Leveraged-Loan Gloom Is Way Overdone: Eaton Vance PM

pace so far this year. The total outstanding debt has surpassed its sister assid class of US junk bonds. And oh, some people are getting worried about we covenants and other issues. Joining us now to tell us how concerned we really ought to be is Christopher Remington. He is a portfolio manager at Eaton Vance focusing on leveraged loans, which are also called bank loans, and he joins us now. Christopher,

thank you so much for being with us. Do you think that the gloom and doom that we've heard, this sort of rising risks in the weaker standards? Do you think that that's an accurate portrayal of the asset class not really, Lisa, thanks for having us on UM. Certainly there's been a going storyline in the market that there's been sort of hog wild credit risk taking place, and certainly there's been an uptakeing M and A as you've alluded to earlier on your show. That's normal at this

point in the cycle. Certainly, plenty of things to watch, UM, but we think that overall the sort of risk character in the market is pretty typical of what it is at this stage in the cycle. You pointed out the market is growing the so called bonanza and issuance, and you start to back out refinancings, which is just a recycling of existing paper or um um refinancing refinancings basically

um the net number is much lower. The market has grown by about ten percent looking back over the past year, and that's following what had been at darth of issuance for a couple of years before that. So the markets

catching up. There has been a good amount of issuance this year, but that's really just a reflection of the M and A machine and nuts on the back of what's been a pretty sound US economy, fair enough sounded US economy for now the last time we saw a boom and m and A that was funded by the leverage finance market reminds me frankly of two thousand six seven.

It wasn't so pretty after that. And some people are concerned that a lot of companies are raising money in the loan market and not raising money in the bond market, and therefore there is no real advantage to being first lean to basically having get to sort of first recoveries in a bankruptcy and liquidation. What do you make of all of that, though, I wouldn't suggest there's any causality between the fact that there was a lot of issuance in the bank loan market and the great recession that

ultimately followed. They did follow in time order, but one had little to do with the other. UM in the in the sort of broader context of bonds versus as loans, I think, you know, the attractiveness of loans today. UM is certainly one that can be made in absolute sense, but really it's all about relativity. If you're the investor, you have a multiple sort of pieces to the puzzle you're trying to balance in a portfolio. You look over on the equity side of your portfolio, and you have

stocked creating at all time ever highs. I think stocks have lost I'm pretty sure something like half their value twice in the last fifteen years. That does happen in a recession. Over in bonds, you have a headwind of rising interest rates, and with the FED on the move, they're relatively few places to position in fixed income land where you actually get a benefit from FED raising interest rates,

and this is definitely one of those neighborhoods. So folks who are coming in to the asset class I think are doing it from the standpoint of pretty good reasons. They're searching for yield. Yield is hard to find today,

but they're also searching for the absence of duration. Um. Certainly, their risks in our market credit risk, liquidity risk, but it's not bond risk, and so investors are trying to balance those things, and I think for good reason, Christopher, have you witnessed money managers pushing back on deals that are too aggressively priced? Well, I can tell you I work here at an asset manager that is indeed doing that.

So there's been plenty of issuance, as you've started out the segment talking about, but there's also been plenty of deals to turn down UM. Our turndown rate here at Eaton Advance has averaged about seventy year to date, so I would characterize UM those largely coming on the back of smaller deals UM and also deals that have weaker

structures UM. So I'd say the overall sort of temperature of the market is good economy generally good about average credit risk profile, but with weaker documentation, weaker structures, and that's where we're really digging in and drawing the line. So, what are some recent popular deals that you've drawn the line on? For example, was the Thompson Reuters deal one that you're buying into or staying away from? Well, that

stuff only one of the big ones to date. UM. We're active in the name at the moment, so I can't speak in great detail about it, but I will tell you that that is a deal that would absolutely hit on those topics that I just mentioned. Good company, UH, somewhat weak structure, and if we are participating, it will definitely be on the more conservatively positioned UH in our portfolio. Definitely some things to watch there because of those structural issues.

Probably going to play out just fine, but we think there's likely an opportunity to buy it cheaper sometime down the road. Thanks very much for being with us. Christopher Remington, Director of Income Product and Portfolio Strategy, also institutional portfolio manager for floating rate loans at Eaton Fans. The topic is Brexit. Earlier today, UK Prime Minister Theresa May said that the European Union must treat the United Kingdom with

respect in Brexit negotiations. In a statement in which she read at Downing Street, she said that EU leaders to reject her plan, but no alternative at this late stage of negotiations was not acceptable. Let's find out if it really is unacceptable. Ian wish Art is our European government reporter for Bloomberg News joining us from Brussels. All right, Ian, is it really unacceptable? I thought everything in these negotiations seemingly is acceptable. Accept an agreement exactly. It's either all

acceptable or all unacceptable. It depends on your perspective. Really, um, the EU has made its position clear and it's pretty much stuck to its position for a year. The UK says it doesn't like it, and a year on is still saying it doesn't like it. Where do you go

from there, Well, nobody really knows. Everybody still thinks that at some point and time is running out, but at some point they'll get a deal, but nobody quite knows how that will come about, because, as I say, both sides are completely talking um in different ways from different positions, and nobody seems ready to conceive even one letter to the other side. So, um, who knows what's going to happen.

