Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor with Bloomberg. This week, we're very pleased to welcome Johnny Fine, global head of investment grade Debt at Goldman Sachs. How are you, Johnny, I'm great, Thanks for having me, appreciate you joining us. So we're very excited to have you on the show and to get your thoughts on all things credit and weightlifting, sportslifting, powerlifting, cookery,
all that stuff. Also devices to welcome back Arnold Kakuda with Bloomberg Intelligence. Great to see you and.
Arnold, Oh, thanks for having me again.
So just to set the scene a bit here, borrowers have been raising money at a furious pace this year, setting records across unibonds, leveraged finance, asset backed securities, and investment grade. A lot of that has been to refinance debt coming due or reprice existing foracilities, and it's not confined to publicly traded bonds and loan markets. Private debt and direct lending and asset based finance have also been going gangbusters. Investors are clearly keen. The FED has started
cutting rates the expectation is for lower coupons ahead. And while spreads are very tight, all in, yields on high grade US corporate bonds are still close to five percent, so pretty attractive compared to history. Buyers seem to have a ton of cash, a lot of it sitting in short term money market accounts. Fun Flows have been extremely positive. That's made new issue concessions very tight negative in some
cases last week. Also, a pretty bullish economic outlook is becoming the consensus, and that's supporting the buying that we're seeing. So I just want to bring you in, Johnny. I mean, I get the demand side, but on the supply side, why the rush where the extreme push right now? Why not wait till things get cheaper when the FED really does start cutting.
Well, there's a.
Lot to unpack there. So within that intro, I think emailed everything, but with one exception. And the one exception I think is when you said the expectation is that coupons are going to move lower, because I don't think that's the case at all. We've seen term yields probably at their low point, call it late August, early September, after the volatility, after the unwind of the end carry trade. After the oh my goodness, the Fed's behind the curve.
They're going to have to do some emergency cuts to play catch up. And we hit what maybe three seventy three seventy five in tens then, and we're now back at four point fifteen today. Where term yields are is a function of not simply us beginning a cutting cycle, but really how deep and how fast that cutting cycle is.
And there's been an incredibly robust relationship all year between where the market expects the FED funds rate to be in a couple three years time, So call that a proxy for the terminal rate, a very robust relationship between that number and tenure yields. In fact, you take that number and add seventy five basis points, you get ten year yields. Today that terminal rate a couple years out early twenty twenty six, there are thereabouts is three forty.
Add seventy five basis points four point fifteen. That's where tens are.
And that relationship has been so robust, and as the market has digested that, and as issuers have digested that, they thought about financing in a risk paradigm where you know, we may get rate cuts, But there's not necessarily going to be the case the term yields are going to move lower in lockstep.
Far from it.
So the original question that you posed to me before I went off at a complete tangent and addressed something else was why the rush and the rush really began
in the first half of the year. And it was pretty clear and pretty evident to us all that we were going to have a very robust first half of the year, really driven by a corporate issuers desire to de risk and de risking ahead of more than fifty percent of the people will occupy this planet and live in democratic countries going through the polls, and that's a clear and visible risk. You never know where these elections are going to end up. You never know what kind
of volatility they might introduce. But if you're sitting there and looking at you're financing needs over the course of the next twelve months and you see one, then you're probably not going to sit there and think, hey, I'm going to wait till October. You're going to finance early. You're going to get ahead of that. And by the way, at the beginning of the year, we had a heavily
sharply inverted yield curve. When you have a heavily sharply inverted yield curve, the cost of carry of warehousing long term debt for a corporate is zero or in some cases actually negative and in naturally in a lot of cases. In March of this year, I think the number was something like sixty percent of all investment grade borrowers could issue ten year debt and park the proceeds in six
month treasury bills and earn a positive carry. Now I'm not saying that how corporates manage their balance sheet to try and earn that incremental return, but if you're looking to de risk, if you're worried about what the back end of the year might look like, you see that environment presented in front of you, you're kind of incentivized to finance early. And that's really what drove the first
six months of the year. Now, we expected come the summer that things would start to tape off and we'd have a much quieter run into the end of the year, and that's actually not been the case. We've actually continued at a frenetic pace. And that pace has continued because of a very sharp compression in credits breads, and so credit spreads at the tightest levels we've seen since they think two thousand and five now in the IG index.
And anytime you get a financing environment where you get incredibly tight spreads and as you mentioned James at the top, very low or negative or zero new issue concessions, there'll be supply. And that's they think what's populated the market over the course of the last several months. And there's really not been a pre election slow down as yet.
There's not been a pre election burst of volatility, and there's not been a pre election burst of illiquidity in the market as well, so conditions remain really robust.
