Covid Triggering Incredible Opportunities In Fallen Angels: Mellon

talking maybe even fallen angels. We can do that with Paul. Benson had a fixed income efficient BETA. The firm is Melon, a B and Y Melon Investment management firm. They have five hundred and fifty eight billion. That's with a B under management located in San Francisco. Paul, thanks so much for joining us here. You know, first of all, I want to talk about risk return. Talk to us a little bit about fallen angels. What is a fallen angel

and what kind of activity are we seeing in that market? Yeah, no, this is a great topic for today. Fallen angels have really come onto the marketplace here, uh in in size, in this aftermath of the COVID UH nineteen crisis. So what a fallen angel is is it's just an investment grade bond that has been downgraded. So remember the investment grade sort of ends at the bottom tier at the triple B rating level. Downgraded below triple B, so it's now double B R lower that enters the high yield portion.

So really it's just a high yield bond that once was an investment grade bond. And what investors are seeing is that these bonds have really really attractive risk return characteristics and making for a terrific investment in this kind of environment. So give us some examples of some fallen angels that have you know, kind of come to the fore here during the pandemic. So there are actually a ton.

So what's exciting about this this pandemic? Uh, you know, if anything can be exciting from an investor perspective, it is that it's an unprecedented delusion of activity and sort of ratings migration perspective, and the markets really are not very efficient on the fixed income side at handling that trans transmission from investment grade investors to high yield investors. So you know, in typical year you might have twenty billion, thirty billion dollars of downgrades across a handful of bonds

or or maybe ten or fifteen bonds. In twenty so far we've had we've had almost two hundred billion dollars of following angel downgrades. And this spans, you know, across more than two hundred bonds, two hundred fifty bonds UH. And it's not just one sector, you know, like in in the energy crisis in two thousands sixty and it was predominantly energy bonds. Now this is across everything. This is across consumer cyclicals, This is across banking, this is

across capital goods, basic industry. You know, you're basically seeing it all here. And that actually is a real boon for high yield investors because a diversified play is going to allow you a much greater chance of success of harvesting that that patrol risk premium, that discount, rather than

you know, some idiosyncratic UH investment. So, Paul, when a bond gets downgraded from investment grade to UH non investment grade, does that mean a lot of owners of that bond have to sell by because of their charter they can't own non investment grade debt? Is that kind of how the play starts exactly exactly. And if you look at the the sort of the the the last ten years, you know, within the i G space investment grade space, you'll see that there's been a very inexorable rise in

passive passive managers. So you know, think of not just indexing traditional indexing, the growth of that uh as you know fees have been pushed lower, but also areas like ets. A lot of these et s are very passive in nature. And so you've got two camps. You've got one camp which is traditional for example, pension plans that have strict guidelines and say, you know, thou shalt not invest in

junk bonds. And so you know, if if I'm managing and i G portfolio for a client like that, and a bond gets downgraded below investigrade, it becomes a fallen angel. Even if I think it's a very very attractive investment and it's the worst possible time to sell, I don't have a choice. I have to sell it now. That becomes a real benefit for the folks. On the other side, if you're a high yield investor, and especially if you're investor focusing just on fallen angels, you can pick up

these bonds at an incredible discount. All right, So Paul, give us a sense of just kind of the the credit quality environment that we find ourselves in. I know, is we kind of entered this pandemic in March April. You know, from a credit perspective, there's really concerns that we're going to see it, just this huge wave of defaults, particularly in the leverage loan business, the high yield market business. How we in fact seen that, you know, that's been

the story of the year. It's people tend to panic when when when things when volatility picks up, the first instinct is to panic. And you know exactly what we saw with all the news articles, all the prognostications, even from the major houses, predicting you know, unprecedented uh delusion of defaults and that just has not materialized. And further, you know what really scares us a little bit is

when you look under the hood. And that's what we're really good at as a quantity We're a quantitative investment manager, so we really dive into the details. And people are misinterpreting default rates by and large, they're looking at broad you know, Moodies SMP type speculative grade default rates, which have a completely different composition than what investors, institutional investors are actually investing in. You know, these SMP and Moodies

default rates include these very small companies. They include floating rate debt, all sorts of stuff. Whereas you know, se of the institutional investors are focused on big, big investible benchmarks such as the Bloomberg Barkley's High Yield Corporate Index or you know, the Bambo Master to Index. These benchmarks have only seen about half of the default rates that that these sort of you know, worst case prognonctiications came out at and so we're looking at numbers like like,

