Themes in Credit and a Feeling of Deja Vu

As my second session of the day ended at the Milken Global Conference, I was struck by both the great insights that I’d heard and by a certain feeling of deja vu. This panel discussion, led by Michael Milken himself, was titled “Credit Markets: What’s Next.” With panelists from some of the leading credit investors and ratings agencies, it was an extremely insightful hour. That said, when the session was over, I couldn’t help feeling like I’d heard some of this before.

The panel quickly came to the opinion that credit markets had changed. Steve Tananbaum, from GoldenTree Asset Management, said that in the past “you just had to show up at the party” to be successful in credit investing. But now, he maintained, “you have to go to the right party.” His point is that selecting the right fixed income sectors and selecting the right securities within those sectors was going to be increasingly important. That’s when the feeling of deja vu came on. I quickly checked my laptop to look back at some work that Mark Cernicky (senior product specialist for Principal Global Fixed Income) had done early in 2014. In a blog post and subsequent media appearances, Mark made his case for themes that would dominate credit markets in 2014. His second theme was “Security selection will matter as idiosyncratic risk increases.” I think what Mark was seeing at the beginning of the year, and what the Milken panel was bringing up now, was that there was an inflection point in markets that would begin to favor active management in fixed income.

Later in the conversation, the panel discussed credit creation in Europe. One panelist, Mark Attanasio from Crescent Capital Group, felt that Europe had a lot of opportunity right now. Corporations in Europe have historically relied on the banking system and loans for capital, and that paradigm has been placed in jeopardy by the troubles felt throughout the European banking system. As they try skinny their balance sheets, European banks’ appetite for new loans has decreased measurably. This leads to opportunities for investors to step in and provide that capital.

Again…deja vu. Mark Cernicky’s blog from January also referred to Europe as the “land of opportunity…for credit.” Mark’s comments focused particular attention on high yield issuers, who have historically been underserved by banks. The big point on this topic was probably that investors now have the opportunity to benefit by providing capital to European corporations, but also help strengthen the system by helping those corporations decrease their reliance for capital from just this handful of financial institutions.



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