I think all the smart money is on an agreement being done eventually, but at the moment, both sides of doubling down, both sides of digging in. The Prime Minister woke up to newspaper headlines saying she'd been humiliated by AU leaders at the summit in Salzburg in Austria overnight. So where do we go from here? I think it's going to get very messy. Indeed, in I've got to say, it hasn't exactly been smooth sailing before this, right, I mean, it's been a mess all along, and this seems to

be a sort of escalation of that. I'm just wondering does this increase the chances of a hard Brexit, and if so, to what degree? I mean, right now, the

pound is plunging versus the dollar by the most since. Yeah, I mean, this is the scariest, if you like, the scariest point we've had so far in the break to the negotiations, because it's less than two months really before the deadline, the real hard dearsline where they need to get a deal, and two sides of as far apart as ever, um, you asked dip them out behind the scenes, and they all still stay on both sides that getting

a deal is more likely than than not. Um, So I think we have to assume that that is the case, that behind the scenes, round the negotiating table, there is movement, discussions are being had, but politically it's very difficult to see where where the compromise is made. The speech that threason May made an hour or so ago meant that she really dug in. She really said this proposal that the EU has put forward would see the breakup of the United Kingdom and she can never let that happen.

Now the EU is saying that's the only proposal we're prepared to offer. So where do you go from here? I mean, it's it's not easy to see where any optimism comes from. So it's also very obvious that are hard Brexit, that no deal, that a really messy divorce

is also entirely possible. Ian worship. Is there any conversation about the negotiating style and tactics, I mean number one, negotiating in public, Number two drawing these seemingly firm arguments, but then not having any wiggle room to actually have a negotiation, and then to talk about Northern Ireland when Teresa May's government depends on the support of Northern Ireland members of Parliament. Correct, exactly, everywhere you look, there's there's

pitfalls and obstacles and and dead ends. Um, it's quite clear that both sides over the past eighteen months two years have made mistakes, most of them as mistakes have been made by the UK side. Most of the things that the UK said it would never would never accept, they have accepted. So the EU clearly has the upper hand and has had throughout the entire process. Now we're coming right to the crunch, and as you say, it's all about now the Irish border, it's all about Northern Ireland.

What the EU says it wants to do to protect its own integrity as they call it, to the Single Market, which means protecting the flow of goods and customers controls into its own single markets depends on getting something arranged

for Northern Ireland. What it says it once the UK into reason May is saying she can never accept he's a red line, but something has got to give in just twenty seconds here when you go to the pub or when you walk around and just the average person on the streets of London, how concerned are they about this? How much are they following that details? They're not following the details at all. Really what they want to know what they want to is there going to be a

deal or isn't there going to be a deal? Is breg A going to happen or isn't Brexit going to happen? And even those of us who speak to the people who know can't really stay for short what the outcome will be. And that's the scary thing about the Brexit process at the moment. I wish thank you so much for joining us in wish or does the European government reporter for Blueberg News a big question and angst in

markets these days? At what point will the rising benchmark rates in the United States damp in interest and risk your assets. And here to answer the question is Tony Sheer, director of Research and co portfolio manager at SMED Capital Management, with the two point three billion dollars of assets under management.

So I'm just wondering, Tony. We've been hearing about this that at once, at some point people are going to go back into government debt and avoid the risk kier assets that they've basically been forced into during financial oppression. We're not seeing that yet. When will it occur? It's

a great question. It's been years as cheap money has been flowing around, whether it's private equity money or whether it's just the as you say, riskier assets that have gotten away with not having to show real earnings or free cash flow, and that has gone on for quite

a long time. As yields go up, you'll have something to compete with that, right And so, you know, we don't know when, but we do think that the economy is going to be far more resilient and the next several years than even the consensus right now would tell you. You listen to Jamie Diamond talked about the five percent on the tenure a couple of years out from now, and if that's driven by economic growth, we do we think you think that there's gonna be five percent treasury

yields in a couple of years. It's historically not not asking a lot, actually, right, I mean we just are in a tenure look back where that looks like a really big number right now, but you go back into a longer term time frame, it's really not asking a lot.

