9fin: You joined Bain Capital Credit back in 2008. What changes have you seen in the market since then?

Reymondier: Retrospectively, joining at that time was a strange choice because it was at the start of the GFC and the market had steadily declined for 14-weeks straight when I joined, but since then, the market has evolved in multiple directions. What we do on a day-to-day basis, and the strategies that we invest through have largely been unchanged, but the environment around us and the way we are executing internally has changed quite a bit. For one thing, we've seen more competition emerging. When the office was set up in 2005, there were a few large asset managers investing in loans and bonds in Europe, but now there’s probably close to 60 CLO managers. This has changed the way we manage teams, the way we recruit and the way we’re benchmarked against the competition.

An element of that, which I think is a more recent phenomenon, is consolidation in the market. We have previously seen pseudo-managers acquire other pseudo-managers, but now we see the T Rowe Price’s of the world buying up Oak Hill and the like, and you get global managers being touted as in search of CLO platforms to acquire; Asset managers with trillions of dollars in AUM are now in this space, and it’s a different type of competition than a small firm that’s thinking about opening an office in Europe and planning to build a 4-5 CLO platform.

Another change is a specialisation of teams, driven by the emergence of direct lending. When I joined, the team was working on pretty much everything they could be. I could do a syndication on the one side or sneak up on the bond side. I could do a stressed and distressed trade.

Now you have a diversity of different strategies, so we have moved from, being largely industry specialists at the research team level and product generalists, to be product specialists, but still extremely specialised in industries.

And then finally, the porosity between HY and leveraged loans has been a key trend. Historically you were managing bonds or you were managing loans, and when managing loans, you were spending a lot of time in documentation and covenants, while if you were managing HY, you were much more technical in the market, looking at rates all the time and constantly doing trades. Today, they have two different names, but largely the same specifications, and the key differentiation has gone from HY versus leveraged loans to fixed versus floating. There are slight differences in non-call for example, but you have the coexistence of loans and bonds more and more often at the same seniority in the same capital structure.

9fin: How do the primary pauses caused by the Covid-19 outbreak and the Russia-Ukraine conflict differ?

They’re completely different, mainly in the enormity of Covid-19. At a point in time with Covid, there were no bids. You were trying to sell a perfectly fine company and people were offering [to pay] 80-85 cents for it, whereas here, the loans market only dropped by two points, and while HY dropped maybe 4-5 points, that was mainly because of rates, not the conflict. So as much as the Ukrainian tragedy is a humanitarian disaster, what is currently on investors’ minds is the indirect consequences: higher commodity prices and the impact it has on inflation in general and on the supply chain. De facto, you can price that in by running models. You can get an idea of what your cash flows will be in a series of consequences, imperfectly, like everything we do, but you can take a view.

There was no way to model what happened during Covid. The planet basically stopped. We had no idea where the portfolio companies were going. A company that you thought was super well-positioned could have been doing way worse than any other under those circumstances.

9fin: What do the next few weeks of the Russia-Ukraine conflict hold for the market?

This crisis has consequences from some defined parts of the market. Inflation has a series of consequences that can be extremely uncomfortable if it stays at that high level for a series of credits already issued, but with the new credits that are coming to market, you can decide what impact it has and decide if you want to get involved accordingly.

Also, inflation will not affect the US in exactly the same way as in Europe, because they don't have the same gas problem that part of Europe has with Russia. So if you ask managers in the US, they think there might be a recession in Europe, but they may be more comfortable with the US on that front. Indeed, throughout the crisis, the volume of deals has probably come down a bit in the US, but there’s still been a syndication almost daily there, since the conflict began.

I've never seen this situation, where we have a functioning market in the US and a non-functioning market in Europe in coexistence, for an extended period of time. So if the region stabilises and we can see commodities reaching a certain level of stability (because I don’t think you need prices to drop dramatically, they just need to stop increasing) then we have a good shot at a reopening market. There are €25bn of loans waiting to be syndicated. So it’s not like during Covid-19 when you had six months of complete quiet on the M&A side. Now, from the moment the market sentiment gets better, it will reopen. I'm not going to call that the market has reopened now, but it's certainly not completely dead.

In addition, this is a very momentum-driven market. If we have one syndication and it’s oversubscribed, then there are plenty of syndications that will certainly follow.

9fin: How has the Russia-Ukraine conflict affected the way you look at ESG risk?

It hasn’t affected our view of country risk. There are very few credits that are Eastern Europe-based anyway, and Russia has always been considered a bit like an emerging market, even though it’s not. We’ve never played deals in Russia, or invested in companies with a big chunk of their assets in Russia. The country has had so many crises, with currency instability and the way the government operates being difficult to predict. You don't get rewarded for investing there in the leveraged loan market.

If anything, the conflict has forced people to rethink their policy on some specific sectors. For me, the two sectors I think are going to be interesting to discuss with some investors are nuclear energy and the defence sector.

