'm thinking about M&A and underwriting is you either need to have some visibility around the economic conditions that are contributing to these elevated base rates. Is it because inflation is, you know, moderating at maybe a slow but steady pace, but growth is really holding in and you can forecast pretty well what financials are going to look like and that helps justify M&A and LBOs? Or are we seeing front-end rates collapse because economic stagnation is the new expectation?
And that makes underwriting new deals really tricky. You don't want to be out there in the M&A or LBO market when you're still near kind of all-time high equity valuations and multiples are still high. So I think that from kind of a deal activity perspective, this rates environment and broader macro environment are probably not super helpful. I definitely agree that one factor that could potentially help, and this has been around, this is nothing new, but just given that, you know, the Ukraine war started three years ago, and so there's been a long time of not very robust M&A volume.
There are some sponsors who, you know, do have held assets for a long time and are under pressure to return capital to LPs, and you could see some trades generated from that. I mean, we did see M&A on the OBO last year. It's not that there's nothing, but it's just, yeah, I think that meaningful uptick and, you know, that people were expecting does not at the moment seem like it's going to materialize. Yeah, do you think that we're going to see kind of a continuation of the dividend deal in the near term?
It seems like that was a bit of an increase in share at the end of last year. Yes, I think for the right situations, and this is because there's also a lot of uncertainty around certain sectors and, you know, who's impacted by tariffs or who's impacted by Doge or whatnot. But yes, I do think that dividends will continue to be pitched in situations where it makes sense. So, yes, I do think we'll continue to see that.
I think sponsors in general like to try and make those dividends make sense. Agreed. No matter what the math is. So just to kind of crystallize things, what do you think are the conditions that really need to materialize to drive this pickup in M&A?
Is it purely pricing? Base rates are coming down. Is it more fundamental certainty? Is it something else?
End of Russia, Ukraine. You know, that's an excellent question. I wish I had the answer to it, but I would say it's probably a combination of a mix of more visibility around the macroeconomic front and also on the rates front, just given that rates are elevated and, you know, if you want to be able to have a structure that you're comfortable with, that you're going to be able to manage interest expense, I think having some visibility on that going forward is helpful. Yeah, absolutely.
I think that the conversation around inflation and whether the Fed needs to start moving towards a rate hike environment again, you know, it's not our base case scenario, but given where core PCE has kind of been hanging out, I think that if we start to trend higher back toward a 3% core PCE number, the Fed is going to be forced to kind of re-examine its policies and think about where are we going from here? Do we need to do some incremental tightening to offset some of the easing and financial conditions that happened last year for monetary policy when rate cuts and then also just the massive drive in the equity markets and risk on? So let's shift topics a little bit to the world of private credits, which remains such a hot button issue. I think that it is a top question that clients ask me about, you know, what's going on in private credit?
Is it a bubble? Are defaults okay? Is fundamental certainty okay in private credits? And then, of course, the old competition between broadly syndicated loans and private credit for deals.
How are you seeing this relationship between BSL and private credit evolving so far this year? And what are your expectations for the near term? Well, at least for now, it seems like the broadly syndicated market does have an edge. I'm not just talking about my own book because I cover broadly syndicated loans, but spreads are tying so much in the BSL market that even like single B, all in single B spreads in February, we're at S plus 335.
Whereas basically the floor, I'm talking to my colleagues who cover private credit, the floor you can really do for a private credit deal is S plus 450. And so when you're competing for assets, there are factors that private credit can do in a way BSL cannot, like they can offer, you know, the potential of big interest. They can offer really expensive delayed drug term loans. There are certain features.
If it's a smaller deal, if you don't want ratings, or there is even just in general a premium for a smaller BSL loan that's less liquid. But broadly speaking, getting a lower interest rate is really important. And so, you know, we've seen, we have an interesting deal in market now because it's a tech deal that's going from private credit to the broadly syndicated market. And people tell us there's sort of more of those types of deals behind it, including deals that were predicated off a recurring revenue structure.
So basically the deal is basically based off recurring revenue rather than EBITDA. And we're expecting some of those deals to come to the broadly syndicated market. My understanding is for now, obviously I can't really see if deals are dual tracked, but we got a sense that a lot of them are, that broadly syndicated also has the edge for new M&A LBO business for the same reason. So the one thing I would say is that for now, you know, we're watching things with caution.