you know, sub four percent year to date. You know, this is not this is this is certainly higher than last year, but it's not anything to be overly concerned about as a high yeld investor. Very interesting, Paul, thanks so much for joining us. Share. This is part of the market we don't probably don't spend enough time on, but certainly some opportunities there, the fallen angels, the high

yield credit market, the leverage loan uh business. Paul Benson head a fixed income efficient data at Melan, giving us his thoughts again on these fallen angels UH and some of the higher leverage loan sectors of the marketplace. Yes, they've been impacted by the economic downturn resulting from the pandemic, but probably performing better than expected, so some opportunities there

more to come. This is Bloomberg Now in terms of a new Biden administrator, a lot of folks from wondering what it means for their industries, what kind of policies will the new administration come up with for for specific industries. One of those industries is technology. Uh, there's obviously a big issue with China. There's a big issue with to what extent does technology in the United States need to be regulated. Victoria Espinal, President, chief executive officer of BSA,

the software alliance based on Washington, d C. She joins US. Now, so, Victoria, you know, we think about technology in the United States. Historically, the US has taken a very light hand to regulating technology, and one could argue that's been maybe one of the main catalysts for the growth and development of tech in the U S. Silicon Valley and all of that. How do you expect President elect Joe Biden and his administration

to UH to manage technology policy. Well, first of all, I would saying that I don't think it's about no regulation or lots of regulation. I think it's about smart regulation, you know, where it's appropriate. UM. In terms of the Biden administration now, I'm expecting that we're going to see continue to see some increased scrutiny on the technology industry. UM. I think there are some legitimate issues that need to be concerned, that that need to be addressed, and I

think the Biden administration will focus on that. You know, I will say, speaking for the enterprise software industry, which is the essay, we're excited to work with the administration on those. We feel like there are a number of places where laws and regulations could be updated and improved and modernized UM, and we are really looking for places where we can find solutions. There are some thorny issues

out there, artificial intelligence, privacy, cybersecurity. So we UM you know, as a as an organization, as an industry, we try not to run from challenges but to try to address them. And we're really excited about working with the Biden administration and how to find some long term solutions to some of the real problems that are out there, so Victoria.

One of the problems that has really come to the four of the last several years has been UH China and technology transfers between US and China, and there's some concern that there might be a technology cold war developing between let's call it China and just broadly define the West. How do you expect the Biden administration What would you recommend to the Biden administration as it thinks about technology

policy visa each China. I think it's going to be a major issue going forward, you know, in terms of what I would expect to the Biden administration, I think a Biden administration is going to be tough on China. I think, you know, look, there's a whole range of issues beyond the technology issues and the economic issues with China, right human rights, Taiwan, the situation in Hong Kong, um.

There have been a number of approaches the Trump administration has taken on the eco comics sides, tariffs and trade and got in the most attention, I would say, but you know, other approaches including export controls, investment restrictions. Of course, in the Biden administration goes in, they're going to do their own assessment of what the issues are and what

the approaches are. I think they're going to bring a lot of expertise to that assessment, but I would expect that coming out of that, we're going to see two differences in terms of approach. Broadly speaking, one I think is I think there will be a focus on a broader range of issues, so again not just economic issues,

but issues like human rights for example. I expect we'll see more UM focus on that from them Biden administration, and even in the economic issues, I think we will see a focus on trying to come up with long term solutions to those issues. And again it's sort of a broader range of economic issues that we faced with China, including UM in the technology space. The second difference I expect that we will the is working with other countries

and building alliances. You know, the United States is not the only country certainly that has concerns with China, and I think the US will address is concerned directly with China, but also I expect um the Biden administration will be looking to build alliances and be doing that in concert

with other countries that also share those concerns. UM. The last thing I would say is, you know, the president look by then the major commitment during the campaign in terms of R and D investment in technology, Um, the United States, unlike China, a lot of our investment in the United States comes from the private sector, and I think that's appropriate. But it's also great to see that this administration is going to be focused on putting public sector,

significant public sector of funding into basic R and D investment. UM. I think that's the really important part of this interesting so, Victoria. I guess as it relates to China, one of the more immediate things that the incoming Biden administration will need to address is to talk I'm not even sure where we are on the TikTok issue. Can you bring us

up to date? Well? Um, you know, in terms of the administration, I think the lot of the administrations speak for yourself, and I think what they've said is that it's too early for them to say what you know. I guess what I would say more generally is I don't think this is an administration where policy is going

to be determined by any one particular company. In general, I think it's going to be an administration that is, as I said, looking to find ways to set global standards and rain in bad actors of all different kinds. Um But I think it's going to be at my anticipate it will be a policy approach that it's more about finding that long term, sustainable, durable framework as opposed to being driven by any one particular company or one

particular situation. So, Victoria, I guess the other thing is just kind of you know, the big U s technology companies, particularly this social platforms, do you expect them to face continued scrutiny, increased Scrutinyou is this something that's just gonna be a factive life for the facebooks of the world and others. Um? So I'll say this, you know, as my organization doesn't represent Facebook, you know where the enterprise