Got no, if I can step in here, this is Arnold Coakuda Bloomberg Intelligence covering banking financials from the credit side. So Johnny, you know, like I covered the banking financials the a lot of the management teams have talked about maybe this is a pull forward right of demand for from maybe from next year and stuff like that. So is that how you see it? Right? You talked about someone was supposed to slow down, but no, we haven't
seen that. No, really bouts of illiquidity and stuff like that. You know, are you gonna call it a pull forward or not, or this is this everything looks fine until kind of bonuses are paid and we'll see what happens with twenty twenty by next year.
Well, I think the first six months of the year was clearly a pull forward or a significant component of the financing that we saw was a pull forward. But there's also been real growth as well and real economic activity. You kind of think about supply that we've seen in the energy sector, a lot of that's related to m and a supply that we've seen in the utility sector that's been related to capex. There's been growth on bank balance sheets and that's required a pretty substantial amount of
bank funding. As we think about how this year has evolved, there's been a lot of international financing in the dollar market as well, so there's plenty of growth to finance as well. I would say that what we're seeing right now I don't think is necessarily a pull forward of twenty twenty five activity. I think what we'll see post election is if conditions remain as they are now, I think will then start to see a pull forward of
twenty twenty five financing plans. And I think in particular the frequent finances bank and finance, both domestically and internationally.
But if you're asking me.
Does the supply that we've seen this year mean that we're going to have a down year next year? I think the answer is no. When I look at the market for next year, there's a trillion and a half dollars that's going to come back to investment grade bond investors from one point two trillion of redemptions and three hundred billion of coupon payments plus minus, just in the
US market. I don't believe anywhere near that all of that has been pre financed, And actually kind of when you kind of think about the staggering sum that that represents, and sure, we'll finish this year with the second busiest year ever in US investment grade, the second busiest year ever in global financing, and similar characteristics in left fin If we finish this year in usig at one point six trillion, next year, we've got to print one point five trillion just for the market to kind of wash
its face. So I'm not anywhere near thinking that next year is going to be a down year. I think it's going to be just as robust as this.
Year has been, got it, So you heard that twenty twenty five still going to be pretty busy, so you know, yeah, great, great, And then just you talked about this a little bit in terms of the constituents, right, you talked about you know,
the frequent financers coming and stuff like that. But also on these management calls we've been hearing about, you know, M and A has been rebounding and stuff like that, and maybe you know, maybe you know, we need some change and some of the regulators and stuff like that. But where does kind of the M and A financing start coming in? Are we going to start seeing more
and more of that you think next year? And you know, for those who look at this financials versus non financials, you know, how should we think about that?
Yeah, So there's some misconceptions when it comes to M and A and its impact on financing markets because a lot of people look at M and A over a long cycle and they kind of the numbers up and obviously it's significantly lower than it was obviously in twenty twenty one, and it's actually significantly lower than it was in or lower than it was.
In like eighteen and nineteen.
For example, and that's because M and A captures all sorts of different types of activity in the market overall. What we care about INIG obviously we care about the broad M and A machine because that makes our company more valuable. But when we kind of think about M and A from an IG perspective, we care about corporate to corporate acquisitions with a significant or all cash component to them. And when you look at that time series over a long period of time, it's actually been fairly stable.
When people talk about there being a big rebound in M and A, they're really talking about sponsor M and A. And when they're talking about sponsor M and A, they're really talking about reopening in a much greater level of activity in the LBO market in particular, and a lot of that I think is going to require better backdrops overall in the equity capital markets for IPOs and exits, etc. But from an IG perspective, we've had a fairly stable
and consistent base of issuance every year that's been made up of acquisition financing of corporate to corporate all cash or significant cash components, and this has been no exception. So it's been great to see some M and A transactions on the docket. It's great to see some backlog and some inquiry and our bridge financing desk is busy and active and spending time looking at options and opportunities. There's never been more liquidity in the bridge financing market.
There's never been a greater amount of capital available to ig borrowers in the bridge financing market to go and do very substantial dream deals etc. Obviously, the regulatory environment will prevent there being significant consolidation within industries and probably will prevent some international cross border consolidation from taking place. But even with the headwinds that have been with the existing A disposition towards M and A from a regulatory perspective,
plenty of volume and plenty of activity. And it's been a great addition to the calendar this year.
So trillion and a half next year, just to quote, wash your face, Yes, just to wash your face. You're adding some M and A and some other stuff. I mean, we're on track to set a new record. Then all the time next year.
You think I don't know about that. I mean we came close to two trillion coming out of COVID in twenty twenty. I said one point six is will probably be more or less what we finish up this year.
So I think in and.
Around one point six maybe one point seven as I kind of think about next year is a very early look, so maybe some modest growth. Look as mentioned like economic activities robust, there's a lot of infrastructure financing that needs to take place, There's a lot of growth in the economy that needs to take place, as well as all of the refire that I'm mentioning. So I think we can be modestly up and maybe it's one seven five, maybe it's ten percent up on this year, but I think it will be an up.
Year, right, But on a net basis, it's still quite small, quite small. It's small, and that's going to keep spreads tight. It's going to keep usue concessions presumably very slim, is it.
So I think that the spreading so I would expect my personal view around spreads as we think about the next kind of fifteen eighteen months is it's going to be another low volt year. It's been a very low vall year from a spread perspective. There's been plenty of corporate activity from an earnings perspective that's helped to ensure that earnings are robust and therefore leverage remains kind of well contained, so no one's really kind of tripping leverage
bands and so on. So credit quality in the IG market has been very robust. Obviously, a high yield environment has been attractive for capital inflows, especially the longer part of the curb, especially some of the nuity writers that you guys have covered and spoken about and written about extensively as well. So I think that we're going to get another low vol year overall in credit, so long
as economic activity remains as robust as it has. You kind of think about twenty twenty four, we've only really had a couple of instances where there's been some real credit spread vol One was in June when we had the surprise snap French election called everyone in the US suddenly got very very familiar with bundo at spreads and what that meant in terms of direction of travel for credit and European capital markets, etc. And then the second
bount of volatility in August after the July payroll reports and again coming back to the these defect behind the curve et cetera, et cetera. Both of those were pretty short lived. So hard to envisage there being much in the way of credit spread vole and from a concession perspective, I think also a function of overall levels, like generally concessions will be low in robust, low vol environments. I also think that concessions have structurally been able to move lower.
I think because of the real significant shift in the market structure of investment grade corporate credit that's developed over the course of the last five to seven years, particularly with respect to liquidity.
On the spread. Though, I'm still I mean I always ask people this, so you probably heard me say it, but still a little bit skeptical of the idea that, you know, spreads should be this tight. I mean, I know the all in yield question argument, you know, just look at the yield, don't worry about the spread. But that has got people into trouble in the past. And if you look at the difference between spreads, you know, single aid to double A for example, that's got very
very tight. So it seems like there's a little bit of indiscriminate buying. I mean, I think it's more on the leverage side in the IG side, But do you not feel that the investors should be paying a bit more attention to spreads.
I mean, it doesn't feel bubbily to me. We've seen instances before where the technicals of the market have really outweighed the fundamentals and the requirement to invest, and that's driven i think spread levels to what historically have been maybe artificially tight. This move feels more sustainable, and it feels more real, and it feels more rational and reasonable.
So I'm a little bit less concerned. And by the way, again, it's the inverse of what we talked about a moment ago about the inverted yeld curve driving issuers to want to finance and then part the money in cash. From an investor's point of view, the opportunity cost of not being invested in an inverted yield curve is also low, so they can hide out in short dated instruments and
earn incremental carry versus longer duration. So I think it's a little different in this environment, and I'm less concerned about that overall. Look, the reality is you go back on very very long time series whenever you see credit spreads get to these kinds of levels, and they don't get here very often. They bumble around for quite some time, and then there's some exogrenu shock that moves them out
in a material manner. And we could spend like the next seventeen hours chatting about what we think that exigent a shock is going to be. And I'm ninety nine percent confident we won't get it right as to what does.
Ultimately cause spreads to widen.
But I think that ordinary course of business, I find it difficult to see too many clouds on the horizon. There's been periods when we've been worried about are we going to tip over into recession? Are we really going to be able to have a soft landing. There's been periods where we've been worried about the consumer and the strength and the resilience of the consumer. There's been periods where we've been worried about the labor market, obviously notably
in the summer. We continue to climb these walls of worry very very effectively.
Got it.
And then you talked about, you know, when we talk about like private credit, that's the big buzzword, you know, and then maybe the perception is that's more for levered companies, but you know, then again you have these apollo you know, talking about creative solutions for IG companies. So how do you see you know, folks like that in the IgA space.
Private credit are they front of these Are they you know, another source of financing for you know, some of these companies that you might have done bound deals with or do you see them as maybe potential buffers right for these potential cases of volatility. It's another tool set that these companies have to get some financing.
Yeah, So I think there's plenty of places that private credit will grow and will coexist with the traditional banking sector. And by the way, we will see in USIG this year record volume of issuance from BDC's part of the private credit extension that goes on in the marketplace. They
obviously need to finance themselves. We're providing that there's going to be twenty to twenty five billion dollars of supply from an industry that from a capital markets perspective, it didn't really exist up until kind of the last kind of five six years or so in a meaningful way. Obviously, private credit has a role to play in the leverage finance markets. We've seen that especially for sectors or leverage levels the regulated banking sector are unable to lend into
because of regulatory reform. So that's natural shift of lending risk outside of the banking sector. And then obviously there's a lot of asset based finance and other types of private credit lending that have been taking place. Some of them have been on large cap corps who have looked
at kind of ring fence certain assets. A lot of it has been on smaller corporates similarly looking to ring fence pool of assets or look at single assets and finance them in private markets with a with a credit rating that gets to IG for the nic reasons required for private credit lenders, but the credit profile looks very, very different to what's in the public IG markets. So am I worried about the growth in private credit taking a bite out of what is traditionally financed in global
investment grade corporate bond markets. No. I think there'll be some portions of balance sheets that will get financed. I think very little of it will be direct to investment grade corporates, or at least direct to investment grade corporates
that typically would have otherwise financed in public markets. I just think it's fishing in a different pond, and as a result, I think it will coexist very very nicely with the rest of the credit providers that are out there in the public markets, whether it be ig levered or otherwise.
Got it. And then you had mentioned regulation in there, right, and some of the regulation pushing some of the lending that the banks used to do more to private credit. But then you know, buzzle endgame. I'll just throw it out there. It's a regulation that you know, not loved in the industry. Might see some pullback, or you might even see kind of a total upbending, right if we get Trump for president. But I think a lot of this stuff maybe pertains more to the trading side of
the business. But how about in IG financing. Is that any concerns there any if the regulation were to kind of go through, is that really an impact at all, like the DCM side and an IG or is it more kind of on that trading side and capital intensive side.
I'm not convinced that it's going to have a significant impact on global financing markets, global capital markets, global IG financing. Like we'll look at all of our businesses that we run, every single business that we look at, we look at the capital that gets attributed to those businesses. We look at what the return characteristics of those businesses are on a standalone and on a related ancillary basis, and will
allocate capital accordingly. And as the rules change, we'll look to allocate capital as efficiently as we can, understanding it's a scarce commodity. Wherever we can generate the strongest returns, that's what we'll do. And if the rule, if the rules shift, then capital will shift accordingly as well. But in so far as this impacting kind of the business that I traffic in day in and day out, I'm far from being expert in all the ins and outs
of BARSL three end game. But based on the work that the teams have done, and I'm not convinced that there's going to be a significant impact to our operations.
You don't worry at all, Johnny, about losing a big slug of business to these you know, big asset managers who are willing to write you know, billion dollar checks to large US corporations that would otherwise have gone to the bond market. I mean, they seem to be doing this increasingly, and they seem to have more appetite for it, and they can see, you know, which credits they like.
They could just call up the CFO and do a deal and sell them on the idea that a direct deal is going to be better than whatever they could do in the in the open markets, which would expose them to less volatility, you know, execute very quickly all those things. What extent you're going to lose business from that?
Well, let's let's talk about what the benefits of intermediation.
Are in the capital markets overall.
Because when I kind of think about like global IG markets, the deepest, most liquid capital markets in the world, extraordinary average daily traded volume, extraordinarily low transaction costs, incredibly easy to get in and out of. Overall, the benefits to intermediation of any large corporate looking to raise some financing is to generate a massive competition between a very large number of potential buyers of a standardized security. Global IG
corporate debt is a standard security. It looks and feels the same across markets, across offering documents. It trades on an incredibly regular, deep and liquid basis, and as a result of that standardization and liquidity, it creates a value proposition for an issuer the private markets can't compete with.
Now I know that there'll be some efforts to liquefy private credit and private market credit, but I don't see that wedge ever being sufficiently closed that it won't be more efficient for a large cap corporate in the US to come and ask an intermediary like Goldman Sachs to stand in between them and literally hundreds, if not thousands of global institutional investors and effectively auction off their securities
to the best bidders overall. And so unless somebody can provide a value proposition that says that a standalone investment of a security that's going to be a liquid but will price at the same level as a public competed security, I don't think an issue is going to elect to go down that route. And so from that vantage point, and look, I could be wrong, and you might have me back on here in a couple of years and you may say, hey, Johnny, you got that one wrong,
didn't you. But I only think I will be I think that the market premium for standardized liquid distributed risk is significant enough that issuers will be willing to pay modest fees for intermediaries to go and find that best clearing price.
You also, at your firm, you have a direct lending operation. So to what extent when you talk to an issuer, do you do you have that in your you know, deck of cards. You know that, by the way, you could do a direct lending you know, through Goldman. You know this price?
Does it? Does it? You know?
Is it all included in the pitch?
I mean, it's it's it's a growing part of the tool kit. Obviously, it's a it's a big growth area for us organizationally. But again it's really I think looking at a slightly different swimming pool than the one that we're all playing in right now, got it?
Okay, So now you know we've given you a couple of layups. We're going to start getting into the reason now. So you know, we're all off the sleeves, all right, So I gotta ask you so you know, I don't know if you'll remember the deal, but it's it's the day after the surprise fifty one rate cut Goldman was in the market. You guys issued a longer than expect you know, usual duration preferred, right, typically it's a non
call five. You guys did a non call ten. So you know, can you kind of give us the thought process kind of behind. Maybe not the specific instance, but like when you do something, I guess a little bit different, right, is it management kind of saying hey, you know, maybe maybe the yelds might rise in ten years, So let's
says that the ten year looks cheap? Or is it kind of the investor side saying, hey, you know they just cut rates and on duration, Like, can you kind of give us some sort of you know, the inner thinking you know of how this deal gets formed.
Man, you want me to pull back the curtain on how we make financial decisions at gold Sacks.
You know you asked me questions going to get me fired?
Come on, No, it's We have a very robust and ongoing dialogue with the treasury team at Goldman Sachs and my team in capital markets and syndicate. We provide them constant viewpoints from investors market perception, what we think opportunity sets are, and that will always intersect with what does Dennis want to do, what does Kerry want to do from a corporate finance perspective, will always layer that in together and we'll look at what the best outcome is
for the firm overall. In the preferred market. Over the course of the summer, there was a clear especially as treasury yields were rallying, there was a pretty significant shift to longer duration preferences from the buyerbase. That actually created an inverted yield curve between preferred or junior sub hybrids.
The utilities were doing that, howither a non call five or a non call ten reset mechanism associated with them, And because of that inverted curve, and I think also that in conjunction with the view that there will be a certain amount of preferred spot we're going to have in our capital structure for many, many many years to come, I think all of that together drove us towards looking at the non call ten segment of the market as opposed to the non call five that we'd looked at previously.
And by the way, if you look at corporate hybrids.
I mentioned utilities, but also some international hybrids as well that come in finance in our markets, also similar subordination premium securities. There'd been plenty of supply of non call ten product that's out there, So I certainly don't think it was an outlier. I don't think it was like
wildly different from what we might typically issue. Sure, we hadn't done a non call ten in quite some time, so that made it a little different versus the preferred preferred flavors that we had been issuing in the prior couple of years. But I wouldn't have said it was certainly anything out of the ordinary at all.
Got it? I got it, okay? And then well how about that. You know you have a European you know, fig background as well, So let's talk about a little bit of a difference I guess between you know, the the European Bank eighty one land, where you know, they always issue in front of a call, right, it always
happens like clockwork. But then at the beginning of this year we've seen a lot of you know, big US banks they kind of let the preferreds, you know, they don't call it on first call date, and these coupons jumped up really high, right, And so I guess, I guess generally, one, can you talk about why there's such a big difference between the eighty one European eighty one market versus the preferreds and the call and on call?
And then two kind of what are some of these factors that you look at when when when Goldman decides whether to refire or preferred or leave it outstanding.
Yeah, So.
I would say there's a different perspective from European investors writ large versus US investors writ large with respect to issue a behavior at call dates on down capital structure securities, meaning that European investors generally expect issuers to call these securities at the first call date. US investors expect issuers to behave economically and commercially with respect to whether or not they call the securities or otherwise and so and that,
by the way, has been around. I've been in this business for a long time. That existed coming out of the Financial crisis, where you can imagine there are a lot of like just pre financial crisis, preferred and cap securities issued the floated post initial call in the US market and in the European market, any attempts to allow those securities to float were met with significant investor pushback. So I think just culturally there's a difference between investors
investor behavior and what is expected of issuers. I think when it comes to any issuer making a decision around calling an outstanding preferred in the US, you asked me to kind of talk about it from a golden sax perspective, but I'll just talk about it that generally as to how we discuss this without issuing clients, and how we
advise our issuing clients. Overall, it's obviously got to be economic and commercial to call and refile, and that means you've got to fully load lots of things in there, including the operational costs of going and executing in the market, the underwriting.
Fees, etc.
But there's also got to be an understanding of is there any optionality of having a currently callable preferred security on your balance sheet. So an example is that if it's a non call five or non call ten that then flips the floating post call, it may then be
callable continuously or quarterly or every six months. There may be some real value in having that optionality on your balance sheet as opposed to replacing it with something that you know you're going to have to live with for at least five years, assuming you're replacing it with a non call five, which is the shortest that you can do from a regulatory perspective, So understanding those puts and takes, understanding how the regulatory landscape might develop may mean that
you may let a security remain outstanding for a quarter or two or a six month period or two because you're not one hundred percent sure whether or not you're going to need it, and if you can call it away in three or six months time and you don't need it anymore, then that's a much better deal for you than replacing it for something that might be out there for another five years that you can't do anything about, or you'd have to go and do some liability management,
which will be over very expensive, and then you'd have to run that carry cost through overall. That's some of the things that go through our minds when we're advising clients around to call or not to call, And.
We did have at the beginning of the year, right I guess the rate cut assumptions at the beginning of the year were like what six, eight or whatnot? Yep, versus now.
I remember it January twelfth because it was my daughter's eighteenth birthday. There were seven rate cuts priced in for twenty twenty four yep.
And a lot of these for those that don't know a lot of these prefers right now that are that are coming for call, they're kind of you know, three
months so for you know, based security. So it's really the front end really, right, which is where they're flooding to on a spread versus the issue at you know versus you know spreads versus five and ten years, right, So that inverted curve I think kind of screwed around with some maybe people thinking about, oh they're going to call it an issue and stuff.
Like that, just made it more complicated. Didn't screw around, just made it, just made it more complicated.
It on the pipeline, Johnny, for next year, I'm interested in what you think the drivers are because it looks like the US is just going to take care of itself with this trillion and a half face wash. But the outside of the US, your title is global. Where do you travel for opportunity? Where's the big push coming from in other parts of the world for issuance?
Yeah, So I would say that we've invested a lot in our European business, and we've had a very successful year in our emia credit franchise. I think there's lots of opportunities in Europe as we think about playing things forward as well. I think there's opportunities just I think there'll be natural growth in the financing market. The structure of that market is slightly different in terms of of
what you're able to do. You can do more underwritten, fully bought deals that the risk more so than you can in the US, or there's more desire from the issue aside to do risk transfer transactions. There's the ability to do smaller, one off privately placed deals because the
documentation burden is lighter and easier. And so it's a market I think where if we're investing appropriately in good risk judgment and good distribution, marrying that with an advisory franchise that we have kind of all over the world, I think we continue to grow that business. So when I think about my own personal allocation of time and capital, I'm spending plenty of time in Europe. I think there's opportunities there. I don't think it's going to be confined
to Europe though. I think there'll be plenty of opportunities in Japan, that's been a pretty regular visitor to global international markets.
There'll be plenty of.
Opportunities and probably growing opportunities in Australia as well. That's also been a regular fxture in our markets. I'll generally spend time in markets around.
The world that I would view as.
Like international participants as opposed to going to look at like domestic markets around the world. Many colleagues in Tokyo who run a very successful Japanese municipal domestic investment grade business. I have no business having a point of view on that business. But there's a lot of international business that comes out of Tokyo where I think I can add some value. So that's where I think about my own time allocations.
And what do you mean by Europe? Is it just France, Germany, England or is it much broader than that.
I think it's a little broader than that.
I think Milan, Madrid, I think the Nordic countries are very relevant as well, obviously the Benelux.
But no, I think there's pretty.
Broad based opportunities across Europe.
And is there any particular sector that's focused. I mean, we know that you've done a lot of tech deals that have been great. Is there anything that you think is going to drive it by sector?
I don't think so. I think it's going to be broad based.
Hard pushed to kind of think about any one particular sector that I think will be a stand out in general, the way the pie is split across different industry groups tends to be fairly stable, fairly consistent. As I mentioned this year, like energy has been a kind of a bigger fixture. Actually FIG's been a bigger fixture this year as well. I would imagine they continue to be growthier
segments overall. But we'll wait and see and will be indifferent and agnostic as to which sector wants to be our biggest clients.
And so for gs, you know, the consumer foray, hasn't you know, exactly gone to plan? I guess pull back on the kind of lending side there. But I think what's underestimated, I think is the funding side, right with the deposits, So has that you know, kind of helped with some of the financing businesses maybe you know, providing some sources of funding for like bridge loans and stuff like that, or how has that kind of helped over the past few years to kind of help with the financing business at all?
Well, I mean, look at the end of the day, in any kind of business where you're looking at NIM for any kind of portion of the assets, having the lowest cost source of capital against that is going to be a creative, and so having a bigger deposit franchise and having more of the assets on our balance sheet being able to be funded by bank deposits as opposed to wholesale funding that we can go and raise in
the capital markets is going to be more efficient. So I think it's been a great benefit to us.
And then and then so with that, I guess over the years, right since, since you do have a bigger deposit base, now, do you think that, you know, compared to the historical Goldment that had fewer deposits, maybe maybe dead issuance for Goldman going forward that could be kind of at a lower run rate versus before or.
I don't know if I have a specific point of view on that, because it's really going to depend on the growth in the business and the parts of the business that grow relative to others. There's obviously portions of our business that as they grow, if they can be funded by deposits, then great. If they can't be funded by deposits, then that will take more of a lean
on wholesale funding markets overall. But I'm hard pushed to give you a strong perspective as to whether or not I think that the growth over the next five years is going to be more dominated by deposit funding friendly assets versus wholesale funding required assets.
I tried.
Yeah, we've mentioned the election a couple of times. It's on everyone's mind. Obviously, it could be very volatile election. It's very close. You know. We talked a little bit earlier about how, you know, spreads stay narrow, they bump around, and then suddenly something will affect them. They jump a lot. How concerned are you at this point that the election will cause some volatility event that might close down the primary markets.
I rarely worry, and I'll use some Donald Rumsfield analogies here. I really worry about no unknowns, the non unknowns. By definition, there has to be some quantum of that no, no nun that's in the press. And that's why kind of
I mentioned earlier. The event that will cause spreads to move wider from here will be something that we won't be able to guess, because when we look around the world and survey all the risks that are out there, as we talk about them and we talk about elections, we talk about the Middle East, we talk about Russia, Ukraine, we talk about French government, we talk about any things
that are out there that are topical. By definition, they're known, but they're unknown, and therefore there's some quantum that's in the press. I don't think an election in the US has the capacity to create a cessation of activity in capital markets. Now, obviously there's three scenarios. There's a clear winner that's blue, a clear winner that's red, or there's
something in the middle that then becomes contested. And the amount of time that we have a contested election outcome does have the capacity I think to slow down liquidity. Formation think just means that there's lower volumes of activity. I don't think it necessarily means that there is a material weakening in valuations, a material widening in credit spreads.
I don't think there's going to be much in the way of issuance that takes place in that period, because the market will be looking for clarity, and that generally kind of will create a cessation of activity that may last kind of a few days, maybe a couple of weeks, But I don't think that it's going to be shutting
down capital markets overall. Might just kind of keep create a little bit of a temporary slow down, and by definition, again a lot of the issuance that we're seeing is because nobody is expecting to have to go to market in that narrow window between election day and Thanksgiving. And so if we do have a contestant election and we do have illiquidity, we will have issuers sitting there saying, largest wait, and.
That doesn't really matter becau they've done so much already, they're prepared for this, They're ready to go.
I believe that is indeed the case.
And by the way, it would not surprise me at all even if we do get to a scenario where it is contested, and even where we are concerned that we don't know which way the outcome is going to go.
It wouldn't surprise me if there's some deals that come and price and they do just fine because the demand, because I think people will.
Just say, Okay, I get it, like, we don't know exactly where things are going to go, but at the same time, I will put a price on risk in the capital markets. I'm not really worried about it, because it was certainly going to figure it out in the next kind of a couple of weeks or so which way the country is heading. And so there'll be people that will put price on risk in that period.
Right, Okay. One of my favorite questions to ask underwriters is about league tables, and underwriters often tell me they don't care about league tables. But then you know, you to the guy at the top of the bank and they say, actually, we need to be number you know, one, two or three to be relevant in these markets. I'm just wondering. You know your view of this. Obviously your substantial participant in all markets, but where do you have to be? And you know how important is a ranking to you?
So when we put out in our first investeday, pre COVID, we actually issued KPIs for a bunch of our league table businesses, including my business, and we have a KPI that we look at a combination of dollar in euro underwriting and we exclude obviously self led financings because that's not relevant and we want to be number four in
that business. It's a business where we know that the big three commercial banks in the US are going to have bigger balance sheets and bigger lending extension than we are, and given the size of our relative relationship lending books, we're not trying to get into the top three. Obviously, it would love it to happen. But realistically, that's a bridge too far absent us materially changing the way that
we think about relationship lending. And so we target that spot behind at number four, just behind the big three commercial banks, and that's the KPI that we set ourselves at Invested Day. And yeah, if people tell you that they're not really focused on league tables, then I'm certainly not part of that cohort because I know if I'm ever not in that position where we want it to be, I'm going to hear it from my bosses.
But do you care more about the volume league table, the revenue league table? The wallets share?
I care about both?
Okay, so number four in both.
I care about both, okay.
Yeah, And to Johnny's credit, right, like I did try to look and see sales doing and I think you guys are executing on that, right, Yes we are. And then I think I think, you know, financing is kind of one of the one of the initiatives that right Solomon had really talked about it, maybe even have to become CEO and stuff like that. So you know, good, congrats, I'm doing that, But big question.
I won't take congrats until we finished the end of the year, but thank you.
All right, big question from the audience, right, I sent out to my distribution list, any any questions for for Johnny and you know, if you have any, and then if we can get a studio drum roll, It was all right, how do I get in on the bonds and burgers? You know deal?