One time when private credit can shine is if there's involatility. And when private credit underwrites a deal, they say, okay, here are the terms. They don't come in with flex like underwriters do. So if there were to be a patch of more volatility, predominantly, you know, because of spreads.
So last year it was kind of interesting because I think people were very bullish on this topic and, you know, late, you know, late 23, but it turned out that the private credit market actually returned with its own wave of repricing, which is something that my colleagues on the credit side tracked quite thoroughly going through the BBC files. And my understanding is Q4 is still pretty big for it. But as I said, there is a floor of how low they can go. But I do think that some of the enthusiasm from last year got tamped down because the private credit lender said, oh, okay, we're at 650 now, but yeah, we'll do 500.
We don't want to lose our paper. Because I kind of got this last year. Nobody wanted to lose paper. Yeah, it seems like an issuer who is kind of looking at their options right now, if I'm an issuer, I was in the private credit market, you know, priced at 600 over or 500 over and I can go into BSL, you know, I can reduce my pricing.
And also it seems like there's pretty good technical support from a demand perspective for this kind of new money, even though it's not, like, it's kind of new money, but it's not new money from an M&A, LBO perspective. So I think that the technical evolution there is really interesting. And we'll have to see if this public market volatility comes back into play in the near term for more than 12 hours. Yes, no, I know.
The new money element of this is real, especially in the face of M&A doesn't meet what people hope. I mean, we have this other deal in market newlyweds foods that is taking out a loan held by banks. We've also had some deals that take out high yield bonds. At the end of the day, people think, oh, M&A will be out of this new money, but really anything that doesn't refinance an existing loan is new money.
And so it will be an interesting trend to watch. Yeah, absolutely. I think you bring up another interesting trend, that relationship between the high yield primary and the broadly syndicated loan primary, because we've had these waves where issuers have, you know, tried to get back into high yield because maybe long-end yields have fallen and your all-in coupon can, you know, actually be materially lower than going in the BSL market. Or alternatively, when yields have been a bit more elevated in the long end, issuers have been going back to BSL because they like the flexibility and perhaps the ability to ride down base rates if the Fed does get back into a cutting trend.
What are you saying lately? What is this relationship between the high yield and broadly syndicated loan primary? Is one route being favored over the other? Well, I would say up until this week, I feel like with the recent lurch in treasury yields has changed the dynamic a bit, but definitely the first couple of months in the year, we noticed a gap.
And when we calculate yields, we're just using whatever, three months over, so we're using 430 basis points or whatnot. But we've definitely noticed that there were, it wasn't like a surge, but there were definitely a handful of loans that at least in part we financed some upcoming bond attorneys, whereas the latter wasn't as significant. there was one deal for Sinclair, but it was part of a broader transaction that wasn't really a market transaction, if that makes sense. So it seems like loans were favored a bit.
Of course, there's, you know, some people did point out that spreads and high yields are also super tight. And so even if yields fall, you know, the underlying treasury, how much you spread, you know, how much does your oil and coupon change? And so there are definitely some barbers that do prefer the fixed rate high yield market. But I will say the six months of 101 softball has, that has definitely been on display as, you know, a positive feature.
So I feel like in the first couple of months of the year, we did get some volume. And I don't actually have exact stats handy, but I believe there were more loans that exited, like we had more repayments stemming from bond yields last year than private credit, despite the fact that private credit is like the new game in town and everybody wants to talk about it. But if you looked at like the loan market, which more or less was wanting to stand still last year from like an overall size of the market perspective, there was a fair amount lost to the high yield market just because issuers were taking advantage of the dislocation. Yeah.
The ability to do a new high yield deal that's unsecured at an all in yield or coupon lower than the broadly syndicated loan market. I think people were looking at that and saying, you know, I may be locking myself in, but I also hold it. It's just that three year call period, usually for the kind of the regular way I do transactions, you may have to pay up a bit in terms of premium, but at least you have a little bit of certainty in terms of where your interest payments are going to ultimately go. One of the questions that we are getting quite frequently is where do you hide?