B two B side of the software industry. Um But I think I think it's also fair to say that the tech industry, including the social media platforms, I think will face increasing scrutiny. I think we're going to see that in competition. I think we're going to see that

in accountability issues, platform accountability issues generally. I think that, um, you know, that has been true for a while, so that will not be new with a Biden administration, but I think it I anticipate that there will be increased scrutiny and a Biden administration. And again, as I was saying at the beginning, and I think there are some legitimate concerns that need to be addressed, and um, you know, that's something I think that the Biden administration will be

focused on as well. Hey, Victoria, thank you so much. We really appreciate your thoughts and insight. Victoria Spinel, president and chief executive officer of b s A, the Software Alliance. They're based in Washington, d C. Giving us some thoughts about how the incoming Biden administration may think about policy as it relates to technology, particularly the software companies. And again, probably issue number one on day one will be the relationship of U with the U S and China as

it relates to technology. We are waiting for a discussion on Bloomberg Television between Bowing CEO Dave Calhoun and Rhiner CEO Michael O'Leary. Uh. They announced the deal today for some planes to be acquired by Ryan Air. Let's chat with George Ferguson, Senior Aerospace, Defense and Airlines analyst for Bloomberg Intelligence on what we might hear. So George talked to us a little bit about this deal for Boeing, uh with Ryan Air. It seems like really good news

for Boeing here. Yeah, thanks Paul. I think it's absolute endorsement here for the Bowing Max and the sixes that have taken place, and it's where, you know, where Ryan Air sees that whole process. They must feel pretty comfortable of the airplane's viability. We've been saying it's a viable So I think they feel pretty comfortable and they're and they're coming in for a nice size order seventy five. I actually thought it might have been larger, and I

think it's not larger. Maybe a testament to the fact that we heard the Bowing CEO Calhoun say they're not going to buy themselves back into the market or something like that. Not an exact quote, but I think maybe a testament. You know, we knew Ryan Air was sort of sniffing around looking for order actually for I think it's been at least a year or so. They love to buy airplanes cheap. I guess is that maybe um oh, Larry didn't get quite the prices he wanted and sort

of stepped in for seventy. But looks a good endorsement, good endorsement to the airplane, good news for Bowling, and tell me good news for Ryan Air too. Yeah, so

George talked us about this seventh three of Max. You know, I just speaking for myself, you know, if I were to, you know, actually take a flight, which is a huge if here in this pandemic world, and I walked up to the gate and I looked out the window and I saw seven three seven Max parked at my gate, I'd have no problems getting on the plane, am I? Am I the exception or how do you think this plane is going to be uh kind of embraced by

the airlines as well as in the passengers. Yeah, you know, I think that, Um, I think that the public has sort of a short memory on some of these things, and I think there are some people that would be concerned about flying the Max given the history. I think that, you know, really some of their concerns you put to bed by the fact that the f a A and European regulators have really poured over the airplane to make

sure it's safe. They really don't want egg in their face with it with another problem with the airplane, and we're now going to have simulator training for the pilots transitioning from the seven three seven eight to the max which I think should also give people comfort. I think you'll see advertising campaign around some of those you know,

some of that training. Um. And look again, I think that there there'll be a short memory and you know, sort of Brian Air buying here and have this airplane feathered into their fleet out in one Americans starts to fly. I think at the end of the year here, you know, given the news around the pandemic, I think it'll get lost and I think there won't be as much reticence to fly the airplane had there not been sort of the backdrop of a lot more bigger news stories right

right now. So, George, I think the last time we chatted, one of the discussion points was China. UM, it's really important, uh that China certify the seven three seven max A. It's a huge market. B Uh, it's an economy that's actually growing. They're they're out of their lockdown and there people are beginning to travel. Any sense of when we'll get the green light from China as relates to the

seven three seven Max. Yeah, I mean I'm hearing that the you know, potentially we could see something like that in the new year. I mean I think that Bill the Chinese will want to find a way to do the write word is embrace the Biden administration as they come in. They'd love to be, I think, in the good graces of the Biden administrations to change a tone hopefully from the Trump administration for the Chinese when it comes to trade. And I think you'll see it closer