We at Bain Capital have our own ESG principles as to how we want to invest, but when you manage CLOs you are also listening to what other equity and liability providers want. When I have a client with no ESG definition, I’ll use mine, but if a client doesn't want me to invest in a sector, then the moment I accept a contract, I’m also applying these restrictions.

We’ve previously spoken to investors about nuclear as some did not want any link to such energy. Now that more countries talk about relaunching their program in this field, it’s going to be an interesting discussion. So as a massive pension fund manager, for example, managing billions of euros, there’s going to be a question: Do you prefer Russian gas or European nuclear in the next few years? It’s not a clear cut question, but before there was no discussion at all for some counterparties. Now I think we will talk about it.

And it is the same for defence, As governments are starting to invest in defence for a reason that becomes suddenly more obvious in Europe, it might generate more deals and become an authorised investment again.

9fin: You mentioned increasing competition in the CLO market, and this growth has occurred against a backdrop of increasing difficulty of gaining access to deals. What are the mechanics of gaining early-bird access to deals?

Every single part of the value chain has been consolidating, or has increased in size, for the biggest players. Some PE firms are now raising funds in the teens of billions and will naturally gravitate towards their biggest lenders. Depending on the process, you’ll have 10 to 20 managers involved, and those will usually be the biggest managers, otherwise a manager will have difficulties getting a seat at the table. When you can only take €20m in Europe, then you're not going to be a significant player. Don't get me wrong, there are extremely talented investors at the smaller firms, but the sponsors and banks need to know that those early-bird tickets can be in the €30-40m+ range and they need to know at which level they are going to come into the book.

The market is growing and you need to grow in line with it. Early-bird access is not something that you get for being amazingly nice or amazingly sharp; your size justifies it more than anything else.

My job is to make sure that we are at this table, and that we stay at this table, and to do so, we need to find more clients or launch more CLOs.

9fin: What about achieving your desired allocation?

Allocations are a different game. It depends partly on how helpful you have been in the early-bird process. If you have put a big ticket in that’s almost firm, then you have helped the syndication to move along smoothly and you hope the sell side will take care of you. Now, the people who have control of allocations in this market are the issuers, with the help of their board, basically directed by the sponsor. As such, existing relationships with management and sponsor teams are important as a track record on other deals. But it’s important to remember that everybody in this business is acting in the best interest of their LPs, so relationship management isn’t going to help anyone to get a better margin on a deal or a juicier OID. Allocations are kind of an open game. At some point, the banks need to feed everybody and encourage new players to develop as well.

9fin: Where do you stand on the incursion of private debt into the syndicated loan market?

After the global financial crisis, banks retreated from the leveraged loans space, because they needed to readjust their return on equity, which gave an amazing marketing tool to the direct lender. They were essentially replacing the banks that weren’t financing anymore. So I think they have a completely legitimate reason to exist. They’re providing a service that a certain category of issuer really likes. In some complex auction processes, when you want certainty of financing or you’re investing in a company that is growing fast and may not be generating a lot of cash, then the direct lender could be able, through their angle, the market analysis they do or the relationships they have, to provide the financing very quickly. That has value, but I would argue that they’re not pricing the illiquidity of the loan, they’re pricing the complexity of the situation, or even more so, the complexity of the process.

If you look at it another way, the direct lenders are taking the fees that the banks would have taken for structuring and syndicating. If you look at the spreads, on a comparative basis, when you adjust for the fact that the direct lenders take on a bit more leverage than we do in the syndicated world, they probably wouldn’t achieve significantly different spreads. However, they’re getting the fees that banks would usually take, which brings the transaction to a yield that is noticeably different from the syndicated world.

There are of course pros and cons. We have €7bn assets in the liquid world just in Europe and we can churn that, but you live with your direct lending portfolio much more.

On the other hand direct lending can offer a certain amount of stability in marks. When you have a crisis moment (such as Ukraine), syndicated loans or HY prices drop overnight. Direct lending portfolio marks usually do not respond immediately. Such stability attracts some investors and can help to lever the portfolios with some banks, so it is a very good product. I’m not in the camp of saying these guys are stealing my market.

9fin: Have you seen many deals during this primary pause fall into the direct lending space?

There are very few occasions where a deal should have been syndicated and it wasn’t. But I think at the moment, when the market completely stopped for a really extended period of time, then a lot of people in the financing community would have gone to direct lending. If banks don’t want to finance a deal, you’ll find direct lenders to do it.

I think we heard about a lot of direct lenders trying to approach the banks to see if they wanted to syndicate part of their books, because they could take it on immediately; however, I haven’t seen much of that trading yet and with the market looking like it’s going to open up, I don’t think it will happen.

Over the last few weeks, I have talked with several sponsors that have said that if investors in the syndicated world couldn’t provide the certainty of investment, they would use direct lenders. Their thinking is, yes, it will cost a bit more, but once you take into account the fact that they would have to pay fees to the banks etc. it could make sense.

9fin: In your spare time you have been learning about wine. What is your favourite brand?

Hermitage Rouge. It’s complex, distinctive and ages well, but is still easy to appreciate and enjoyable to drink with friends.