Where do you hide in markets when there is just so much headline noise from separating fact from fiction has become a much more challenging part of my job than perhaps I'm used to. And within the world of leverage finance, you know, each of these asset classes have their pros and cons. High yield, we have objectively historically very tight spreads. That feels like maybe not the best entry point, especially if rates are going to reverse again and move higher.
For all these syndicated loan market, we've had some fundamental erosion. People are all pulled up on M&A, but it's not really coming to fruition. And things have been pricing tighter and tighter there as well. And then private credit, you know, there's still some concerns around what really is in these portfolios.
Is it all kind of the same? Is it good fundamentally? Is it bad fundamentally? Are defaults going to rise?
And pricing is just notching tighter and tighter across everything. Are you hearing any feedback from the sell side or the buy side in terms of where people are kind of hiding out right now? Gosh, you know, that is a really, really excellent question. Because as you say, yes, high yield spreads are really tight.
So are low spreads. Loans performed really well last year because it was such a strong, you know, coupon clipping year. And I think the hope heading into 2025 was that, hey, if rates remain reasonably elevated, even though there's very limited upside potential for price, we can still clip a really solid coupon if, given that the loan market is more skewed towards mid-low single B risk than high yield is, it's a little bit dicier and there's more downside potential from a price perspective. However, if we wind up having another 2024, loans look pretty good.
So, you know, that is a great question. I wish I could tell you where to hide. I'm not sure I know the answer. Yeah, it's really interesting.
So we track high yield bond market fundamentals on the credit side strategy team. And then we have colleagues at Bixby who track broadly syndicated loan fundamentals. And one of the things that I found interesting is high yield is really experiencing some erosion in interest coverage levels because of the limited new issue that's come to market over the last few years. That is starting to weigh on kind of aggregate coupon levels, interest coverage.
You're not seeing as much EBITDA growth lately, you know, still good, but not nearly the really robust kind of 2020 era growth. But on the loan side of things, you know, last year we had 100 basis points of interest rate relief from the Fed. We had a massive wave of repricing, and that actually was proving to play out in a lot of the fundamental data. And so while objectively loans are still a lower rated, kind of more fundamentally stretched asset class than the high yield bond market, they've benefited a bit more from the recent activity and rates easing from the Fed and then also massive repricing activity in the primary loan market.
And so you can't just say, oh, on the surface, high yield better than bonds. It's become a much more nuanced conversation. And that's a really interesting point. I mean, another thing when you're thinking about like maturity walls is loans basically, if something's not like a 25 maturity, there's some hail.
Whereas, and borrowers are opportunistically refinancing 2028s now because why not? Whereas in the high yield market, if you locked in a super low coupon, you know, in 2020, 2021, you're incentive to want to go touch your, you know, four and seven, eight notes, when you'd be paying 7% today really doesn't exist. But as a result, there's more maturities, you know, that are closer, you know, in high yield. Yeah, it is crazy when you look at the updated BSL maturity profile, it was pushed out so much last year.
And high yield maturities, they don't look scary, but they do not look like the push out of the loan market. And high yield's been in this really interesting place, unlike investment grade, where I think issuers were really willing to come to market last year on much tighter spreads. High yield issuers were willing to come to market, but we didn't see kind of the bonanza of supply that we saw in the IG and broadly syndicated loan market. So a lot of moving pieces across the world of left-in, across primary markets.
Carrie, I know that you and your team, LFI, will continue to put out just an amazing amount of reporting on the BSL market, on the private credit market, on the high yield market. And I, for one, really appreciate that all you and the rest of the team do. Well, thank you, Winnie. And I will continue to look for your analysis on the volatility we have facing us right now.
Oh my gosh. Well, first we need to make Mutual Admiration Society t-shirts and perhaps some Leverage Finance Enthusiast t-shirts as well. We can get some merch going. Maybe we need a Credit Sites No More Miss Better podcast merch store in the near term.
Do it. All right. Carrie, thank you so much for joining me today. Thank you all for listening.
If anyone has any follow questions for me or Carrie, you can always find us on thecreditsites.com website using the Ask It Analyst feature or reach out to your Credit Sites sales representative. Thank you, Carrie, and good luck with the new issue markets. Thanks, Winnie. You too.
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