to Joe Biden present elect Biden coming into power. But so I would expect it sometime earlier next year. And it's it is a core market, super important for about talk to us, George, you know about boweing here, maybe a little bit of a post mortem here, we've got the a little bit of a hindsight here. It just it feels like they didn't manage the process. Well I'm not sure you know what else they could have done,

but it just feels like they didn't manage the process. Well, what's the what's the feeling among you know, you aviation geeks that you know look at the stuff all the time. Yes, So I do think they I do think you know, perhaps a little bit of Hubris took over at Boeing, a little bit of marketing uh and managing financial statements private was prioritized over engineering. And you know, I think Calhoun's job is really to make sure that he resets that um, you know, resets that uh. You know that

environment at Boeing where the focuses on solid engineering. You try to keep the Hubris down UM. And so you know, it feels like as they've moved the airplane through the recertification process, it feels like they're getting that back in order. You know. Look, I think it's a constant challenge. They are one of the pre eminent airplane builders in the world, you know, one of the two compared to air MUTH and I think they really have to manage that that

culture going forward. So it feels like it's gotten better and it looks like they've really got a good job in re certification. I think Calhoun and his success are really need to think about keeping that engineering culture forefront

at the company. And I think they got to start thinking about their next product, you know, and that's another engineering challenge, so I know, and the other again aviation geek, you guys take your yearly pilgrimage to either you know, London or Paris for the annual air shows, which is, you know, just a scam in and of itself in my opinion, But you guys do it every year. What happens at the next time, when post pandemic you guys

meet in Paris and or London. What's Boeing's position going to be in terms of, you know, selling the seven thirty seven Max. Are they going to be able to successfully uh put some more these planes into the fleet? Well? So I think today was again, you know, a big endorsement there for their delay to sell the airplane. Um, I don't know anything about a scam, but it's a

big cocktail party, is what I think. Look, there's still there's still a heck of a lot of orders in the backlog, and I think really their job is to go out and touch those customers and and get them happy about the airplane and wanting to take those orders in the backlog, because the beauty is they don't have to sell the plane. It's already sold. You've got a good death back, all right, George, thanks so much. We appreciate it. As always, I look forward to you making

your pilgrimage over to London and Paris. George Ferguson's senior Aerospace, Defense and Airlines Animals for Bloomberg Intelligence. It is time for Bloomberg Opinion. We're joined today by Near case Or, founder of Unison Advisors and a Bloomberg Opinion columnists. Near thanks so much for joining us. I know you and Tim O'Brien and Bloomberg Opinion out with a column today where you're you're talking about what Congress should consider as it does move forward slowly on a fourth round of

physical stimulus. What are some of your key takeaways that you think Congress really needs to think about here? Well, um, good morning, Paul, thanks for having me. Um. We're um. You know, we think that more stimulus is probably necessary. You know, the economy is improving, markets are up. It looks like there's light at the end of the tunnel, so to speak, with a vaccine coming, but there's still a lot of suffering and it's not clear what the

timing around that is going to be. So more similar, more stimulus is probably appropriate and probably and around the size that they're thinking about, but there's an it's another opportunity to sort of step back and ask what is the point of the stimulus? What are we trying to accomplish?

You know, if if you just pull them back the lens a bit, uh, you know, we will have spent If if this package is roughly a trillion dollars, we will have already spent uh, you know, roughly two point seven trillion with the Cares Act for a total of roughly four trillion dollars. And four trillion dollars could do

a lot of things. I mean, you could build infrastructure, it could bolster education and public health, um, and and we're suggesting that we just take a step back and maybe give some bigger thought to the impact that that kind of money could have on the entire economy, not

just certain segments of it. So it's interesting here, I think you know, some of the issues here, the concerns here that discussion points here are how much should go to individuals versus how much should go to maybe industries and companies to support employment and growth, how much should go to states and municipalities. How do you think Congress is thinking about this? And where where where do you

think they will allocate some of uh this upcoming stimulus? Well, you know, based on what they've said, UM, it sounds like this. UM. We'll see what the final details are, but it sounds like this latest round and relief is going to be UM and gets going to go to supplemental unemployment insurance for unemployed American It will go to

small business, state and local governments that are obviously badly hurting. UM. And then and then some money sprinkled around for various things including public health and some other and some other initiatives, UM and UM, which is all fine, but it sort of continues this UM, this sort of uh, you know, crisis relief approach that we've had really since the two thousand and eight financial crisis, where we're just really sticking fingers in a damn and just plugging whatever holes are there.