And so no, we don't think. So we're at a four point something percent four point two I think with the last print on GDP right now, with unemployment lower lower than that, how long is that going to persist without yields eventually starting to reflect some upside on the longer term treasury bond? Tony, I gotta ask you about one group of stocks that has been leading the market higher,

and that's technology. I want to know about this idea of financial euphoria and why you believe where if you believe that holding technology and growth stocks could permanently damage investors long term success. From a letter from Smeat Capital Anyway, great question. The short answer is yes, absolutely, All manias and euphorias don't end well. You know, the Internet changed our lives coming out of nine until eighteen years later

to today. It changed your life. But when most of the capitalization went towards those ideas, right, you know, you lost your shirt in the subs went three years. Whereas the under capitalization that was going on in value stocks and ever forgotten about, you know, the old economy type stocks. You didn't just do relatively well, you did nominally well

in the next couple of years. Right, you could, you could just absolutely beat the mother you'd rather let's say, and I'm not picking on one stock for any reason, but I mean, you'd rather go with the McDonald's and a Coca Cola then you would Facebook or Amazon dot Com? Uh as absolutely? Okay? The you know, I we wrote a piece here recently about that mania, and we went back to two thousand eleven, just as a case in point,

when no one was really thinking about fang stocks. That was a point in time where we were looking at another recession, in that case, a double dip recession. And what you were thinking about then was g l D. Right, gold, the gold dt F had more money sucked into it, and the sp wise, the broad market et F at seventy eight billion dollars. Okay, you fast forward to today, the g l D has twenty nine billion in it and the spy has two ninety bill in in it.

You should have been taking risk back then, but you were buying bonds and gold was up for that year. The market that SMP had an inter year down draft of nineteen and a half percent, and people were scared, right, But you should have been taking risk then. Fast forward to today, no one is thinking or caring about that stuff. They're only thinking about the things. So you've got, in our view, massive, massive over capitalization in in a very narrow set of stocks, and that's been exacerbated by the

amount of money that's gone into passive. There is the agnostic money that owns this stuff that they don't know really what they own or how poorly exposed they are. So let's talk about your portfolio. How have you adjusted it most recently in terms of stocks, bonds, and within stocks,

the types of stocks. Great questions. So I mean for us, what this offers, what this capital and misallocation offers us is some cheap stocks that have been left for dead and really forgotten about in comparison to the over excitement and fang. So we've been adding to our position in Walgreens Boots Alliance for instance. Uh, you know, we've been adding to Target Kroger. We've been adding to some of the cheaper stocks that no one cares about a newer

name for us, to Discovery Communications. And if you aren't Netflix, okay, you get discounted in old media land. Almost across the board, Discoveries incredibly cheap. We think it offers. They just did

a deal with Hulu. They did is gonna now offer their content on the Hulu website or that's right, And that's exactly what they said they were going to do when they did the deal with Scripts Networks when they when they combined, right, they're gonna bring the discovery channels excuse me to uh to the same over the top platforms as Script Networks has had. So real quick. What about bonds versus stocks? Well, I mean yields we think are going to be rising here. So you don't like bonds, No,

we don't like bonds. Okay, you don't like any bonds? And how long if you not like bonds, well, you're like approximately a decade were an equity we're an equity manager. But no, we do think that we're going to be in a in a well we think also in we haven't talked about inflation. We think inflation but also economic growth is gonna drive rates higher, so you don't want

to be, you know, owning bonds. High quality, value oriented equities we think are going to be a place that you can win, not just relatively but nominally as well. Well done, Thanks very much for coming in and sharing your thoughts with us. Tony Sheer is director of Research co portfolio manager for Smeeed Capital Management, helping to manage more than two point two billion dollars. They're based in Seattle, talking about adding to positions in Walgreen's Boots Alliance, Target, Kroger,

and Discovery Networks. David Neilman is a serial airline entrepreneur, founder of Jet Blue Airways, also a founder of Morris Airways, also founder of west Jet Airways. Also he is going to have a new airline, a low cost airline, and here to tell us all about it is George ferguson Bloomberg Intelligence, his own expert when it comes to all

things aerospace and defense. This is an interesting story, George, that David Neilman is going to be taking those A two twenty jets that were developed by Bombardier formerly known as the C series, and he wants to start a new airline called Moxie. Does the world need Moxie? Well, so, I think principally he will be flying US routes. And I can't only speak for the entire world, although I try sometimes, but I think the US doesn't necessarily need

another airline. We have a lot of capacity, fairs are under pressure, margins are falling for airlines. Um, he's going to try to wedge Moxie in here. I think it's going to be difficult to make a lot of money with Maxie, all right, But this is the founder of jet Blue, so he has some experience and jet Blue has done pretty well, right, I mean, they've done uh, gotten a lot of market share, and they have a model that is being emulated by others. I'm just wondering.

