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William Hoffman

9Questions is our Q&A series featuring key decision-makers in leveraged finance — get in touch if you know who we should be talking to!

In his nearly 20 years at KeyBank, where he heads up investment grade and leveraged finance, Eric Peiffer has navigated his capital markets team through several periods of volatility.

We caught up with him at his home base in Cleveland, Ohio, to discuss the chances of a US recession, and how to look after clients during these volatile times.

1. Everyone is wondering if a recession is just around the corner. Where do you stand on that debate?

Everybody in this business has an opinion, and I'm no Jamie Dimon, so don't take my opinion as gospel by any means. But I don't think we're going to find ourselves in a recession.

We’ll get out ahead of inflation. And as soon as we have a CPI print that beats expectations — in other words, a lower inflation rate than what is expected — we're going to see a hard rally in the market. And I think we're going to see things begin to improve.

I certainly come out on the more optimistic side, but there are a number of dichotomies in the market. You have rampant inflation, but at the same time, consumer spending seems to be strong. You also have near-record low consumer confidence levels, and that's happening in the midst of essentially near-record low unemployment. And then you have corporate earnings that might not have been great, but they’ve been good, they've been decent.

And you kind of pair that with the fact that the markets have been selling off so hard this year. Some of that's just a revaluation that's been needed. But nonetheless, for every strong argument that's in favor of saying a recession is on the horizon, I feel like there are couple of other arguments — particularly our unemployment level and the level of consumer spending — that say a recession is not on its way.

It just seems hard for me to conclude that we are going to have a full-blown recession. And I think if we do have one, it's going to be mild.

2. How far do you predict high yield spreads could widen in this environment?

I wouldn't say spreads have topped out necessarily, but I don't think they could go much higher.

The reason I say that, is I think a lot of the bad news is priced in, unlike during other prior backups or recessions in the high yield market. There are some positives right now that didn't occur in the context of those other environments, like consumer spending and low unemployment, as I just mentioned.

Importantly, every time high yield has passed around 9% on the high yield index, you've seen investors come back into the market and buy more of the names that they like. The yields are just too compelling.

Overall, the fundamentals of these issuers are strong. They might not be as strong as they were a year ago, and there are concerns about whether inflation can be passed through, and if consumer demand is going to dissipate at some point here.

But overall — and we've seen it this week — when high yield spreads are up past 9% and you get even just a little bit of good news, you have quite a few investors come back in and start buying more of the stuff they like. And it has the effect of bringing yields inside of 9% again.

3. We recently wrote how the Fed’s hiking policy will impact companies with floating-rate debt. Do companies have the cash flow to survive a 350bp-400bp increase in interest costs?

The answer is yes. Overall, companies — from a fundamental perspective — have better credit metrics now than they did during past recessions.

For the overall high yield index, top-line and EBITDA are at least where they were before the pandemic, or better than where they were in 2019. While we may predict those credit metrics will trail off, or the fundamentals to deteriorate a bit, many of the issuers are in at least as good a position as they were in 2019.

Interest expense has moved up for floating rate borrowers. SOFR has moved up above 3% and into the mid to high threes. That's going to impact borrowing costs, but I think it's also important to compare borrowing rates today to interest rates over the past 50 years or so. If you look at the average 10-year Treasury rate over the last 55 years, it is just under 6%. So, while we've seen a very rapid move upwards in that 10-year rate, we're currently at only half the historical average.

What we have now, relative to what we didn't have then, is a global set of coordinated central banks that are willing to engage in significant monetary stimulus. That's going to have the effect of keeping a cap on rates.

I personally don't foresee a circumstance where the 10-year Treasury gets well above 4.25%. It's just to say that interest rates — while they moved borrowing costs up — are not as significant as they've been in past recessions.

4. Lots of companies refinanced last year or earlier this year. But how would you advise clients that still have upcoming refinancing needs?

Yeah, I think there's really two sets of issuers in the current market. One are companies that have to go. And some of those would be part of the $55bn or so of leveraged loan and high yield paper that just needs to clear the market.