And while that is necessary to some extent, UM, it does put us in a situation where we have various groups with you know, within the economy that are fighting over over money. You know, in two thousand and eight, it was mostly Wall Street and corporate America that got the money, and you know, we're living with the ramifications

of that to some extent today. UM. You know, today, appropriately more of the money should go to individuals that are suffering from this pandemic at small business that are also suffering. But but what they really ought to think about is is there a way to spend this money in a way that improves the entire economy as a whole. And you know what, some of the some of the

data that we cite in the piece is instructive. I think if you, if you take a look at this economy from a longer, longer term perspective, what you see is that for for decades we've had lower economic growth. We have a situation where a half of households in

America don't make a living wage. We have, roughly, by credible westments forty five million Americans that are food and secure, and that speaks not only to the problems with the pandemic, it speaks to a larger systematic problem of this functioning of the economy. And what we're saying is what we need is robust investment in education and infrastructure and public health, and that kind of money we believe will will go to the benefit of everyone, both business, big and s

all an individual. So near it's you know, you talk about the food and insecure I'm glad you brought that up because you know, we still have you know, roughly ten million workers that have yet to recover their jobs that were lost during the pandemic. We've got. We see every night on the news these incredibly long lines of

cars going to food banks and so on. So it seems like the near term immediate need is so pronounced that it might be tough to kind of think about some of those longer term investment areas, whether it's education or skills and things like that. How do you again, how do you try to How do you think Congress is thinking about that balance? Well, that's fair, and I think the way that they are thinking about it again

is just let's take care of the immediate problem. But but I would suggest that it's helpful to try to connect the dots. It's not clear to me, and I don't think we should take for granted that once this pandemic passes that these problems that we're seeing, that all these ten million jobs um will will be back, and that food and security will will will improve. It's possible that this pandemic has caused sort of longer lasting systemic problems to the economy, the roots of which were already

in place before the pandemic came. The pandemic just just sort of brought them to the floor, right, And if that's the case, I don't think it's gonna be enough to spend a trillion dollars on supplemental un employment insurance and and help uh too, small business and the like. I think the question is going to be how do we get more jobs? How do we get how do we improve training for workers, how do we um how do we improve the wages of of of working American?

And it seems to me that that's going to take a sort of a longer term vision and a longer term investment in things like education, infrastructure. So near give us a sense of kind of how this timing might play out. I know we're in this lame duck session here. Do we expect something to come out of this lame duck Congress now? And then after President Elect Biden is sworn in on January with a new Congress that there

may be something bigger, broader that maybe you're you're thinking about. Well, I think they understand that it's going to have to be soon. It's probably gonna have to be this year if they want to have something passed um and if they don't get it done, then it's probably gonna get kicked into the next administration. In terms of what can happen and under a Biden administration, I think it really

depends on what happens in Georgia. Um. You know, if the Republican hold the Senate, then I think you're looking at a stimulus package to the extent you ever get one um that looks roughly like the one we're talking about today. On the other hand, if the Democrats take a Senate um and they you know, they hold the White House and Congress, then I think it opens up. I think it opens it up to to a much broader initiative to the except that they want to do

it something that's more new deal left, you know. But it really depends on whether they'll have the votes exactly. So, I mean, you know, infrastructure, there seems to be something that is bipartisan that seems to be the party line here that infrastructure is in fact bipartisan. Is that money well spent? Do you think if we can move down that road and maybe get my you know, gateway project done so I can take to train into the city and a with a safe tunnel that would be nice wood.

And then yeah, I mean infrastructure I think is one of those things that that everyone can benefit from. Obviously, we need infrastructure and at various realms, um, you know, in order to to sort of lay the foundation for business and for commerce and all for all that obviously, but also infrastructures jobs program as well. So I mean, you have ten million Americans right now that have lost

their jobs, are looking for work, and um. You know, in a big, ambitious infrastructure project from the federal government is a high is hiring opportunity for millions of Americans UM. And potentially to to to to provide them not only with training, but good paying jobs, um. And and not to mention all the knock on effects from having improved infrastructure and transportation in WiFi, and you know, we can

think of many applications. So infrastructures is a great example of a program where the money that you spend is not so much relief as it is investment UM. And that investment, you know, we can we can look back to the nineties, thirties and nineteen forty for ambitious, big government projects that paved the way for the prosperity UM. That all Americans have joined the fifties sixties UM in early nineteen seventies, and we can have that again. Hey Near,

thanks so much for joining us. We appreciate it as always. Neil Case, our founder of Unison Advisors. Any Bloomberg Opinion comms. You can read all of Near's at work on Bloomberg dot com, slash Opinion or O P I N go on the terminal. We'll have more coming up. This is Bloomberg Markets. Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn. I'm on

Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio