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Welcome everyone to the Mizuho Markets Mindset for Q2.
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I’m pleased to have with us
00:00:28:20 - 00:00:29:07
Phil Tamplin
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- you've joined us in the past - who oversees our high yield
00:00:32:09 - 00:00:33:22
business, and Andrew Simon,
00:00:33:22 - 00:00:36:13
who oversees our corporate risk solutions business.
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So look,
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we got together last time in January to talk about the market
00:00:41:03 - 00:00:45:20
and it's definitely an understatement to say a lot has changed.
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We have tariffs,
00:00:46:17 - 00:00:50:15
we have company corporate earnings expected to be lighter,
00:00:51:07 - 00:00:53:17
a lot of volatility across both markets.
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And so I wanted to dive right into it
00:00:56:05 - 00:00:59:10
and stating the obvious, you know, “Liberation Day”
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has really produced that tariff issue front
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and center and has created a lot of the volatility
00:01:05:09 - 00:01:06:03
and uncertainty.
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We see that with the issuers
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as well as market participants
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when deals have come to market.
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At the same time,
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we've seen the treasury
00:01:14:06 - 00:01:15:15
that has bounced around fairly
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materially over the first four months of the year,
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dipping below 4%
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and then gapping out to a 4.75%
00:01:22:06 - 00:01:25:06
where you've kind of been in a range around 4.3%.
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So maybe there's a little bit more steadiness there.
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And then finally, the FOMC,
00:01:31:18 - 00:01:34:18
we have a “who”, a “what” and a “when.”
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We haven't moved rates to date,
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but obviously there's three rate cuts baked into the curve.
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And then lastly, Phil, on your side, and I'll start with you.
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We've seen a closed market, although we have seen
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some tea leaves and some transactions come of late.
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So I'll start with you.
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How do we think about
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not only what we've been through,
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but really the trajectory going forward?
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- Sure.
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Look, it's been an interesting month.
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April 2nd,
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I think people expected tariffs,
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but not in the form they came in.
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It was a very aggressive sell-off.
00:02:05:17 - 00:02:07:16
So the high yield index was 150 basis
00:02:07:16 - 00:02:10:04
points wider in the space of a week.
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The loan index was down two points.
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The market effectively shut for two to three weeks.
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We saw record outflows.
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So, high yield was just under $10 billion.
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That's the largest outflow ever. Loans was just under five.
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So there was, you know,
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I’m not going to use the word panic,
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but there was definitely risk-off.
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Thankfully, the administration has softened the tone
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on some of those tariffs and the markets
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reacted very favorably to it.
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We've been able to watch the market reopen
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as you would expect it to.
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So first of all, IG issuers
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came to market, then high yield, then Term Loan B,
00:02:43:01 - 00:02:44:12
and then we've seen European issuers as well.
00:02:44:12 - 00:02:46:08
So, I'd say the reopening has been
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what you would like to see, which is positive.
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And of those index sell-offs, you've recovered about 50%.
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So, we're still not back to where we were,
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but we're definitely in a better position.
00:02:56:22 - 00:03:01:00
- I think it was very helpful that, from a policy perspective,
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we found an off-ramp from global tariffs.
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But there has been some carnage in there.
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We have a couple of hung deals
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that were pulled from the market. The banks have—
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are holding some of that paper.
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How do you think about private credit
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potentially being an off-ramp
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for some of those hung transactions?
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And when do those come back to the market
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to really have a free-flowing market?
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- Yeah, so there's been a lot of press about the hung deals.
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Look, they hit an air pocket.
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Many of those deals, whether it was ABCTI
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or Patterson, were in-market as those tariffs were announced.
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So, it's unsurprising
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that people couldn't find a clearing level.
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So again, as we see that recovery,
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they will come back to market as certainty improves.
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Look, I think on the hung deal front,
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the Street is significantly less exposed than it was in 2022.
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That's the positive.
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The second thing,
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many of the bridges are now
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in the form of 364-day commitments that don't have a cap.
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So, that is helpful.
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And the private credit bid is now back in favor.
00:04:01:19 - 00:04:04:00
So, you've seen some of these very large deals,
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whether it was at underwriting or afterwards,
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where the private credit guys will help clear that.
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So, I actually think it's a very helpful relationship.
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Sometimes the syndicated market will be stronger,
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and other times the private credit bid will be helpful.
00:04:16:16 - 00:04:18:22
People talk about competition. I think it's healthy.
00:04:18:22 - 00:04:21:01
And I think those two will always be in balance
00:04:21:01 - 00:04:22:20
and just depends where the pendulum sits.
00:04:22:20 - 00:04:24:00
- I would agree with that.
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I think the private credit market
00:04:25:20 - 00:04:29:11
almost is a shock absorber for the syndicated loan market
00:04:29:16 - 00:04:33:09
when it hits those especially rough time periods.
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On your side, I alluded to this at the beginning.
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It's usually the “what” and “when”,
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but to some degree in the news cycle
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the last couple of days, it's been the “who” as well.
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So why don’t
00:04:43:23 - 00:04:47:07
you spend a few minutes on the Fed, rate cuts, outlook,
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and maybe what clients are doing?
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- Yeah, sure.
00:04:49:11 - 00:04:50:13
I mean, listen, as we sit here
00:04:50:13 - 00:04:52:02
today, the market's got some pretty aggressive
00:04:52:02 - 00:04:53:14
expectations for easing.
00:04:53:14 - 00:04:55:15
It's about 125 basis points over the next,
00:04:55:15 - 00:04:57:09
call it 12 to 15 months.
00:04:57:09 - 00:04:58:19
And remember, that's on top of the 100
00:04:58:19 - 00:05:00:09
basis points that we've gotten already, right?
00:05:00:09 - 00:05:02:23
So that's pretty significant cuts from the Fed.
00:05:02:23 - 00:05:04:23
Is this the market backdrop for that, right?
00:05:04:23 - 00:05:05:14
Keep in mind
00:05:05:14 - 00:05:08:14
that we're a fairly healthy economy going into this recent
00:05:08:18 - 00:05:09:19
bout of volatility.
00:05:09:19 - 00:05:11:22
The economy is actually doing pretty well, right?
00:05:11:22 - 00:05:13:13
The labor market’s really strong.
00:05:13:13 - 00:05:15:10
Inflation has been a little bit sticky.
00:05:15:10 - 00:05:17:06
Keep in mind that we haven't had that asset
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liability mismatch that typically causes a credit crunch.
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So is another 125 basis points of cuts here
00:05:22:19 - 00:05:24:22
realistic for the market environment that we've got?
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Keep in mind also we have the Trump tax cuts
00:05:26:19 - 00:05:28:02
that might come later this year.
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That's very stimulative from that perspective.
00:05:30:04 - 00:05:31:23
So, we think the market's got it wrong.
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We're actually forecasting
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no additional cuts from the Fed,
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which is a very different outlook
00:05:35:08 - 00:05:37:05
relative to the Street and relative to our peers.
00:05:37:05 - 00:05:39:13
- We're seeing that with the early indications of
00:05:39:13 - 00:05:41:03
reported earnings for Q1.
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So that's interesting
00:05:42:19 - 00:05:44:06
that we're taking a little bit of a
00:05:44:06 - 00:05:46:00
contrarian view to the market.
00:05:46:09 - 00:05:48:11
So Phil, we did see some tea leaves
00:05:48:11 - 00:05:49:17
over the last couple of weeks.
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And I think the deal that we led for Venture
00:05:51:23 - 00:05:55:00
Global really reopened the high yield market.
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Spend a minute on how investors are viewing new issue
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and alongside that opportunistic or
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the commitment pipeline
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that ultimately will have to come to market.
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- So, we obviously had the privilege of reopening the market
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with Venture Global.
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They launched a $1.5 billion
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and took $2.5 billion.
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I think before we launched that,
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the conversations around cash management,
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you had the optimistic
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portfolio managers that had higher cash balances
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because they were looking forward to primary.
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And that's a good entry point.
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You had the pessimistic PMs who had higher cash balances
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because they were concerned about more outflows.
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Thankfully, the market has gone in the optimistic direction.
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Venture was a huge success.
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The book was over three and a half times oversubscribed.
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The deal was upsized and has traded well on the break.
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Immediately after that transaction,
you saw Excelerate (Energy)
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come to market. You saw Jane Street.
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And then just this week, you saw Beacon QXO.
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That transaction was both secured bonds and Term Loan B.
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So that's the first Term Loan B to price post-market close.
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Both of those were launched at $2 billion
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and upsized to two and a quarter.
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And I think you're going to see more
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that will come from that.
00:07:03:12 - 00:07:06:18
So again, this to me is just the natural reopening cycle
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I talked about.
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It's like IG, then high yield, then loans, then Europe.
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And we've started to see that.
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I think in terms of pipeline, obviously,
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the hung deals that we talked about,
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they could come back to market.
00:07:16:11 - 00:07:18:09
There's a long list of other underwritten deals
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that haven't closed yet. Those will come.
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I think we're probably another 50 basis points of tightening
00:07:23:09 - 00:07:25:12
before you start to see many of the refinancings.
00:07:25:12 - 00:07:27:14
Because yes, we found stability,
00:07:27:14 - 00:07:30:17
but the execution levels are still far less attractive
00:07:30:17 - 00:07:32:16
than they were just four weeks ago.
00:07:32:16 - 00:07:35:12
So I think it’ll be where they have capital needs, either
00:07:35:12 - 00:07:38:06
M&A or CapEx build-outs.
00:07:38:06 - 00:07:39:16
Those will be the first back to market.
00:07:39:16 - 00:07:41:20
And then we'll get back into the usual.
00:07:41:20 - 00:07:45:01
- In a nutshell, you're seeing a strong bid for the right deals
00:07:45:01 - 00:07:46:15
that are structured appropriately
00:07:46:15 - 00:07:49:11
and pricing that fits investors.
00:07:49:11 - 00:07:52:04
- I mean, today, they've been higher quality or higher rated.
00:07:52:04 - 00:07:53:10
They've been known assets.
00:07:53:10 - 00:07:55:08
So people know how they should perform
00:07:55:08 - 00:07:56:23
in this tariff environment.
00:07:56:23 - 00:08:01:03
I think the longer we stay in this type of environment,
00:08:01:08 - 00:08:02:15
then risk appetite will improve
00:08:02:15 - 00:08:04:08
and we can move down the credit spectrum.
00:08:04:08 - 00:08:07:06
- And there's a pretty wide net of what clients are doing.
00:08:07:06 - 00:08:09:08
We see some that are looking at new issue.
00:08:09:08 - 00:08:12:01
We also see clients are doing debt buybacks
00:08:12:01 - 00:08:13:07
as well as equity buybacks.
00:08:13:07 - 00:08:15:22
So I guess I'll turn my attention back to you again.
00:08:15:22 - 00:08:17:15
What type of thing are issuers
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thinking about
00:08:18:13 - 00:08:20:18
and what type of interest rate swaps
00:08:20:18 - 00:08:22:22
are you working with clients on?
00:08:22:22 - 00:08:24:19
- Yeah. I would say the focus is de-risking, right?
00:08:24:19 - 00:08:25:23
If you think about the volatility
00:08:25:23 - 00:08:27:11
that we've had over the past couple of weeks,
00:08:27:11 - 00:08:28:11
we've had intraday swings
00:08:28:11 - 00:08:31:11
in the treasury market of 25 to 30 basis points.
00:08:31:11 - 00:08:33:01
As an issuer, you're worried about that, right?
00:08:33:01 - 00:08:36:00
That used to be two to five. 20 to 30 is pretty significant.
00:08:36:00 - 00:08:39:11
So, people look at their ‘25 and ’26 refinancing needs
00:08:39:11 - 00:08:42:02
and try to take that risk off the table by doing a rate lock.
00:08:42:02 - 00:08:43:09
For our floating rate borrowers,
00:08:43:09 - 00:08:44:16
we've been very active in swapping
00:08:44:16 - 00:08:46:13
their floating rate term loans to fixed.
00:08:46:13 - 00:08:47:03
In today's
00:08:47:03 - 00:08:50:03
yield curve, that produces about 80 basis points of savings.
00:08:50:07 - 00:08:52:15
So you're de-risking and providing interest cost savings.
00:08:52:15 - 00:08:54:18
So it's been a very attractive transaction
00:08:54:18 - 00:08:56:00
in the current market.
00:08:56:00 - 00:08:58:17
And I'd be remiss not to talk about the FX markets.
00:08:58:17 - 00:09:01:11
FX markets have been extremely volatile.
00:09:01:11 - 00:09:03:16
The dollar has depreciated pretty significantly
00:09:03:16 - 00:09:05:09
over the past couple of weeks, given
00:09:05:09 - 00:09:06:05
kind of the change in tariff
00:09:06:05 - 00:09:08:13
policy of investors have left the dollar market
00:09:08:13 - 00:09:10:02
and into other safe havens.
00:09:10:02 - 00:09:13:02
So we've seen a pretty strong uptick in client activity
00:09:13:02 - 00:09:14:00
and net investment hedging.
00:09:14:00 - 00:09:16:13
So locking in the higher value of their foreign assets
00:09:16:13 - 00:09:19:16
and also providing some significant interest cost reduction
00:09:19:21 - 00:09:21:21
by moving to those lower yielding currencies.
00:09:21:21 - 00:09:22:12
So where is that?
00:09:22:12 - 00:09:23:06
That's euro,
00:09:23:06 - 00:09:26:12
that's Japanese yen, Swiss franc and CNH.
00:09:26:12 - 00:09:29:15
And then lastly, on the kind of tariff front geopolitical,
00:09:30:06 - 00:09:31:11
cross-border M&A
00:09:31:11 - 00:09:33:03
and the interest rate hedging and foreign exchange
00:09:33:03 - 00:09:35:05
hedging related to that, deal-contingent structures
00:09:35:05 - 00:09:36:20
continue to be very popular,
00:09:36:20 - 00:09:39:02
especially in this politically charged environment.
00:09:39:02 - 00:09:39:15
- Great.
00:09:39:15 - 00:09:41:06
Thank you, everyone, for joining us.
00:09:41:06 - 00:09:42:01
It's obviously
00:09:42:01 - 00:09:45:09
going to continue to be a rather volatile market,
00:09:45:14 - 00:09:47:22
but we do see ways that issuers can
00:09:47:22 - 00:09:49:03
access the market as well
00:09:49:03 - 00:09:53:10
as use hedging solutions to navigate these interesting times.