Clearly, terms and rates on those have to conform to what investors are willing to buy, but there are creative things being done to get that paper through the market on terms that are as issuer-friendly as possible. But still, there is a big supply and demand imbalance at the moment, between the amount of committed financing that needs to clear the market, and the amount of investor interest.

For those issuers that don't have to approach the market, you don't have to refinance. Right now the answer clearly is to stay on the sidelines at the moment and let this play out. In other words, let the huge book of underwritten LBO paper clear the market before you jump in.

5. Some of the LBO deals from earlier this year looked quite painful at the time, but in hindsight look attractive at today’s levels. Did you take any lessons from those trades?

I think the lesson is, when there is an open window in the market jump through it. For some of those deals that we were involved in, McAfee and Athenahealth, they were fortunate enough to get into the market prior to mid-February when the acceleration upward in rates really began to commence.

A number of issues done at the beginning of the year, and really 60% of bonds in the high yield market, are trading below a price of 90 cents on the dollar. And to a large degree, that's not reflective of the credit quality of most of these names — it's just reflective of the fact that rates have moved upward so rapidly, and in such a short period of time, that the math results in a 90 cent dollar price, or even lower.

6. You mentioned creative things being done to get paper through the market. Does that include PIK debt or preferred equity?

Those strategies work, as well as issuing a term loan A tranche if there are some banks that can or would like to hold term loan paper.

Certainly, we’re approaching direct lenders rather than the traditional high yield or broadly syndicated term loan B market. Some of the direct lenders are interested in large pieces of the transaction. It comes on their own terms, but sometimes terms that are more predictable than they would be if you were in the leveraged loan or high yield market for days at a time, trying to price the deal during periods of volatility.

7. You’ve been at Key Bank for nearly 20 years now. How have you managed to navigate other periods of volatility and how does it apply to the current market environment?

I'd say generally that the bank has been pretty nimble in recent years, not overextending ourselves when we expect a downturn or a period of volatility in the markets. And that has played out in the current environment.

We do a very good job of staying close to our clients in this type of environment. Because there is no shortage of opinions. And one may think that clients are getting more advice than they can handle, but what we've tended to find is that clients are as hungry as they've ever been to talk with their bankers and to get input and advice. Because these are tricky times to navigate.

Even basic questions like: “I need to refinance debt in the near term but I don't need to do it now. Should I do it now? Or should I wait?” That's a question on the minds of many CFOs and treasurers. And so we've endeavored to be in pretty close communication with a lot of our clients around that topic in particular, but certainly, most clients just like to hear thoughts on the macroeconomy and gather information, advice and input.

8. What hurdles do you have to work through being based out of Ohio versus a financial capital like New York? And what advantages does it bring?

I think there are advantages from the standpoint of hiring very good employees. It makes us a destination workplace in the industry, because of the opportunity to work at the headquarters in Cleveland.

Certainly, that’s an advantage. As people rethink being in the big cities, Cleveland has been a fantastic option. That being said, we also have pretty significant offices in New York, Chicago and San Francisco, so that option exists as well. Insofar as seeing clients certainly having grown up in the Midwest and having a whole lot of Midwest industrial type of clients, it certainly helps to have the presence right here.

In terms of travel, Cleveland is still a hub for United. There are fewer flights a day, but there are a whole lot fewer delays then at the New York airports!

9. In a prior 9Questions interview, I asked another Ohioan about the Cavs. So in the summer, it feels right to ask you about the newly renamed baseball team. How do you feel about The Guardians’ chances this year?

I'm optimistic about the Guardians’ chances. That being said, I've seen the Yankees play more this year than I've seen the Guardians, including a game they won 7-6 in the bottom of the ninth with a three-run home run. So I'm not as optimistic about the Guardians as I am the Yankees, because they look awfully good.

The Guardians have a lot of young, strong personalities on the team. And the games I've been to this year have just been more fun to be at. Maybe that is the energy of the crowd now that everything is finally fully reopening — the games have been really fun.

9Questions — Eric Peiffer, KeyBanc Capital Markets

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9Questions — Eric Peiffer, KeyBanc Capital Markets

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