Leveraged-Loan Tourists Are Waking Up To Big Risks

that perspective. Tom, can we just start with what happened on Friday that this funds such a huge decline? Absolutely, good morning. I think you're battling against a couple of issues here. People coming around to the realization that recession probabilities are rising, growth concerns are are emanating and finding themselves in a credit credit risky product in the leverage

loan market. And then also you have over the life of this expansion very very long expansion, tourists or people that are not commonly used to the leverage loan market finding themselves in a place where they may or may not be so comfortable with the credit risk that they are exposed to. Now. In the Federal Reserves Financial Stability Report, the quote is business sector debt relative to gross domestic product is historically high, and there are signs of deteriorating

credit standards. Leverage loans, junk bonds now in excess of two trillion dollars. Is this as good as it gets? I think the best of these markets, pimp to your point, are behind us. I really do. If we try to just drill in a little bit on what the FED is looking at, what are they really trying to showcase to us? The leverage loan market is now bigger than the high yield market. That market historically has been left

for private credit. Now we're in place where the demand for floating rate product over the last ten years has driven people to this asset class. And I think a good amount of education is necessary. What is a leverage loan. It's a loan to a business that already either has a lot of debt or of poor credit quality. That's a default risk type of product. I'm not saying default risks are high. I'm saying these are the credit quality

natures of these these companies. And then looking at the quality, what do I think the FED is really looking at underneath the hood of the leverage loan market. Covenant light ubiquitous at this point eight percent of leverage loan debt. Is just tell people what is covenant life really mean? Good? Good? Point him? So uh. A covenant light issuer says, they are leaving the parameters for the lending of this money to a company strictly in the hands of the company.

The company can do what they like with with that debt. There are no restrictions on what they can do with the debt, so they can basically pay off private equity owners. They and level up further. They can borrow more money, and there isn't necessarily any kind of sign off that

the bar that the lenders have to do. You know, I want to go back to something you are saying, which is there are all these tourists who got in through things like e t f s which are liquid even though the underlying isn't as liquid by any means um. Why are they being triggered now? Because the FET has been issuing warnings in this area for a while. It's hard to say that it's just this, but there hasn't been a major credit quality issue, So why are they

fleeing right now? I think the main reason they're fleeing now is that you are finally seeing cracks in the credit market. The volatility we've been seeing in the equity market over the year hasn't really corresponded to much concern

and credit markets. However, since the turn of this quarter, the fourth quarter of we're starting to see credit spreads widening now, and and when UH investors are opening up their statements in the leverage loan space, they are seeing not that steady increase in valuation, they're actually learning that those products can go down in value. So I think you're seeing an outflow US in response to a mark to market type of of environment where credit spreads are are,

they're widening. We have to acknowledge that just to help me understand something, because I was those under the impression that junk bonds or leverage loans would be issued by companies that were in dire straits that needed the money, that couldn't access the triple A or you know, the corporate credit worthiness space. But that's really not who's been doing all the issuing, right, You're right, I think the comparable market to leverage loans is the high yield market.

Let's assume you're a company and you have an option you can go to the high yeld market. You might see some covenants or restrictions on what you can do with those funds, and your funding status might be higher than what you see in the leverage loan market, and so naturally a company is going to migrate to the market where they get the most favorable UM lending or borrowing terms that they see. And that's I really do think what we've seen over the last five to ten

years a flocking of companies to this market. It's the best terms of trade for them. So let's play this out. How do you think the leveraged loan market performs over the next six to twelve months. We've seen some UH firms recommending loans over bonds because they've actually been underperforming UM. But what you're saying sounds pretty dire. So I don't mean to sound dire. I think what you just did LEA says how you need to think about this asset class.

Do I prefer high yield fixed rate bonds or the leverage loan market, which has a floating rate component to it. That's the trade I don't think leverage loans are going to outperform high yield over the next twelve months. Actually, we this trade we're talking about dates back to US to June. We removed leverage loan overweights relative to high yield in June. So when do you when do you put it back on? What are you looking for? I'm I'm gonna I need to see the credit cycle actually

play through. I actually favored duration at this point. I don't think when I'm when I'm an fixed income investor deciding do I want to have interest rate exposure the likelihood that rates will come down, I want to own that option at this point. So the leverage loan for me is all you're playing is that credit spreads will remain very tight. My bias is credit spreads widen and that risk free rates come down. In that world, I

prefer a longer duration investment. How bad if the loss is going to get loans, the loan, the loan sell off, and trying to identify what a bogey is for defaults, I I don't even pretend to be the perfect expert in doing that. I think when you're an investor, you have to recognize the deterioration in quality is happening in the leverage loan market. It's been happening for years. If you don't think rates are going to rise very much, this is not the asset class that you should expect

to outperform relative to high yield. Calling a default cycle, which I know you're looking at me and you want me to do, yes, please God, I really I can't. I don't think anyone's gonna be able to do that our time. That well, Lisa, thanks very much for being with us. As always Tom Kennedy, he is the head

of fixed income strategy for JP Morgan Private Bank. And I want to bring in Teresa Raphael Bloomberg opinion editor covering European politics and economics for Bloomberg, and of course still with us is John Author's senior Marcus correspondent, columnist editor everything under the Sun here at Bloomberg Trace. I'd love to start with you. What was your sense What was the most sort of newsworthy thing that Prime Minister May said? Well, I mean I think the first thing

to note was the atmospherics in the house today. We made him get out two sentences before um there were jeers and she was being laughed at and derided, and that really speaks to, you know, a prime minister whose power has just waned dramatically. Um the most newsworthy thing. She's not promising that there will be any substantial renegotiation. The European Union has been very clear that they're not going to open the legally binding part of this agreement

around the Irish backstop. What she is sort of suggesting as that there might be some additional reassurances that could I'm now extrapolating that could sort of take the part of UM additions to the political declaration. There may be some sort of side assurances. She's also um said that she would find ways to empower the Commons to increase the democratic legitimacy and and allow the comments to place

obligations on government. All of that has to do with Um reassuring skeptics that Britain will be able to find a way out of this backstop. But you know, really she's saying, this is the deal. Look at the alternatives. You're not going to like any of them. Give it a chance, But I know that I don't have the votes to do this tomorrow, John, Just to reiterate the Irish backstop that we've been learning about is basically an insurance policy that the border between Northern Ireland and the

Irish Republic would remain open as open as its currently is. Yes, that's what I mean. In other words, there will be no change yes to the it's an it's an insurance policy for the Republic of Ireland, for the South of Ireland for those who passionately believe in the process that was started under Senator Mitchell, Tony Blair and the various Irish players twenty years ago, that the that the board that the trade within the Island of Ireland will continue

as it currently is. I saw a very interesting comment from Glafstadt saying a few minutes ago before I came to the studio, saying that whatever happens, the EU will

not let Ireland down. And that is the am past that we have that in the event that we don't have some kind of wonderful new technology involving laser beams and and chips in embedded in people's foreheads or whatever to enable um A border to remain as soft as it currently is while still having Britain outside the Customs Union, you will have this this arrangement that will will carry on given that most people assume that the the high tech ability to to run a border where most people

can just drive straight through like an easy pass on the George Washington Bridge. While most people assume that that's not going to be possible, this backstop remains. And while the backstop remains, Britain remains within the Customs Union without having a vote over it, and that is unappealing to democratic at a political level, I just want to give some market response, because we are seeing a market reaction.

The pound continuing to decline versus the dollar session lows and at the lowest levels since two thousand seventeen April two seventeen, So you have to think people are taking this as the likelihood of a no deal brexit, a hard brexit that will have material impact on the economy is increased. Saying you're also seeing your UK bond yields decline, a sort of suggestion that growth expectations going forward are declining.

Ters come on in here. I mean, is today sort of a landmark moment in terms of basically increasing the chances of a no deal brexit and showing there really isn't a political leader who can carry this through on the UK side. I mean, there's no question we're at a watershed moment. I think, you know, if if Donald Trump's modus operandi has been you know, denied, denied, denied, Theresa May has been delayed, delay, delay, and today she's

delayed further. But there's only you know, so much road left for her um in terms of the um you know, economy. She said very clearly in her comments address today. Look, those of you that are advocating leaving without a deal, be upfront with people. That is going to have costs. And she's quite right that the you know, hard line brexitters who say, look we we can trade on World Trade Organization terms will be fine. And uh, you know,

the question is fine and what time period? Because every you know, economic study on this and including the Bank of England and the government and the various economic thing takes have come and said that is going to be painful in the short term, ten fifteen years. Well, it's also a report and John you can come in on this as well, and Terres maybe you can give us a sort of bird's eye view of what it's like in the UK because the government, the UK government has

already told supermarkets such as Asda, Tesco, Sainsbury Morrison. They've actually spoken to those supermarket groups asking them to stock as much as possible in their warehouses in case the UK crashes out of the European Union without a deal. Well, this go ahead, John, John, I used to it for the Financial Times. She's famously manically pro Remain. I voted Remain myself. That kind of story bothers me as a very strong pro Remainer in it it has It has a whiff of the pro pre y two k argument.

It also has a whiff of what the Leaf campaign accused the Remain campaign of doing during the campaign, which is project fear. I'm prepared to believe that a no deal Well, I do believe that a no deal Brexit would be a very very bad idea for the UK, and to the extent that the UK matters to everybody else, it would be a bad deal for everybody else. Um,

it doesn't play well. I suspect in the provinces. In the smacks of the elite trying to get everybody scared, of trying to play two fears that may not be totally justified. Yeah, I think John just put his finger, And there's there's the optics of those kinds of messages, and then there's a reality, you know, should we really be stalking up? Should supermarkets be stalking up? And the reality is that a lot of it is in the

gift of the EU. Europe could actually um impose, you know, impose the letter of the law such that there are such backups of Lori's that you know, there may be certain supplies that would be UM short, you know, in short supply for a while while new supply chains are being sourced and things are being worked out. The reality is probably that there will be some last minute UM agreements to ensure that the worst of the emergencies and we're talking sort of medicines more than um kit cat

bars uh is averted. But you know, somebody did a study is that a two minute delay at the Dover Calais border would lead to sort of seventeen miles of backed up Lorrie. So there is some truth to all of this. Just to let you know, just to let everyone know that the pound has broken one and now trades one five eight nine. When I first came to the States as an exchange students, it was one one oh five yes, So back to you, but I want to I want to go back to something you're talking about.

When you're saying that you know more than more than kickcap bars, we're talking about medicine. How bad could this get? I mean, when when were we here, uh Prime Minister May talking about making provisions for a no deal brexit? Are we talking about stockpiling medicine and having you know, enough corn to just sort of uh feed out to people, you know, in a sort of warlike situation. Is that what we're talking about? Well, I think medicine, yes, to

some extent, because some medicines have to be refrigerated. Refrigerated trucks can you know, only have a certain amount of time they can um, you know, they can keep things refrigerated. So there in the NHS, the National Health Service, estate run health service here has been told to keep certain supplies uh in reserve. So I think yes that I mean terms of corn and people sort of starving, I

mean that would seem wildly overblown. Um And as I said, I would imagine that the EU would say, psibly put in to play certain emergency measures, certain temporary uh kind of equivalency recognition of EU of UK rules and regulations so that we're not going to see a sort of cataclysmic scenario. But you know, that's not to say that a no deal exit isn't a very scary place to be. And there's only a sort of small minority in the House of Commons, but they're very vocal, and they're within

Theresa May's own party that are advocating that. Trying to just come in on the sort of pick up on what Terrez was talking about and the domestic political change. Do you think that that we should be ready for a new prime minister in the United Kingdom. Well, that's a further problem, and this is actually perversely Theresa's strongest cards at this moment um. You've heard various people within the Conservative ranks are trying to position for a leadership campaign.

But it's not as though um either the party in the country or certainly the Parliamentary Party would be wild about coalescing behind Boris Johnson. Dominic rob who recently stood down as Brexit Minister, as I gather, is also interested in a leadership bid. He made this disastrous sounds bite where he admitted that he hadn't realized until the last few weeks how important the Dover Calais link was the British trade, bringing sarcastic comments that he's only just realized

we're an island. Yes, thank you. The geography lessons continue. John Author's thank you, senior editor for Bloomberg Market saws our thanks to Terres Raphael Bloomberg opinion columnist, and I want to turn our attention to bitcoin and crypto currencies, which have basically been demolished. Basically a tractor has run over them, and then a giant has come and stomped on them, and then everybody turned and looked and said we told you so because they lost more than their

value or more. Joining us now is somebody who actually uh supportive of the technology behind bitcoin and the others, and that is a blockchain Ron Quaranta, as founder and chairman of the Wall Street Blockchain Alliance, joining us here in our eleven three our studios. So run, what do you make of the recent cryptocurrency route? Good morning? So thanks for having me. Yeah, there are a couple of things going on that we talked about on a regular basis.

I think we're clearly seeing some of the sell off that's pulling some of the froth out of an overvalued marketplace, and I think part of that is institutional money that's

kind of been taking a bit off the table. It's important to realize that a lot of o TC trading that isn't reported directly, so I think a lot of that is precipitating some of that price decline, and in particular the past month and change, given some regulatory action the sec UH sanctioning a unregistered exchange to specific token offerings for example, that had settled with the SEC because they sold unregistered securities, that kind of regulatory overhang has

kind of clouded the marketplace. People have kind of fled for the doors. Eight A bitcoin downs something like others down well over ninety percent um. That doesn't diminish the overarching value proposition that we believe for the technology and quite honestly crypto assets. In our mind, this is part of that evolution that needs to happen to be part

of the world that we know. Ron just explain to people what is the Wall Street block chain alliance and given example, if you can of a project or something specific that is being worked on to take advantage of this technology. Sure, so the worst street blockchain alliance is a nonprofit trade association based here in New York with a mission to god and promote comprehensive adoption of blockchain

technology across our member base. And our members are banks and brokers and hedge funds and institutional investors, law firm accounting practices, really trying to understand the ecosystem of both blockchain and and crypto assets. One of the biggest models that we've seen that's really going into production leveraging blockchain

technology is supply chain. When you look at shipping companies like Marriage working with IBM, when you look at banking and trade finance institutions, leveraging blockchain to audit and manage the shipment of goods overseas and the cost effective, more efficient way that's fundamentally evolving how supply chain and trade management works. Okay, well, I gotta I gotta just be

really honest here. When you start talking about cryptocurrencies and taking the currency away from a nation, that's pretty sexy.

That's like, you know, vote rogue kind of actors kind of creating their whole own ecosystem in the web, and you know, and when you talk about supply chain management, it's not And uh, I have to wonder whether blockchain has moved from a catchphrase that got everybody's attention and people just threw money at it to something that's more of a show me, show me the money proposition, and there's actually less interest in just throwing money at the

development of new applications here. Yeah, I mean we've seen out over the past two or three years, we have had lots of money thrown at radical new solutions that were leveraging blockchain technology. If you and I put together at power Point, we probably would have gotten ten million dollars to create a new startup. But why didn't you call me? But it's become show us why it makes sense. It's become show us why this should go to market. And I think the interesting part of this is the

stuff that you don't hear about in the news. We all hear the mania about bitcoin and price declines. The work that's happening behind the scenes. Our members are part of some of that. Some of the largest technology providers IBM, Microsoft, Amazon Web Services leveraging blockchain technology to bring to slowly bring solutions that make how we do what we do more efficient, more effective, more um more cost effective. Broadly

across the entirety of the ecosystem. Our banks interested in blockchain technology because they see it as the next version of Swift, which is the national payment system that is currently being used. Yeah, we don't. I don't know a bank that's not a large bank that's not looking at blockchain technology in some way, shape or for him for a couple of reasons. One is the function of banks

needs to evolve. It's a very friction filled world. You and I were discussing that a bit earlier, from everything from payments to clearing and settlement is really expensive. Really, you know, friction filled is what we call it. So most major banks are looking at leveraging blockchain technology to evolve how they do what they do, how they transfer funds, how they manage client accounts. Even things like k y C a m L. They're going to be leveraging blockchain

technology to manage identity for their clients. And when you look at the costs of ky C a m L, that makes sense to to leverage a cost efficient technology and cost effective technology to make that better. Have the applications in the financial sector been overstated with respect to blockchain, I wouldn't say they've been overstated. I think we all waited with bated breath and then realize some of the stuff not coming to market quickly enough. And the old joke is in steen it was all going to be

in production. And I've been in the blockchain space for for several years now and we're still waiting for that big production already moment. I don't think it's been overstated. I think the expectations were a bit inflated. Um And what we're beginning to see now is real solutions that don't get the news. They're boring stuff that we don't talk about in the sexy news cycle of cryptomassets, for example, But the solutions are are coming to market behind the scenes. Now.

You mentioned just to do the acronym explanation when you said K y C A m L. This is things like anonymity and confidentiality. Yeah, when you engage financial relationships, most financial organizations are required by law across your customer, no, your customer and anti money laundering requirements at each of those instances that each financial institution is it's expensive to go through the process of confirming that I have I

can do certain transactions with the financial institution. Imagine a blockchain solution that allows that to happen more quickly, more fish, and they perhaps shared across an ecosystem of parties, and you begin to understand the possibilities of security an identity leveraging blockchain technology. So can you give us an example of a space where blockchain has revolutionized something? So I think the supply chain thing. I come back to that simply because when you look at the stuff that's quote

unquote in production. UM shipping companies right now leveraging UM supply chain, leveraging blockchain to manage supply chain for tracking organic goods. So you might have seen the lettuce that had been UM the remain the remain lettuce scare and challenges their shipping companies are beginning to use blockchain. I think Walmart, for example, now leverages blockchain to track provenance of their food for example UM, and that stuff is

happening right now. UM. I think healthcare interestingly, there's some look at healthcare around how do you manage digital health records. I think we're a bit early in that space, but if you think about the mess that healthcare records are globally, b chain solutions really are being aimed at, how do we make that better for the patient. Thanks very much

for being with us. Always the pleasure. Ron Coranta. He is the founder and the chairman of the Wall Street Blockchain Alliance, talking about new technology to perhaps streamline the movement of money around the world, and also or lettuce in nothing wrong with that, all right. Let's turn our attention now to the world of healthcare with Scott Flanders.

He is the chief executive and board member of the Health and he's here to tell us about consolidation in the healthcare industry, plus an update on enrollments in the Affordable Care Act. Scott Flanders, thank you very much for being with us. Is the A c A enrollment levels are they? Are they still climbing or have people decided to take a rest And how to figure out what

premiums they can afford the pay before signing up. Well, that's definitely the challenge, and I appreciate you bringing a focus to it, because the premiums are up much less than they have been the last few years, and so there has been stabilization in the individual market as particularly if consumers receive subsidies, it's very affordable. More insurance companies

are offering plans this year than last year. But even with all of that good news, the reality is fewer consumers are signing up for the two thousand and nineteen coverage year than they have in past years. You know, I'm interested in the fact that Barack Obama, former president, who came up with a c A, just tweeted a less than an hour ago. No jump shots, no ferns, no memes. Not this time. I'm going to give it to you straight. If you need health insurance for twenty nineteen,

the deadline to get covered is December. Pitching this, why do you think? What do you think it would take to re ignite this program in a meaningful way? And on the flip side, I mean, is this sort of the last gasps of it before it gets demolished? I mean, where are we with this? Well? Look, it's down double digit Enrollments are down uh ten twelve percent from prior year,

so it's not collapsing, it is shrinking. There are more more alternatives this year, so the extension of short term duration from ninety days to a full year in some cases multiple years, has been a nice alternative, very attractive to many of our consumers who can't afford the rising premiums and the very high deductibles of Obamacare. You know, we we do surveys all the time of our consumers and don't even know that the open enrollment period ends

on December fift So I appreciate President Obama tweeting that deadline. Now, Scott, previously you have served in a variety of positions only in the media industry. Now that you're in the healthcare of business, just tell us a little bit about the health because you're more of a you're a marketplace, so you get a different view of what is going on now, that's right. Uh, we're completely neutral for the consumer. So we're like Expedia is in travel, the health is the

same for health insurance. We have over a thousand people and every day our mission is to try to get every American with affordable health insurance. That's a simple mission, but it's very hard to execute because it's complex. It's a shopping experience and consumers only do once a year. It's not their favorite, fun, most fun thing to do, but yet it's important and has consequences if they get it wrong, and so we're there to be a comparison site.

We also have call centers to help consumers that need to speak to someone, but most of our consumers interface with us on our website e health dot com. Scott, you know, we've talked a lot of people about how to make healthcare cheaper in the United States, and a lot of people say that Ultimately, given what's going on in government, and given the fact that Medicaid Medicare can't negotiate for drug prices and things like that, Uh, it's very difficult to see the government take the lead on this.

It will have to come from corporations like JP Morgan and Berkshire Hathaway that have sort of made moves about having their own healthcare system. It has to sort of lie with them to create the competitive pressure. So are you seeing any sort of corporation supporting what you do and making moves that can materially lower healthcare costs in the United States? Well, that's that's a three plus trillion

dollar question. Seventeen or eighteen percent of our entire economy is spent on healthcare, so and it's it's growing faster than GDP. So you know, it's a it's a major fiscal issue today and it's growing and getting more challenging. So you're right to focus on it, and there aren't easy answers, but I do see the CBS merger as a progressive, constructive step that I think will improve access.

You know, for many conditions, going into a hospital is just so punishingly expensive, and if you have a high deductible, which many Americans have, and there's still twenty seven million Americans that have no insurance, and so they're going into emergency rooms for treatments that could more easily be handled and met checks or perhaps even at a pharmacy, and that could be where we see that at CBS merger evolved.

So we think providing more access UH will make healthcare more accessible to more Americans, and ultimately that will on the margin, bring down cost. Scott Flanders, thank you so much for being with a Scott Flanders, chief executive officer at e Health, coming to us from Mountain v You, California, talking about what the Obamacare enrollment has been like way down UH and just in general with how to provide a tool for people to better shop for insurance programs.

Thanks for listening to the Bloomberg p m 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