The bonds and burgers deal? You know kind of you got to set it up, you guys, like know I love to cook. If you ever kind of want to do a show where I'm kind of showing you how to make a good homemade burger and at the same time, I'm talking about rates developments and kind of where I think the corporate bond market is going to go.
I'm all in.
I mean, there'll be an audience of maybe kind of ten or fifteen people that I think that will be fascinated by that. But if you want to make it, I'm down.
Got I got it sounds good And then uh, just James. Actually, so I'm in the studio here with you know, athlete, athlete, I guess chef and then also a running right right, je You're doing the marathon for the first time.
So wow, but it's not as impressive as Johnny's powerlifting, So we need to get back to that.
I don't know, that's impressive.
Anybody who can anyone who can do something that boring for that long, I will tell you it is really impressive. I don't I don't have the I don't have the mental capacity to do something quite as enduring as that.
I listened to podcasts on the way. But getting back to the things, you know, you mentioned known unknowns and this don Donald rum Feldian way of responding, Are there any known knowns you are particularly worried about? You know what keeps you up at night worrying about?
You know?
The state of credit markets, which we have discussed are very very tight, and we're heading into some potentially very volatile events, anything that concerns you.
So my concern, it was a concern I kind of had May June time, kind of went away July August when it looked like the economic activity was certainly softening. Albeit I think that was somewhat of a forced flag.
That concern, which I have now probably more intently, is that this may be a far from traditional rate cutting cycle, rate cutting cycles that get us back to kind of a neutral rate, which some people might say, is three to three in a quarter right now, at which point then we reassess economic activity and move forward from there.
I think this may be a far from traditional cutting cycle.
We may get another one or two cuts for the remainder of this year, we may get one or two cuts in the first half of next year.
But I think that the.
Thing I'm really kind of focused on and concerned about is that if inflation stops moving towards target, as we've taken our foot off the gas, sorry, as we're putting our foot on the gas a little bit from a monetary policy perspective, then I'm going to put the brakes back on pretty quickly. And then all of a sudden, the market's thinking that three and a quarter three and
a half is where the FED stop. They might repress that to four to four and a quarter percent, and then all of a sudden, that's going to take tenure yields out to five percent. And then that's before we even start thinking about term premium, which has been largely absent this year because the market's been much less focused on treasury financing requirement. There's been much less, much less focused on auctions and.
Tails, etc. Because it has been a big deal.
As we wind things forward into next year, I think both of those things could intersect and the yield curve could look quite different. So there's anything that I'm worried about, it's that.
Could any of that affect credit fundamentals in IG I mean the assumption noise is that this is a solid market. Earning is the good. The economy's strung, and then you know, if you push people very hard, they'll say, well, actually there's a FED backstop as well, so you'll be fine whatever happens. Do you think there's any worry that that
you know there could be downgrades? There could be I mean we're talking about a big potential fallen angel in Boeing right now, But are there any kind of things on the horizon that could push credit quality down in an investment grade?
I mean that scenario.
I mean, if it's copper with a weak thing of economic activity, then yeah. I mean if earnings are coming down in that scenario, then that's the negative outcome for the US. I describe all of that are low probability. I think that's kind of like a ten to fifteen percent type probability. Beyond that, the longer that rates remain more elevated, the more relevant the interest expense becomes on
the cash flow statement. Obviously, rates have been elevated for several years, there's been an assumption that that's been temporary, or there's been an assumption that the levels that we've migrated to on average over the course of the last six months might be the ones that are around for a longer period of time. If that resets another hundred basis points higher, then that's going to start to impact some financing costs, refinancing costs, interest expense, and so on.
It will take some time for that to bleed through. Similarly, by the way, on the consumer balance sheet as well as mortgages get refinanced at higher yields. But those are things that I think about.
Great stuff, Johnny Fine, Global head of investment grade Debt at Goldman Sachs. Thank you very much for coming on the credit edge.
It's been a pleasure. Thank you for having me.
And to Nold Cocuda with Bloomberg Intelligence, thank you so much for joining us today. Had a great time freed More Analysis. Read all of Ronold's great work on the Bloomberg terminal. Bloomberg Intelligence is part of the Research Department, with five hundred analysts and strategists working across all markets. Coverage includes over two thousand equities and credits and outlooks on more than ninety industries, one hundred market industries, currencies
and commodities. Please do subscribe to the Credit Edge wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including b Podgo on the Bloomberg terminal. Give us a review, tell your friends, or email me directly at Jcrombie eight at Bloomberg dot net. I'm James Cromby. It's been a pleasure having you join us again next week on the Credit Edge