I mean, I personally would kind of enjoy it if somebody offered even lower fares out there. What's the problem. Yeah, you know, I think everybody wants lower fares. I think that's a that's a good thing. So again, but the more you cut fairs and more Abiales cuts fars, the more difficult it is to make a profit in this business. But George, hold on a second, because actually prices have been going up steadily. I don't know if you've noticed at him, I don't know if you've noticed it, but

it's been going up pretty dramatically. And now you have to pay for your overhead luggage and you have to pay for uh the oxygen that you breathe. So, I mean they have succeeded in increasing priss but believe it or not, airlines are still less profitable this year than they were in and the reason is fuel prices are rising like and fares are rising to three so there, so they don't have the pricing power to compensate for

that eising costs. Can you make me go into a little bit of the thinking behind using that A to twenty jet, that C series jet, I mean, it only holds about a hundred and fifty travelers, and most of the low cost carriers, as I understand, they're going with

something like the airbus. You got it. And that's why I think it's very interesting about this too, right is that uh So, David Neilman has worked before with UM with air Bus, and I think there's a little bit of some of the old the Airbus getting the band back together. Um, and they really need to build some demand for this A to twenty. And I think they're hoping that Neilman can build a fleet of these because we think that they give him a deal on the

sixty aircraft. You think, my guess, My guess is they did. Um. I think that's a big difference. Uh. Sort of in moving this airplane from Bombardier to air buses, you now have deeper pockets. I think as you launch an airplane, you have to be ready to take a little bit of pain less profitability, a bunch of discounting, and that's

what this does. He wants to fly from tertiary airports in America or maybe secondary tertiary, So you could argue that you need that smaller size because he's flying from places like Trenton, you know where windsor Locks, Connecticut in places like that. Well, you're not gonna be able to fill a hundred and fifty or a hundred and seventy sea airplanes. But the rest of the little cost world is going to much bigger airplanes as they try to defray the cost of higher pilot salaries in the front

and those higher fuel expenses. Lisa Abrama it's just wants more leg room and wants to not be charged for the oxygen that she uses on the plane. Yeah. Also, I mean there are there are a list of things that I would like. I would like the free snacks to come back, because I know that in some places that's not acceptable. I also the whole idea of support pets that are like huge peacocks that take up They got rid of that, they got rid of the peak not not not a big fan of that. And yeah, no,

I think that there are some issues. There's some issues that need to be addressed. I think Lisa wants, ever wants to get those wings you know that they used to give out when you traveled on in there. I think they still have them. All Right, George, I want to talk to you about some news that was made this week with the Emirates and Eddie had Uh. These two pretend these airline rivals exactly, and there is some talk that perhaps are going to be combining perhaps not.

They denied it, But what's the logic here? Why would it be beneficial for them to join forces? Yeah, I mean there's a lot of capacity that flies between UM Europe and Asia. Right, it's a it's a big trade route.

There's a lot of people that fly those routes, UM that that work in in Europe or work in the even further into the US UM and so so because of all this sort of demand for flying airlines amended even more supply, and so you have you have a market that the big European carriers compete for, the big Asian carriers compete for. In the Middle Eastern carriers compete for, and I and fairs are just horrible on these routes. Uh. And so you know, ET hasn't had the best go

of it. Um. They're they're smaller than Emirates they went after by horrible you mean they're low Um, Yes, okay, because because okay, carry on, George, just remember shareholders do deserve a decent return, all right, and some of these are approaching levels. Aren't a decent return for Charilder. We can debate that later on, I guess if you want. But so ETA had hasn't had a great go of it.

Emirates has been much more successful. Look, they're kind of brothers, right, They're both in the U a E. They're in the towns that are a hundred kilometers hundred fifty kilometers apart UH, and I think that probably the government to us probably pulling both of them to get together because they Abadhabians are probably pired of losing money on at the HOD

and they see emirates as being more successful. And so I think the reason why this could get done in the end is that that government will push a lot of parties that don't want to, you know, maybe be together together to rationalize this UH this carrier, and that would lower some of the capacity between Europe and Southeast Asia and help fares in that part of the world.

George Ferguson, thank you so much for joining us. Please do lower the prices, get us some more leg room and possibly even overhead overhead space that you don't have to pay for. Thank you. Those are our requests. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa

abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.