The Credit Edge by Bloomberg Intelligence

A borrowing boom among technology companies and governments is upending debt indexes, raising questions about their relevance to investors. “We’re actually starting to think about whether managing versus a benchmark makes a whole heap of sense,” Ross Pamphilon, Impax Asset Management’s fixed income chief investment officer, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. “You’re going to end up owning a lot of US Treasuries if you’re in the aggregate index and a lot of tech if you’re in the US investment-grade index,” says Pamphilon, who estimates that about 12% of the high-grade market is now AI or AI related. They also discuss climate risk, opportunities in mortgage-backed debt plus the timing and severity of the next credit cycle.

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Mom-and-pop investors are buying hyperscaler debt after a selloff that has hit bonds with long maturities particularly hard, according to R. Seelaus & Co. “You’re just seeing absolute yields in long Meta paper, or a household name, that retail is starting to find really attractive,” Annie Seelaus, chief executive officer of the broker dealer and asset manager, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Arnold Kakuda in the latest episode of the Credit Edge podcast. “That’s a microcosm of a bigger pocket of demand that’s out there,” says Seelaus, who notes that investors are moving into bonds as stocks become vulnerable to a correction. They also discuss secondary-market liquidity, contagion risks, the asset-backed security boom, private credit turmoil and how to invest in data centers.

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TCW’s $160 billion fixed-income group has slashed credit risk to the lowest in three decades amid valuation and contagion concerns. “Look back over the last 30 years — you would not find a period where we had less exposure to both investment-grade and high-yield bonds as we do today,”Bryan Whalen, the group’s chief investment officer, tells Bloomberg News’James Crombie and Bloomberg Intelligence’sJody Lurie in the latest episode of the Credit Edge podcast. They also discuss the potential for distress in debt rated CCC to spread to other parts of the corporate debt market. “That is the weakest borrower, and they cry uncle first,” says Whalen, referring to CCCs. “Make no mistake about it — your single B borrower is going to feel it next, and then your double B borrowers.”

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Blackstone is looking to more than double its $40 billion systematic credit business, which uses models to crunch data and build portfolios. “This can and should be a $100 billion business if you look at us compared to other large traditional discretionary fixed-income managers,” Adam Dwinells, Blackstone Credit & Insurance’s head of corporate bond strategies, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Jean-Yves Coupin in this episode of the Credit Edge podcast. He expects systematically managed portfolios to rise to 20%-25% of the market, matching equities, from about 1%-2% in US corporate credit now. “You could certainly see something on that order of magnitude in credit eventually. Maybe not over the next couple of years, but over the next decade,” he adds.

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More private investors in distressed companies are looking to replace directors and take control, according to Kirkland & Ellis. “It’s a very important remedy — it candidly drives a lot of negotiation when things are distressed,” H.T. Flanagan, a debt finance partner at the law firm, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s David Havens in the latest Credit Edge podcast. “I have seen folks explore this with greater frequency and execute it with greater frequency,” says Flanagan, who advises private debt funds and alternative lenders. They also discuss the outlook for liability management exercises, hybrid capital solutions and opportunities in defense, aerospace and financial services.

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Magnetar Capital is scouring a $600 billion pile of troubled corporate bonds and loans for value as much of the debt comes due. “Yesterday’s buyout boom is today’s credit opportunity,” Austin Camporin, head of special situations at the $17 billion alternative asset manager, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Negisa Balluku in the latest Credit Edge podcast. “It’s those small firms that incurred debt in the zero interest rate environment, primarily in the broadly syndicated loan market, that are obviously having a harder time,” Camporin says. They also discuss private credit risk and investment opportunities in software, healthcare services, building materials and packaging.

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Lumen Technologies is reducing leverage and reinventing itself as an AI play after completing one of the biggest-ever out-of-court debt restructurings. “We had to keep as many winners as possible if we were going to be able to pull this off,” Chris Stansbury, the company’s president and chief financial officer, tells Bloomberg News’ James Crombie and Reshmi Basu and Bloomberg Intelligence’s Phil Brendel in the latest Credit Edge podcast. “It was a moonshot and it worked,” Stansbury adds. They also discuss capital-expenditure plans, a copper-scrap opportunity worth “hundreds of millions of dollars,” and Lumen’s exposure to the AI backlash.

