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

As high yield credit spreads near record lows, Bill Zox of Brandywine Global sees potential in higher-quality leveraged loans. Serving as the portfolio manager for the firm’s high yield and corporate credit strategies since 2021, Zox discussed opportunities in financial services and energy, and how private credit may benefit broadly syndicated debt investors.

1. High yield credit spreads are running close to all-time tights. How long can this be sustained?

I will stipulate that spreads are tight and that is the primary risk that must be managed but the outlook is still favorable. Investors and allocators who think spreads are all that matters have lost out on much of the strong high yield returns over my career. Large pools of capital all over the world have figured that out and they are lining up to invest in high yield at 8% and 93 dollar price even if spreads are tight. Defaults have stabilized for six months at well below average levels and the strong demand has been met with minimal new supply other than refinancing. I expect volatility to pick up but spreads to remain at the tighter end of the range until these conditions change.

2. As an investor who has traditionally focused on bonds, how does the relative value of leveraged loans compare in today’s market?

Higher quality leveraged loans, strong Bs and BBs, are attractive because of the inversion between SOFR and the five to 10-year Treasury curve and the favorable supply-demand dynamics in the loan market. But those dynamics could shift when the Fed starts cutting. And the weaker loan issuers are starting to feel the pain from higher interest costs.

3. Do you think we will see a meaningful increase in net new loan supply in 2024?

I think the historic pace of repricings and amend and extends will continue but net new supply probably requires rate cuts and a better IPO market to facilitate more LBOs. The loan market is competing harder for the larger, higher quality private credit deals which adds some net new supply to loans and an adverse selection issue for private credit.

4. Brandywine’s Corporate Credit Fund (BCAAX) and High Yield Fund (BGHAX) are currently focused on financial services and energy. Why are you targeting these sectors?

Since the Global Financial Crisis, there have been lots of changes in financial services and perpetual mispricings because so many managers don't commit sufficient resources to the space. After their issues in early 2023, banks and their regulators and ratings agencies have been more focused on liquidity and capital than growth. That is good for bank credit and also good for non-bank financials that compete with banks.

After a brutal decade of capital destruction and capital flight, energy companies have become some of the most conservative capital allocators in leveraged finance. It is another industry that has a lot going on with frequent mispricings. In both of these sectors we find many bonds that we believe offer lower than market risk for market-like returns or better.

5. Are there any other sectors you believe are currently being overlooked that could provide value in the longer term?

Every day we come in and cable equities and cable bonds are down. Enterprise value multiples have been cut in half or more in some cases. The consensus is that cable is in secular decline. Parts of cable, like video, are in secular decline but the last mile high speed connection to the home is a valuable, utility-like asset. Competition from fixed wireless and fiber overbuilders has been intense but could be peaking. We see fantastic opportunities in cable but adding at a prudent pace is important.

6. How has the growing footprint of private credit changed the playbook for investors in broadly syndicated debt, in terms of modeling default risk and capital market access?

Since the inflationary pressures really started to impact markets in early 2022, the access to capital for 90% of the high yield market has been fine and improving. The bottom 10% of the market may not have access to syndicated capital markets but, in many situations, private credit will find a structure and a price that makes sense for them and extends the runway for the management team to improve the business. If you are invested in the right part of the capital structure at the right price this can work to your benefit. If not, you can become permanently impaired. It is not for the faint of heart but there are opportunities in stressed high yield bonds and loans due to access to private credit. Access to capital in a wide range of markets, including private credit, is a key reason why defaults in the syndicated markets have stabilized at a low level.

7. Sponsors are finding it difficult to find attractive exits for their portfolio companies. How might this impact creditors?

It is less likely that creditors in stressed situations will be bailed out by an IPO or an acquisition. Again, private credit is the best source of capital here but you have to be invested in the right part of the capital structure and the right price or you could become permanently impaired.

8. Are you positioning for any political risks or opportunities ahead of the upcoming election?

Political risk is one reason why I expect volatility to pick up. Risk assets may struggle as we get close to the election but we typically add risk in that environment as it should do well when the uncertainty of the election is behind us regardless of the outcome. We love to bet on good corporate management teams and rely on them to manage political risk and opportunities. We will take CEOs and CFOs over policy makers any day of the week.

9. Do you have a personal anecdote that will let our readers know more about you?

When I was real young, six or seven years old, we had a full sized Air Hockey table (Google it). There was a contest at Sears (Google it) on a mini, table top Air Hockey table. I figured out that I could cover enough of the goal so that my opponent couldn't score. And then my opponent would get impatient and I could score just by deflecting my opponent's shots into the goal. I won the contest and insisted on keeping the prize which was a full sized Air Hockey table. Most likely we were the only house on earth with two full sized Air Hockey tables. Starting with a good defense is a good way to win in markets but markets are more competitive than mini Air Hockey. You need a good offense and special teams too.

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9Questions — Bill Zox, Brandywine Global — Seeing potential in loans

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