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High global government yields are a growing threat to corporate debt markets, according to London-based hedge fund Andromeda Capital Management. “You either have to let long-term yields go up — and with that you can cause a credit crunch, especially with all the AI borrowing that’s happened — or you let the currency depreciate,” Alberto Gallo, the firm’s chief investment officer and co-founder, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Stephane Kovatchev in the latest Credit Edge podcast. “We might have already hit some icebergs with government bond yields going so high,” says Gallo, who compares the situation to the Titanic disaster. They also discuss winners and losers from the artificial intelligence boom, private credit contagion and why Japanese inflation matters.

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Columbia Threadneedle is looking to outperform by buying into the flood of debt from companies building artificial intelligence infrastructure. “It’s really the best place to try to find some volatility and some alpha opportunities here, as long as you can remain nimble,” Tom Murphy, the $715 billion manager’s head of investment-grade credit, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s David Havens in the latest Credit Edge podcast. “If we start to see all of this investment turn into cash flow, it could really be tremendous,” he says. They also discuss fundamental and technical credit market indicators, the September issuance rush and relative value in financial sector bonds.

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Massive borrowing by artificial intelligence companies — some of it to fund their own customers — risks inflating a technology-sector bubble, according to Seaport Research Partners. “Things are going to get crazier,” Jay Goldberg, the firm’s senior analyst for semiconductors and electronics, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Robert Schiffman in the latest Credit Edge podcast. “All this debt is coming on stream, it’s going to amp up things even further — this feels to me like 2007,” Goldberg says. “There are certainly corners of the industry that are prone to blow ups.” They also discuss AI vigilantes, concentration risk and growing anxiety about circular financing.

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BMO Asset Management, which oversees almost C$300 billion ($218 billion), has cut its junk-bond holdings and moved into safer parts of credit as geopolitical and macroeconomic pressures mount. “We love the movie — we’re still there — but we’re just getting a seat closer to the exit,” Earl Davis, the firm’s head of fixed income and money markets, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Spencer Cutter in the latest Credit Edge podcast. “You’re not getting paid to hold as much risk here,” he says. They also discuss why the financial and energy sectors look attractive, how to play hyperscaler bond issuance and opportunities in Canada’s nascent high-yield market, including debt from commodity and defense companies.

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Companies need to move fast to refinance leveraged-buyout debt coming due over the next few years, according to ICG. “Folks should start getting ahead of it because the traffic jam may be more the issue than anything,” David Saitowitz, the $126 billion global alternative asset manager’s head of US liquid credit, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Mike Holland in the latest Credit Edge podcast. “That could be the kind of risk event that may push the market wider for a period of time,” he says, referring to credit spreads. They also discuss the AI funding bubble, collateralized loan obligation performance and fallen-angel risk.

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Investors are increasingly wary of lenders who dish out so-called bad PIK, or payment-in-kind interest, to help struggling portfolio companies avoid default, according to Anant Kumar, global investment strategist at Benefit Street Partners, the private credit arm of $1.7 trillion asset manager Franklin Templeton. “If you’re a manager who wants to mask stress in the portfolio by doing that, you can probably fool some of the people some of the time,” he tells Bloomberg News’ Sinead Cruise and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. “I do think investors will catch on if you see a widespread use of PIK in the portfolio without any resolution.” Those managers will likely undershoot expectations when their next fundraising rolls around, Kumar says. The trio also discuss the resilience of private credit illiquidity premia, the specter of inflation and how an industry transparency push is forcing firms to address dubious marks faster than ever before.

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Data-center debt returns are falling, risk is rising and there’s uncertainty over what the properties may be worth in the long run, Wellington Management says. “We think a lot about that replacement value when evaluating data centers,” Sonali Wilson, the $1.3 trillion manager’s lead investment director for private credit, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s David Havens in the latest Credit Edge podcast. “Today, I’ll say — not every situation — but, by and large, it’s a pass,” she says. They also discuss commercial real estate investment strategies, how to position for AI disruption and why Wellington is building out a private-debt platform now.

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Collateralized loan obligations face a second straight year of equity losses, according to Eagle Point Credit Management, a major buyer. “Where we stand right now, it’s certainly possible,” Tom Majewski, the $14 billion private-credit manager’s founder and managing partner, says in this episode of the Credit Edge podcast, when asked about the chance of negative returns. “While there were some credit problems, oddly the bigger issue was the bull market and repricing of loans,” Majewski tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Reto Bachmann. They also discuss software-loan stress, business-development-company turmoil, lower returns in significant risk transfers and how Eagle Point is diversifying into hard assets like midmarket infrastructure lending.

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Sona Asset Management is looking to expand its business in asset-based finance and significant risk transfers as public and private debt markets converge. “The thing that excites us the most is the scope for growth in ABF markets here in Europe,” Henrik Johnsson, the London-based hedge fund’s chief executive officer, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Aidan Cheslin in the latest Credit Edge podcast. “We really like SRTs, although spreads have obviously come in a lot over the last couple of years,” Johnsson adds. They also discuss how to short corporate debt, software-loan distress, secondary sales of private credit assets and investing in the AI boom.

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SpaceX bondholders are bolstered by a fat equity cushion, high-grade ratings and a relatively small amount of debt outstanding — but they depend on founder Elon Musk, according to Bloomberg Intelligence. “There’s a huge risk there, and the rating agencies have actually pointed this out in terms of governance,” Robert Schiffman, BI senior technology credit analyst, tells Bloomberg News’ James Crombie in this special episode of the Credit Edge podcast. “You’re absolutely on an Elon Musk trip — his vision and his ability to raise money is a large portion of this company right now,” adds George Ferguson, BI senior equity analyst for aerospace, defense and airlines. The trio also discuss poor secondary performance in SpaceX bonds, relative value compared with the equity, and credit-market risks if AI flops.

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Further acceleration in AI debt issuance has the potential to steer demand away from government bonds, according to Amundi, Europe’s largest asset manager. “At some point it could have a crowding effect, but we are not there yet,” Gregoire Pesques, the firm’s chief investment officer for global fixed income, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. “It’s a risk that we monitor,” says Pesques, whose company has $2.7 trillion under management. They also discuss value in corporate debt relative to government bonds, how G7 countries are behaving more like emerging markets and Amundi’s concerns about central bank independence.

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Private credit disarray spells opportunity for housing giant Pretium, which targets high returns by lending to US homebuilders. “Our private credit looks a little bit different than other private credit in the sense that we are secured, we have real good downside protection,” Jon Pruzan, the company’s co-president, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Erica Adelberg in this episode of the Credit Edge podcast. “We have a lot of people who want capital and not a lot of people providing capital — that puts us in an opportunity to continue to generate attractive returns,” says Pruzan, who was previously chief financial officer at Morgan Stanley. They also discuss housing fundamentals, opportunity by region, how Pretium achieves midteens returns and political risks going into the November US midterm elections.

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Private lenders are going back to basics as debt trouble spreads, market participants tell Bloomberg News’ James Crombie in this special episode of the Credit Edge podcast. “Boring is beautiful, boring is better right now,” says Christina Lee, managing director at Oaktree Capital Management. The podcast also explores AI debt risks, software distress, how tight bond spreads can go and the state of US consumers with the following guests: Matt Brill, head of North America investment-grade credit at Invesco; Anish Shah, global head of debt capital markets at Morgan Stanley; Lotfi Karoui, multi-asset credit strategist at Pimco; Jody Lurie, Bloomberg Intelligence senior credit analyst; Na Wei, global head of leveraged finance at Barclays; Sheel Patel, head of Mayer Brown’s private credit practice in New York; Shalini Sriram, Third Point’s head of structured credit; and Scott Goodwin, co-founder of Diameter Capital Partners. Interviews were recorded June 3 at Bloomberg’s Global Credit Forum in New York.

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